-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rh1ZpG8AvEL8FvGMirh1odb/RFZIbFPJl0F7Bh5IuonUtn3z/yo94U02MBcqvFuo OE3tX6Z8G7iYe/c7smQIcw== 0000950149-98-001622.txt : 19980929 0000950149-98-001622.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950149-98-001622 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIGEN INC \DE CENTRAL INDEX KEY: 0000932903 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 133647113 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28272 FILM NUMBER: 98716669 BUSINESS ADDRESS: STREET 1: 1201 HARBOR BAY PARKWAY STREET 2: SUITE 1000 CITY: ALAMEDA STATE: CA ZIP: 94501 BUSINESS PHONE: 5107487150 MAIL ADDRESS: STREET 1: 1201 HARBOR BAY PARKWAY #1000 CITY: ALAMEDA STATE: CA ZIP: 94502 10-K 1 ANNUAL REPORT 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR [ ] 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 0-28272 AVIGEN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3647113 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1201 HARBOR BAY PARKWAY, SUITE 1000, ALAMEDA, CALIFORNIA 94502 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (510) 748-7150 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of September 21, 1998, was approximately $22,840,728 based upon the closing sale price of the registrant's Common Stock as reported on the NASDAQ National Market System on such date. The number of outstanding shares of the Registrant's Common Stock as of September 21, 1998 was 7,309,033. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into Parts III and IV of this Form 10-K Report: The definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders scheduled to be held on November 19, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 7 Item 2. Properties.................................................. 19 Item 3. Legal Proceedings........................................... 19 Item 4. Submission of Matters to a Vote of Security Holders......... 19 PART II Item 5. Market for Registrant's Common Equity and Related 19 Stockholder Matters....................................... Item 6. Selected Financial Data..................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition 21 and Results of Operations................................. Item 8. Financial Statements and Supplementary Data................. 23 Item 9. Changes in and Disagreements with Accountants on Accounting 23 and Financial Disclosure.................................. PART III Item 10. Directors and Executive Officers of the Registrant.......... 23 Item 11. Executive Compensation...................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and 23 Management................................................ Item 13. Certain Relationships and Related Transactions.............. 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 23 8-K.......................................................
i 3 Except for the historical information contained herein, this report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors." PART I RISK FACTORS This section briefly discusses certain risks that should be considered by stockholders and prospective investors in the Company. Many of these risks are discussed in other contexts in other sections of this report. EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY Gene therapy is a new and rapidly evolving technology. To date, there has been only limited research and development in gene therapy using AAV vectors. The Company is not aware of any gene therapy products which have obtained marketing approval from the United States Food and Drug Administration ("FDA"). Because there is only limited research regarding the safety and efficacy of AAV vectors, the Company believes that clinical trials will proceed more slowly than clinical trials involving traditional drugs and biologics. Avigen is at an early stage of development. All of the Company's potential products are in research or early preclinical development. There can be no assurance that the Company's research and development activities will be completed successfully or will support the initiation of clinical trials or that any proposed products will prove to be efficacious or safe. Before obtaining regulatory approval for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the proposed product is safe and efficacious for its intended use. None of the Company's proposed products has been tested in humans. There can be no assurance that the Company will not encounter problems with the clinical trials which will require the Company to delay, suspend or terminate such trials. All of the Company's products in research and development may prove to have undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. Even if successfully developed, there can be no assurance that any potential products will be cleared for marketing by United States or foreign regulatory authorities or that such products can be manufactured at acceptable cost or that any approved products can be successfully marketed. Products resulting from the Company's research and development efforts, if any, are not expected to be commercially available and revenues from the sale of any such products are not expected for at least the next several years. HISTORY OF LOSSES To date, the Company has been engaged in research and development activities and has not generated any revenues from product sales. The process of developing the Company's products will require significant research and development, preclinical testing and clinical trials, as well as regulatory approval. These activities, together with the Company's general and administrative expenses, are expected to result in operating losses for the foreseeable future. The Company's ability to achieve profitability is dependent, in part, on its ability to successfully complete development of its proposed products, obtain required regulatory approvals and manufacture and market its products directly or through partners. There can be no assurance that the Company will achieve revenues or profitability in the future. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company will require substantial additional funding in order to complete the research and development activities currently contemplated and to commercialize its proposed products. The Company anticipates that its existing capital resources will be adequate to fund its capital needs for at least the next 12 months. The Company's future capital requirements will depend on many factors, including continued scientific progress in research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, 1 4 prosecuting and enforcing patent claims, competing technological developments, the cost of manufacturing scale-up, the cost of commercialization activities and other factors which may not be within the Company's control. The Company intends to seek additional funding through public or private equity or debt financing, when market conditions allow. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders may result. There can be no assurance that the Company will be able to enter into such collaborative or financing arrangements on acceptable terms or at all. Without such additional funding, the Company may be required to delay, reduce the scope of or eliminate one or more of its research or development programs. The Company's common stock is traded on the Nasdaq National Market ("Nasdaq"). In order to maintain its listing on Nasdaq, the Company must maintain net tangible assets, market capitalization and public float at specified levels, and generally must maintain a minimum bid price of $1.00 per share. The Company believes that maintaining its listing on Nasdaq is central to its ability to raise additional funds as well as to provide liquidity to investors. The Company failed to meet the Nasdaq net tangible asset listing requirement at June 30, 1998. The Company will be required to generate sufficient revenue or raise additional capital to maintain Nasdaq listing requirements through second fiscal quarter 1999. NEED FOR ESTABLISHMENT OF CORPORATE PARTNER RELATIONSHIPS The Company does not currently have a corporate partner relationship with respect to any of its technologies or potential products. Given the very high cost of funding clinical trials and bringing a proposed product through the governmental approval process to the commercial market, the Company believes that successful development and commercialization of its technologies and products will depend in large part on the establishment of one or more such relationships. There can be no assurance that the Company will be able to establish such relationships on favorable terms, if at all. In addition, the failure to raise needed future capital could put the Company at a disadvantage with respect to negotiating favorable terms with such potential corporate partners. NEED TO OBTAIN RIGHTS TO PROPRIETARY GENES AND TECHNOLOGY A number of the gene sequences or proteins encoded by certain of those sequences that the Company is investigating or may use in its products are or may become patented by others. As a result, the Company may be required to obtain licenses to such gene sequences or proteins or other technology in order to test, use or market such products. For example, in connection with its anemia program, the Company anticipates that it may need to obtain a license to a gene for erythropoietin. There can be no assurance that the Company will be able to obtain such a license on terms favorable to the Company, if at all. In connection with the Company's efforts to obtain rights to such gene sequences or proteins, the Company may find it necessary to convey rights to its technology to others. The Company has entered into agreements for the license from third parties of certain technologies related to its gene therapy product development programs. Certain of these license agreements provide for the achievement of development milestones at various times beginning in February 1997, which were amended extending the date to December 31, 1997. In the event the Company fails to achieve such milestones or to obtain extensions, certain of the license agreements may be terminated by the licensor with relatively short notice to the Company. Termination of any of the Company's license agreements could have a material adverse effect on the Company's business. Some of the Company's gene therapy products may require the use of multiple proprietary technologies. Consequently, the Company may be required to make cumulative royalty payments to several third parties. Such cumulative royalties could be commercially prohibitive. While the Company believes the third parties will be motivated to adjust the royalty structure under such circumstances, there can be no assurance that the Company will be able to successfully negotiate such royalty adjustments. UNCERTAINTY OF MARKET ACCEPTANCE The Company's success is dependent on acceptance of its gene therapy products. The Company believes that recommendations by physicians and health care payors will be essential for market acceptance of its gene 2 5 therapy products. In the past, concerns have arisen regarding the potential safety and efficacy of gene therapy products derived from pathogenic viruses such as retroviruses and adenoviruses. While the Company's proposed gene therapy products are derived from AAV which is a non-pathogenic virus, there can be no assurance that physicians and health care payors will conclude that the technology is safe. In addition, health care payors can indirectly affect the attractiveness of the Company's proposed products by regulating the maximum amount of reimbursement they will provide for such proposed products. There can be no assurance that the Company's products will achieve significant market acceptance among patients, physicians or third party payors, even if necessary regulatory and reimbursement approvals are obtained. Failure to achieve significant market acceptance will have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The production and marketing of the Company's proposed products and its ongoing research and development activities are subject to extensive regulation by governmental authorities in the United States and foreign countries. At the present time, the Company believes that its products will be regulated as biologics by the FDA and comparable foreign regulatory bodies. Gene therapy is, however, a relatively new technology and has not been extensively tested in humans. The regulatory requirements governing gene therapy products are uncertain and are subject to change. No gene therapy products have been approved to date in the United States or any foreign country. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action against the Company. The Company is currently conducting preclinical studies and is planning clinical trials of its AAV vectors. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process implemented by the FDA under the federal Food, Drug and Cosmetic Act. Satisfaction of such regulatory requirements, which includes satisfying the FDA that the product is both safe and efficacious, typically takes several years or more depending on the type, complexity and novelty of the product, and requires a substantial commitment of resources. The Company may encounter significant delays or excessive costs in its efforts to secure regulatory approvals, particularly because gene therapy is a novel method of treatment and regulatory requirements are evolving and uncertain. Preclinical studies must be conducted in conformance with the FDA's Good Laboratory Practices regulations. Before commencing clinical trials, the Company must submit to and receive FDA authorization of an investigational new drug application ("IND"). There can be no assurance that submission of an IND would result in FDA authorization to commence clinical trials. Clinical trials must meet FDA regulatory requirements for Institutional Review Board ("IRB") oversight and informed consent and good clinical practice regulations. The Company has limited experience in conducting preclinical studies and no experience in conducting clinical trials necessary to obtain regulatory approval. There can be no assurance that those clinical trials can be conducted at preferred sites, sufficient test subjects can be recruited or clinical trials will be started or completed successfully in a timely fashion, if at all. Furthermore, the FDA may suspend clinical trials at any time if it believes the subjects participating in such trials are being exposed to unacceptable health risks or if it finds deficiencies in the IND or conduct of the investigation. There can be no assurance that the Company will not encounter problems in clinical trials which cause the Company or the FDA to delay, suspend or terminate such trials. In addition to the FDA requirements, the National Institutes of Health ("NIH") has established guidelines for research involving recombinant DNA molecules, which are utilized by the Company in its research. These guidelines apply to recombinant DNA research which is conducted at or supported by the NIH. Under current guidelines, proposals to conduct clinical research involving gene therapy at institutions supported by the NIH must be approved by the NIH's Recombinant DNA Advisory Committee. There can be no assurance that any product developed by the Company will prove to be safe and efficacious in clinical trials or will meet all of the applicable regulatory requirements necessary to receive marketing approval. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approvals. If regulatory approval is granted for a product, such approval will be limited to those disease states and conditions for which the product is useful, as 3 6 demonstrated through clinical trials. Furthermore, approval may require ongoing requirements for postmarketing studies. Even if a product is approved for marketing, the product, its manufacturer and its manufacturing facilities are continuously subject to review and periodic inspections. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. In order to market its products outside of the United States, the Company also must comply with numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country. UNCERTAINTY OF PRODUCT PRICING AND THIRD PARTY REIMBURSEMENT The business and financial condition of biotechnology companies such as the Company are affected by the efforts of government and third party payors to contain or reduce the cost of health care through various means. In the United States, there have been and will continue to be a number of federal and state proposals to implement government control on pricing. In addition, the emphasis on managed care in the United States has increased and will continue to increase the pressure on the pricing of pharmaceutical products. While the Company cannot predict whether any legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, in both the United States and elsewhere, sales of medical products and treatments are dependent, in part, on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing its proposed products to the market, there can be no assurance that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company to sell its products on a competitive basis. COMPETITION The field of gene therapy is new and rapidly evolving, and is expected to undergo significant technological change in the future. The Company believes its primary competitors in the AAV gene therapy market are Genetic Therapy, Inc. (acquired by Sandoz, Ltd.), Genzyme Corporation, and Targeted Genetics Corporation. In addition, competition from fully integrated pharmaceutical companies and other biotechnology companies is expected to increase, particularly as large pharmaceutical companies acquire smaller gene therapy companies. Most of these companies have significantly greater financial resources and expertise than the Company in research and development, preclinical studies and clinical trials, obtaining regulatory approvals, manufacturing, marketing and distribution. One of these companies is supporting clinical studies for use of AAV vectors in the treatment of cystic fibrosis. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. In addition, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. The Company is aware that other companies are conducting clinical trials and preclinical studies for viral and non-viral gene therapy products. These companies include Cell Genesys, Inc., GeneMedicine, Inc., Systemix, Inc., Viagene, Inc. (acquired by Chiron Corporation) and Vical Incorporated. Avigen believes the primary competitive factors for success in the gene therapy field will be product efficacy, safety, manufacturing capability, the timing and scope of regulatory approvals, the timing of market introduction, marketing and sales capability, reimbursement coverage, price and patent position. There can be no assurance that the 4 7 Company's competitors will not develop more effective or more affordable products, or achieve earlier product commercialization than the Company. UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; POSSIBLE CLAIMS OF OTHERS To date, the Company has filed a number of patent applications in the United States relating to the Company's technologies. In addition, the Company has acquired exclusive and non-exclusive licenses to certain issued patents and pending patent applications. There is no assurance that patents will issue from these applications or that any patent will issue on technology arising from additional research or, if patents do issue, that claims allowed will be sufficient to protect the Company's technologies. The patent application process takes several years and entails considerable expense. The failure to obtain patent protection on the technologies underlying the Company's proposed products may have a material adverse effect on the Company's competitive position and business prospects. Important legal issues remain to be resolved as to the scope of patent protection for biotechnology products, and the Company expects that administrative proceedings, litigation or both will be necessary to determine the validity and scope of its and others' biotechnology products. Such proceedings or litigation may require a significant commitment of the Company's resources in the future. If patents can be obtained, there can be no assurance that any such patents will provide the Company with any competitive advantage. For example, there can be no assurance that others will not independently develop similar technologies, others will not duplicate any technology developed by the Company, or any such patent will not be invalidated in litigation. In addition, two of the Company's patent applications are co-owned with co-inventors. Under the terms of agreements with such co-inventors, the Company has an option to obtain an exclusive, worldwide, transferable, royalty-bearing license for such technology, and is currently in discussions with one of the co-inventors to obtain such a license. In the event the Company is unable to negotiate exclusive rights to such co-owned technology, each co-inventor may have rights to independently make, use, offer to sell or sell the patented technology. Commercialization, assignment or licensing of such technology by a co-inventor could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that third parties will not assert patent or other intellectual property infringement claims against the Company with respect to its products or technology or other matters. There may be third-party patents and other intellectual property relevant to the Company's products and technology which are not known to the Company. Although no third party has asserted that the Company is infringing such third party's patent rights or other intellectual property, there can be no assurance that litigation asserting such claims will not be initiated, that the Company would prevail in any such litigation, or that the Company would be able to obtain any necessary licenses on reasonable terms, if at all. Any such claims against the Company, with or without merit, as well as claims initiated by the Company against third parties, can be time-consuming and expensive to defend or prosecute and to resolve. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. In addition, to the extent outside collaborators apply technological information developed independently by them or by others to the Company's product development programs or apply Avigen's technologies to other projects, disputes may arise as to the ownership of proprietary rights to such technologies. The Company also relies on a combination of trade secret and copyright law, employee and third-party nondisclosure agreements and other protective measures to protect intellectual property rights pertaining to its products and technologies. There can be no assurance that these measures will provide meaningful protection of the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. In addition, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that the Company will be able to protect its intellectual property successfully. 5 8 LACK OF MANUFACTURING AND SALES AND MARKETING EXPERIENCE The Company has no experience in, and currently lacks the resources and capability to, manufacture or market any of its proposed products on a commercial basis. In addition, the Company's proprietary process for manufacturing AAV vectors has not yet implemented the FDA's regulations concerning Current Good Manufacturing Practices ("cGMP"). Initially, the Company anticipates that it will be dependent to a significant extent on collaborative partners or other entities for commercial scale manufacturing of its products. In the event the Company decides to establish a commercial scale manufacturing facility, the Company will require substantial additional funds and personnel and will be required to comply with extensive regulations applicable to such facility. There can be no assurance that the Company will be able to develop adequate commercial manufacturing capabilities either on its own or through third parties. In addition, the Company does not anticipate establishing its own sales and marketing capabilities in the foreseeable future. There can be no assurance that the Company will be able to develop adequate marketing capabilities either on its own or through third parties. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on certain members of its management and research and development staff. The loss of any of these persons could have a material adverse effect on the Company's business. In addition, the Company relies on consultants and advisors to assist the Company in formulating its research and development strategy. Recruiting and retaining qualified technical and managerial personnel will also be critical to the Company's success. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel who generally are in high demand in the pharmaceutical and biotechnology industries. The loss of certain key employees or the Company's inability to attract and retain other qualified employees could have a material adverse effect on the Company's business. A majority of the Company's scientific advisors are engaged by the Company on a consulting basis and are employed on a full-time basis by employers other than the Company and some have consulting or other advisory arrangements with other entities that may conflict or compete with their obligations to the Company. SIGNIFICANT PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE The manufacture and sale of medical products entail significant risk of product liability claims. The Company currently does not carry product liability insurance although it intends to obtain such coverage prior to commencing clinical trials. There can be no assurance that such coverage will be adequate to protect the Company from any liabilities it might incur in connection with the use or sale of the Company's products. In addition, the Company may require increased product liability coverage as additional products are commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business and results of operations. The Company must indemnify certain of its licensors against any product liability claims brought against them arising out of products developed by the Company under these licenses. HAZARDOUS MATERIALS The Company's research and development efforts involve the use of hazardous materials, chemicals and various radioactive compounds. The Company is subject to federal, state and local laws and regulations governing the storage, use, and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations if the Company develops its own commercial manufacturing facility. 6 9 CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW The Company's officers, directors and principal stockholders beneficially own approximately 17% of the Company's Common Stock. As a result, such persons may have the ability to effectively control the Company and direct its affairs and business. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of the Company. In addition, the Company's Board of Directors have the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be materially adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue shares of Preferred Stock. Furthermore, certain provisions of the Company's Restated Certificate of Incorporation may have the effect of delaying or preventing changes in control or management of the Company, which could adversely affect the market price of the Company's Common Stock. In addition, the Company is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. VOLATILITY OF STOCK PRICE The Company believes that various factors, including announcements of technological innovations or regulatory approvals, results of clinical trials, announcements of new products by the Company or by its competitors, healthcare or reimbursement policy changes by governments or insurance companies, developments in relationships with corporate partners or a change in securities analysts' recommendations, may cause the market price of the Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the shares of biotechnology and healthcare companies in particular, have experienced extreme price fluctuations. These broad market and industry fluctuations may materially adversely affect the market price of the Company's Common Stock. Beginning November 19, 1996, contractual restrictions on the sale of approximately 3,646,559 shares of Common Stock otherwise eligible for sale subject to compliance with Rule 144 or Rule 701 expire. ITEM 1. BUSINESS THE COMPANY Avigen is a leader in the development of gene therapy products derived from adeno-associated virus ("AAV") for the treatment of inherited and acquired diseases. The Company's proposed gene therapy products are designed for in vivo administration to achieve the production of therapeutic proteins within the body. The Company is developing two broad-based proprietary gene delivery technologies: AAV vectors and the Targeted Vector Integration ("TVI") system. The Company believes AAV vectors can be used to deliver genes for the treatment of hemophilia, thalassemia, hyperlipidemia, neural diseases and metabolic storage diseases. AAV Vectors. The Company's gene therapy products are based on gene delivery systems called vectors. AAV vectors are derived from AAV, a common non-pathogenic human virus, and take advantage of the natural efficiency with which viruses deliver genes to cells. To produce an AAV vector, the virus is modified by removing the viral genes and replacing them with genes for therapeutic proteins. The Company believes that AAV vectors combine desirable properties of viral and non-viral vectors and may offer several potential advantages over other gene therapy vectors. These advantages include efficient delivery of genes to both dividing and non-dividing target cells, absence of viral genes that may be responsible for causing an undesirable immune response, in vivo administration to patients, higher levels of gene expression and improved stability allowing AAV vectors to be stored and handled like more traditional pharmaceutical products. Due to the complex replication cycle of the natural virus, AAV vectors have been difficult to produce. Avigen believes that its proprietary manufacturing process will simplify manufacturing and purification and achieve increased yield of high purity AAV vectors. 7 10 In spite of the potential advantages, the use of AAV vectors for gene therapy also presents potential disadvantages. Since the genome of the natural AAV virus is relatively small, the amount of the genetic material that can be included in an AAV vector is limited. Therefore, large genes cannot be delivered by AAV vectors. In addition, in vivo administration of AAV vectors may result in the production of antibodies which may limit the effectiveness of repeat dosing of these vectors. Furthermore, direct administration of AAV vectors may result in their distribution to inappropriate tissues. Product Development. Based on encouraging results in animal models, the Company has initiated two preclinical development programs using AAV vectors for the treatment of hemophilia and thalassemia. Additionally, the Company has a number of research programs and collaborations intended to generate product development candidates for hyperlipidemia, neural disease and metabolic storage diseases. Avigen believes that the number of potential applications for gene therapy will increase significantly as advances are made in the area of genomics. These advances are enabling scientists to link diseases to specific gene defects. As more genes are discovered, the need for improved gene delivery technologie is expected to increase. With the identification of new disease-related genes, the Company believes that its AAV vectors will provide it with significant opportunities for new gene therapy products. Corporate Partnering Opportunities. The Company is seeking to develop long-term strategic collaborations with pharmaceutical companies that can provide funding for research and development activities and clinical trials as well as access to complementary technologies, including gene sequences. The Company believes that its proprietary gene delivery technologie can be used to deliver a number of different genes, giving rise to multiple product and corporate partnering opportunities. GENE THERAPY BACKGROUND Gene therapy is an approach to the treatment of inherited and acquired diseases whereby genes are delivered into patients' cells in order to direct the cells to produce therapeutic proteins. Genes are regions of DNA that contain the instructions that direct cells to produce proteins, one of the basic building blocks of all cells. Each cell in the body has the ability to produce proteins necessary for cellular structure, growth and function. The process that results in protein production by the cell is known as gene expression. By directing the cells to produce proteins, gene therapy offers the opportunity to correct defects or diseases at the molecular level. All gene therapy approaches contain three key components: (i) the vector, (ii) the gene cassette, and (iii) the target cell. Vectors. One of the most critical factors for the success of gene therapy products is the development of vectors that can practically, efficiently and safely deliver genes into cells. The process of gene transfer may be accomplished in vivo (by administering the vector directly to patients) or ex vivo (by removing patients' cells and combining them with vector). Viral vectors are derived from naturally occurring viruses. Non-viral vectors are produced by standard recombinant DNA techniques. Viral vectors take advantage of the natural efficiency with which viruses transport their own genetic information into cells. Viral vectors are constructed by removing some or all of the viral genes and replacing them with a gene cassette. Viral vectors have been the most extensively studied method of gene delivery, and most gene therapy applications currently undergoing clinical evaluation involve the use of viral vectors. However, viral vectors currently under clinical investigation have limitations which may affect their safety or efficacy. Viral vectors based on retroviruses ("retroviral vectors"), for example, require that target cells be dividing or multiplying to achieve gene delivery. Because most target cells in the body are not dividing or divide very slowly and because retroviruses become rapidly inactivated in the blood, most clinical applications currently under evaluation employing retroviral vectors involve a complex and expensive procedure whereby patient cells are removed and the gene is delivered to these cells ex vivo. Another type of viral vector is derived from adenovirus. Adenoviral vectors are capable of efficiently delivering genes to dividing and non-dividing cells. However, adenoviral vectors contain and express genes from the naturally occurring virus, and as a result, the body's immune system is triggered following their administration. This immune response is believed to limit the length of time that gene expression can be maintained in the target cell. 8 11 Additional safety issues have been raised by the use of retroviral and adenoviral vectors since both vectors are derived from pathogenic viruses. During the manufacture of these vectors, there is a possibility of generating a small amount of the natural virus. Although considered a low risk, such a possibility necessitates additional costly product testing. In addition, retroviral vectors randomly integrate the gene cassette into the target cell. Any gene therapy approach that involves the random integration of genetic material into the target cell's DNA could, theoretically, cause the activation of another gene involved in the development of cancer or the inactivation of a beneficial gene. It is generally believed that such events would be rare. Non-viral vectors are produced by standard recombinant DNA techniques and are delivered to target cells either unmodified ("naked DNA") or combined with lipids (e.g., liposomes) or proteins designed to facilitate the entry of DNA into the cells. Because they have no components derived from viruses, they are perceived to be safer. In addition, non-viral vectors are capable of delivering large segments of DNA to target cells. However, non-viral vectors are relatively inefficient at delivering genes to cells, and in general, have resulted in temporary or low levels of gene expression in target cells. In contrast to retroviral and adenoviral vectors, AAV vectors are derived from a non-pathogenic human virus to which the majority of the population has been exposed. In spite of its name, AAV is genetically unrelated to adenovirus. AAV, as it exists in nature, can only reproduce in the presence of another virus. AAV vectors are derived from AAV by removing all of the viral genes and replacing them with an appropriate gene cassette. The Company believes that AAV vectors offer several potential advantages over other viral and non-viral vectors. These advantages include efficient delivery of genes to both dividing and non-dividing target cells, absence of viral genes that may be responsible for causing an undesirable immune response, in vivo administration to patients, higher levels of gene expression and improved stability allowing AAV vectors to be manufactured, stored and handled like more traditional pharmaceutical products. The Company believes that AAV vectors combine the desired properties of viral and non-viral vectors and may offer a safer and more practical alternative to the other gene therapy vectors. Two clinical trials evaluating AAV vectors manufactured by another company for the treatment of cystic fibrosis are currently being conducted. Gene Cassette. Packaged inside a gene therapy vector is the gene cassette, containing the gene for a desired therapeutic protein and the control elements which direct protein production by the cell. The design of the gene cassette depends on the therapeutic application. The gene may be a naturally occurring gene for a therapeutic protein (e.g., erythropoietin or factor IX), one that sensitizes cancer cells to chemotherapy (a "suicide gene") or a man-made gene with novel anti-viral properties. The control elements that regulate expression of the delivered genes are equally important in the success of gene therapy products. Certain control elements permit gene expression in many cell types while other cell-specific control elements direct expression only in a particular type of cell. The Company believes that inclusion of the cell-specific control elements in a gene therapy vector may increase safety in certain gene therapy applications by limiting gene expression to a desired organ or tissue. AVIGEN TECHNOLOGY AAV VECTORS AAV vectors are emerging as a promising gene delivery system because they combine the efficiency with which viral vectors deliver their DNA to cells with a potential safety profile closer to that of non-viral vectors. A major limitation in the development of clinical applications for AAV vectors has been the lack of an efficient production method. Current methods, in general, result in low yields of AAV vectors and require the input of an infectious virus, most commonly adenovirus, to initiate vector replication. The Company has developed a proprietary manufacturing process which allows for the more efficient production of larger quantities of AAV vectors and does not require the use of an infectious virus, thereby eliminating some potentially harmful contaminants. The Company believes that its process will simplify manufacturing and purification of AAV vectors for clinical trials. In addition, the Company believes that its proprietary process will result in a product that will be safer and, as a result, more commercially viable than AAV vectors produced by commonly employed methods. 9 12 GENE THERAPY DEVELOPMENT PROGRAMS The Company has selected its gene therapy development programs based on experimental data that demonstrate the feasibility of gene delivery to specific target cells. The Company believes that its technologies may be used with several different genes, giving rise to multiple product and corporate partnering opportunities. Avigen believes that further advances in genomics, including the sequencing, mapping and identification of genes linked to diseases, may offer other opportunities. The following table summarizes the Company's current gene therapy development programs: AAV VECTOR-GENE THERAPY PROGRAMS
PROGRAM INDICATION TARGET CELL STATUS(1) ------- --------------- ------------ ----------- Blood Diseases Hemophilia Muscle/Liver Preclinical Anemia(2) Muscle Preclinical Metabolic Diseases Hyperlipidemia Muscle Research Storage Diseases Muscle Research
- --------------- (1) "Research" indicates activities related to designing, constructing and testing vectors in specific target cell types in order to evaluate gene expression. "Preclinical" indicates in vitro and animal studies to evaluate efficacy, pharmacology and toxicology. (2) Includes programs utilizing delivery of an erythropoietin gene for the treatment of renal failure, sickle cell anemia and beta-thalassemia. BLOOD DISEASES Hemophilia. Hemophilia is a hereditary disorder characterized by the decrease or absence of clotting factor activity in the plasma. The most common forms are caused by deficiency in protein coagulation factor VIII ("hemophilia A") or factor IX ("hemophilia B"). Approximately 10,000 individuals, mostly male, are treated for hemophilia A and about 2,800 individuals are treated for hemophilia B in the United States. Worldwide, there are about 80,000 hemophiliacs. Patients with either disease experience acute and often life-threatening bleeding episodes and can also suffer joint deformities from repeated bleeding into joints. Depending on the severity of disease, treatment consists of either intermittent or chronic administration of clotting factor which has either been purified from plasma or, more recently, a recombinant DNA-derived protein. Transmissions of viral agents have been significantly reduced with the increased use of highly purified or recombinant clotting factors. The Company believes that any AAV vectors may be useful to deliver the genes for Factor VIII or Factor IX and achieve long-term expression in vivo. Anemia. Anemia results from a variety of inherited and acquired conditions resulting in a reduction of the number of red blood cells and hemoglobin, the red blood cell protein that carries oxygen. In the case of sickle cell anemia and beta-thalassemia, two inherited diseases, anemia results from the production of inadequate or abnormal hemoglobin molecules. In acquired cases such as renal failure, AIDS or as the result of the administration of chemotherapy for cancer, anemia is generally due to the inadequate production of red blood cells. Erythropoietin ("EPO") is the protein produced by the kidney that stimulates cells in the bone marrow to produce red blood cells and is involved in the production of hemoglobin. Recombinant human EPO, a drug first developed by Amgen, Inc., is administered several times a week by injection for the treatment of anemia secondary to renal failure, AIDS or chemotherapy. Currently, there are approximately 140,000 renal failure patients receiving dialysis in the United States and an equivalent number in Europe. It is estimated that about 85,000 renal failure patients receiving dialysis are presently receiving EPO worldwide. In addition, it is 10 13 estimated that approximately 50,000 AIDS patients are also currently being treated with EPO. The incidence of anemia in the approximately 1 million cancer patients in the United States is estimated at 14%, providing a potential additional 140,000 patients who also may be candidates for EPO therapy. There are an estimated 60,000 patients with sickle cell anemia in the United States. The Company believes that there are approximately 8,000 to 10,000 cases of beta-thalassemia in the United States. Currently, there is no effective and widely available therapy for beta-thalassemia and sickle cell anemia. Studies in animals and clinical trials in a small number of patients suggest that administration of large doses of EPO, either alone or in combination with other agents, in certain individuals with beta-thalassemia and sickle cell anemia can increase the production of functional hemoglobin molecules and perhaps ameliorate the symptoms of disease. Avigen scientists have demonstrated that biologically active levels of EPO can be achieved in mice following a single intramuscular administration of an AAV vector containing a gene for human EPO. Mice treated in this study showed a dose-dependent increase in the amount of EPO in their serum and a proportional increase in red blood cells. In this ongoing study, increased EPO levels and red blood cell production have persisted undiminished for greater than twenty-four months. The results of this study have not been independently verified. METABOLIC DISEASES Hyperlipidemia. Disorders of lipid metabolism contribute to a number of common human diseases. Hyperlipidemia, characterized by elevation of cholesterol or triglycerides in the blood, is a risk factor for atherosclerosis which leads to heart attacks, strokes and peripheral vascular disease. Elevation of triglycerides ("hypertriglyceridemia") often accompanies diabetes and may contribute to the acceleration of atherosclerosis observed in that patient population. In addition, high triglyceride levels, resulting from an underlying genetic disease, can also lead to life-threatening pancreatitis, which is frequently unresponsive to current therapies. Treatment of elevated lipids has been shown to decrease the risk of atherosclerosis. There is evidence that elevated triglycerides, particularly in combination with low HDL cholesterol ("good cholesterol") in the blood is a substantial risk factor associated with coronary artery disease. While dietary control and exercise are important methods to treat high cholesterol, many individuals do not achieve adequate results with these conservative measures. Drug therapy for high cholesterol has been successful at reducing the complications of atherosclerosis. Although drugs to lower blood triglycerides are widely available, medical management of this condition is often problematic and treatment regimens are often poorly tolerated by patients. The lack of a uniformly effective therapy for hypertriglyceridemia provides a rationale for development of novel, alternative treatments, including gene therapy. Deficiency of the enzyme lipoprotein lipase ("LPL") is believed to be common in patients with hypertriglyceridemia, and there may be a correlation between decreased expression of LPL, which is normally produced in the muscle and fat, and hypertriglyceridemia. Based on the Company's research demonstrating that AAV vectors efficiently deliver genes to muscle resulting in sustained protein production, the Company is working with a collaborator who intends to conduct studies in animals to evaluate the effectiveness of delivering an AAV vector containing the LPL gene to muscle to lower triglyceride levels. Storage diseases. Storage diseases are a diverse set of inherited disorders characterized by a deficiency of one of several proteins that are necessary for the function of cellular lysosomes. Lysosomes are the compartments in all cells that process macromolecules as a part of normal turnover and tissue remodeling. Storage diseases are characterized by abnormal cell function and cell death resulting in a variety of clinical manifestations such as progressive neurologic dysfunction, including mental retardation, enlarged organs or skeletal abnormalities. Gaucher's disease and Tay-Sachs disease are two of the more well-known examples of this class of disease. 11 14 Based on the finding that long-term production of therapeutic proteins can be obtained following the intramuscular injection of an AAV vector containing the relevant gene, the Company has entered into collaborations to evaluate this approach for the treatment of storage diseases. In collaboration with investigators at The Johns Hopkins School of Medicine, the Company has initiated studies to evaluate gene therapy for the treatment of Pompe's disease. This disease, caused by deficient production of the enzyme, acid maltase, leads to lethal skeletal and cardiac abnormalities in affected individuals. These investigators intend to determine whether, following the intramuscular administration of an AAV vector containing the acid maltase gene, the muscle will produce a sufficient amount of this enzyme to reverse or prevent the manifestations of this disease. Although conditions like Pompe's disease are rare, there is currently no available treatment for these devastating diseases. In addition, the Company believes that research on such conditions will benefit the Company's product development efforts because the clinical endpoints are relatively clear and measurable and the results are expected to be sufficiently generalizable to allow for the design of AAV vector gene therapy for several other diseases. CORPORATE PARTNERING STRATEGY The Company is actively seeking to develop long-term strategic collaborations with pharmaceutical companies that can provide funding for research and development activities and clinical trials. The Company believes that its technologies are proprietary and broad-based and can be used with many different genes, giving rise to multiple product and corporate partnering opportunities. The Company has initiated discussions with a number of pharmaceutical companies in the United States, Europe and Asia. The Company has not entered into any definitive agreements with respect to any corporate partnering arrangements. Avigen's strategy is to contribute both technology and expertise in the gene therapy field while seeking corporate partners who can provide access to complementary technologies, including gene sequences. In addition, the Company intends to rely on corporate partners, licensees or other entities for marketing of its products, when and if such products achieve regulatory approval. There can be no assurance, however, that the Company will be able to reach satisfactory arrangements with such parties or that such arrangements will be successful. LICENSING AND RESEARCH AGREEMENTS Research Corporation Technologies. In May 1992, the Company entered into a license agreement with Research Corporation Technologies, Inc. ("RCT") for rights to a patent and patent application relating to a cell-specific promoter in AAV vectors. The license is exclusive and worldwide. In consideration for the license, the Company paid an initial license fee and issued 247,949 shares of its Common Stock. In addition, the Company is required under the agreement to pay RCT royalties based on net sales of products which utilize the licensed technology, with certain minimum annual royalty payments due beginning in 1999. Avigen must exercise its best efforts to commercially develop, promote and sell products covered by the licensed patent rights, and is obligated to file a product license application or a new drug application by the end of 2000. In the event the Company fails to achieve milestones by their applicable deadlines, the Company has the right to pay RCT additional fees of up to $250,000 to extend certain of the deadlines for specified periods. RCT may terminate the agreement if the Company becomes insolvent or bankrupt or fails to perform any of its obligations under the agreement. The Johns Hopkins University. In November 1992, the Company entered into an agreement with The Johns Hopkins University under which it issued an aggregate of 152,702 shares of its Common Stock and agreed to make certain cash payments in exchange for an exclusive, worldwide, royalty bearing license to a patent application relating to certain synthetic genes which direct the production of proteins with specific antiviral properties and which the Company believes may be useful in infectious disease. Under the agreement, Johns Hopkins has control over the prosecution and maintenance of the licensed patent application. The Company is obligated to exercise its best efforts to develop and commercialize products which utilize the subject technology. Under the terms of the agreement, as amended, the Company is required 12 15 to meet the following development milestones: initiation of large animal studies for a licensed potential product by the end of 1997, submission to the FDA of at least one clinical protocol utilizing a licensed potential product by the end of 1998, initiation of at least one clinical study utilizing a licensed potential product by the end of 1999 and receipt of FDA approval to market a licensed product by the end of 2002. If the Company fails to perform any of its obligations under the agreement, Johns Hopkins may terminate the agreement upon 60 days' written notice. For technical reasons, the Company has not met the first milestone, and will not meet the second milestone. Johns Hopkins has taken no action to terminate the agreement. After the completion of additional experiments, the Company will decide whether or not to seek an extension of all the development milestone dates. The Company has entered into other exclusive and nonexclusive license agreements with certain research institutions and their representatives. Although specific terms of the licenses vary, all of such licenses require the Company to achieve certain development milestones. In addition, the agreements require Avigen to pay certain license fees and royalties to the licensors. All of the licenses provide for a term which extends for the life of the underlying patent. The failure to achieve any required development milestones or to negotiate appropriate extensions of any of the Company's license agreements or to make all required milestone and royalty payments when due and the subsequent decision of any such institution to terminate such license could have a material adverse effect on the Company. The Company has also entered into agreements with certain research institutions and corporate entities with respect to its research and development efforts. Under such agreements the Company has provided specific vectors and other materials for research purposes conducted at the direction of a principal investigator. Generally, the agreements also provide that: (i) the Company remains the sole and exclusive owner of the transferred materials; (ii) ownership of improvements will be determined under patent law principles, based upon the parties' relative contributions to the improvements; and (iii) the Company has the right to prosecute patents on jointly-owned improvements. Although specific terms of each agreement vary, the Company is generally granted, with respect to jointly owned improvements, an irrevocable, nonexclusive, royalty-free license and an option to negotiate in good faith an exclusive license at royalty rates to be mutually agreed upon. There can be no assurance that exclusive rights to any such improvements can be obtained on terms acceptable to the Company, if at all. In addition, the Company engages from time to time in discussions with other prospective academic partners regarding potential research and development projects and may, in the future, enter into arrangements in addition to those described above. MANUFACTURING The Company has developed a proprietary manufacturing process for AAV vectors. The Company believes it currently has the capacity to manufacture AAV vectors in amounts sufficient to conduct clinical trials, but it will be required to implement cGMP policies and procedures prior to manufacturing material for clinical trials. The Company believes that its manufacturing process will simplify manufacturing and purification. The processes used by the Company are new, however, and there can be no assurance that such processes will be feasible or cost-effective. Avigen currently does not operate manufacturing facilities for commercial production of its gene therapy products. Avigen's strategy for the manufacture of its gene therapy products may be to enter into alliances with pharmaceutical and other biotechnology companies. There can be no assurance that the Company will be able to negotiate satisfactory arrangements with such parties, that such arrangements will be successful or that its corporate partners will be able to develop adequate manufacturing capabilities for commercial scale production. In the event the Company decides to establish a commercial scale manufacturing facility, the Company will require substantial additional funds and personnel and will be required to comply with extensive regulations applicable to such facility. 13 16 GOVERNMENT REGULATION The production and marketing of the Company's proposed products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, pharmaceutical products are subject to rigorous regulation by the FDA under the federal Food, Drug, and Cosmetic Act. Biological products, in addition to being subject to certain provisions of this act, are also regulated under the Public Health Service Act. These laws and the regulations promulgated thereunder govern, among other things, testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and promotional practices and import and export of drugs and biological products. In general, the Center for Biologics Evaluation and Research holds primary responsibility for the regulation of biological products and has handled the IND submissions of most gene therapy products to date. At the present time, the Company believes that its products will be regulated as biologics by the FDA and comparable foreign regulatory bodies. Gene therapy is, however, a relatively new technology and has not been extensively tested in humans. The regulatory requirements governing gene therapy products are uncertain and are subject to change. No gene therapy products have been approved to date in the United States or any foreign country. Under the NIH Guidelines for Research Involving Recombinant DNA Molecules, clinical protocols involving human gene transfer conducted at institutions receiving NIH funds cannot be initiated without simultaneous submission of information describing the proposed clinical protocol to both NIH/ORDA and the FDA. Submission to NIH/ORDA shall be for registration purposes and determination regarding the necessity of full RAC review and approval/disapproval. Full RAC review of an individual human gene transfer protocol can be initiated by the NIH Director or recommended to the NIH Director by three or more RAC members or other Federal agencies. An individual human gene transfer protocol that is recommended for full RAC review should represent novel characteristics deserving of public discussion. Prior to submission of a human gene transfer experiment to NIH/ORDA, the Principal Investigator must obtain Institutional Biosafety Committee approval from each institution that will handle recombinant DNA material that is to be administered to human subjects and Institutional Review Board approval from each institution in which human subjects will undergo gene transfer. Submission of human gene transfer protocols to the FDA will be in the form of an IND application. The review process conducted by NIH/ORDA and the FDA is unpredictable and may result in considerable time and expense to the Company. The steps required before a new drug, including a biologic, may be marketed in the United States generally include (i) preclinical laboratory tests and preclinical animal studies, (ii) the submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials commence, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the product, (iv) the submission to the FDA of a Product License Application and Establishment License Application ("PLA/ELA") for a biologic and (v) FDA approval of the PLA/ELA prior to any commercial sale or shipment of the biologic. The FDA has proposed regulations that would eliminate the separate requirement for an ELA for certain biotechnology products, including certain recombinant DNA products, that satisfy the regulatory definition of a "well-characterized product." The FDA, however, has indicated that gene therapy products are not considered "well-characterized" at this time. Domestic manufacturing establishments are subject to inspections at any time by the FDA and must comply with cGMP regulations enforced by the FDA through its facilities inspection program. Manufacturers of biological products also must comply with FDA general biological product standards. In addition, the Company must obtain a drug manufacturing license from the State of California for any of its products administered to humans, including products intended for clinical trials. Preclinical safety studies include laboratory evaluation of the product, as well as animal studies to assess the potential safety and, if possible, efficacy of the product. Preclinical studies must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will become automatically effective 30 days after its receipt by the FDA unless the FDA indicates prior to the end 14 17 of the 30-day period that it does not wish the trials to proceed as outlined in the IND. In such case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Clinical trials must be conducted in accordance with FDA's Good Clinical Practice regulations and must be approved by the IRB at the institution where the study will be conducted. The IRB will consider, among other things, safety and ethical issues, proper informed consent of the human subjects, possible issues relating to health care costs and potential liability of the institution. The IRB may require changes in a protocol, and there can be no assurance that an IRB will permit any given study to be initiated or completed. Clinical trials typically are conducted in three sequential phases, but the phases may overlap. Phase 1 typically involves the initial introduction of the drug into patients primarily to determine the drug's metabolism, pharmacokinetics and pharmacological actions in humans and the side effects associated with increasing doses. Phase 2 typically involves studies in a limited patient population to (i) determine the efficacy of the drug for specific indications, (ii) determine dosage tolerance and optimal dosage and (iii) further identify possible adverse effects and safety risks. If the drug is found to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to evaluate efficacy and safety within an expanded patient population typically at geographically dispersed clinical study sites. There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specific time period, if at all, with respect to any of the Company's products subject to such testing. Furthermore, the FDA may suspend clinical trials at any time on various grounds, including a finding that patients are being exposed to an unacceptable health risk. FDA regulations also subject sponsors of clinical investigations to numerous regulatory requirements related to, among other things, selection of qualified investigators, proper monitoring of investigations, record keeping and record retention and notice to investigators and FDA of any death or adverse serious reaction. In addition, the FDA may require post marketing clinical studies (Phase IV) which will require extensive patient monitoring and recordkeeping and may result in restricted marketing of the product for an extended period of time. The results of the pharmaceutical development, preclinical studies and clinical trials are submitted to the FDA in the form of a PLA/ELA for approval of the manufacture, marketing and commercial shipment of the biologic. The testing and approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a PLA/ELA if applicable regulatory criteria are not satisfied, require additional testing or information, or require postmarketing testing and surveillance to monitor the safety or efficacy of a product. Moreover, if regulatory approval of a biologic is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for PLA/ELA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to cGMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, financial resources and effort in the area of production and quality control. In accordance with the Orphan Drug Act, the FDA may grant Orphan Drug status to certain drugs intended to treat a "rare disease or condition" defined as a disease or condition which affects fewer than 200,000 people in the United States, or which affects more than 200,000 people for which the cost of developing and marketing the drug will not be recovered from sales of the drug in the United States. An approved Orphan Drug may provide certain benefits including exclusive marketing rights in the United States to the drug for the approved indication for seven years following marketing approval and federal income tax credits for certain clinical trial expenses. The Company believes that some of its future products may qualify for Orphan Drug status but there can be no assurance that such products will receive FDA approval. In addition, there is no assurance that potential benefits provided by the Orphan Drug Act will not be significantly limited by amendment by the United States Congress and/or reinterpretation by the FDA. For clinical investigation and marketing outside the United States, the Company is also subject to foreign regulatory requirements governing clinical trials and marketing approval for pharmaceutical products. In 15 18 Europe, the approval process for the commencement of clinical trials varies from country to country. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. In addition to regulations enforced by the FDA, the Company also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, it could be held liable for any damages that result from accidental contamination or injury and any such liability could exceed the resources of the Company. PATENTS AND INTELLECTUAL PROPERTY Patents and other proprietary rights are important to the Company's business. The Company's policy is to file patent applications and protect technology, inventions and improvements to inventions that are commercially important to the development of its business. The Company also relies on trade secrets, know-how, continuing technology innovations and licensing opportunities to develop and maintain its competitive position. The Company has one issued U.S. patent and 6 pending U.S. patent applications, all of which have been foreign filed. Two of the patent applications are co-owned with co-inventors. The Company has one exclusive worldwide license to a patent, an exclusive license to one U.S. patent and three worldwide exclusive licenses to patent applications. The Company also has a non-exclusive license to one U.S. patent. There is no assurance that patents will issue from these applications or that any patent will issue on technology arising from additional research or, if patents do issue, that claims allowed will be sufficient to protect the Company's technology. The patent application process takes several years and entails considerable expense. In addition, with respect to each of the Company's co-owned patent applications, the Company has an option to obtain an exclusive, worldwide, transferable, royalty-bearing license for such technology, and is currently in discussions with one of the co-inventors to obtain such a license. In the event the Company is unable to negotiate exclusive rights to such co-owned technology, each co-inventor may have rights to independently make, use, offer to sell or sell the patented technology. Commercialization, assignment or licensing of such technology by a co-inventor could have a material adverse effect on the Company's business, financial condition and results of operations. The failure to obtain patent protection on the Company's technologies or proposed products may have a material adverse effect on the Company's competitive position and business prospects. The patent positions of pharmaceutical and biotechnology firms are generally uncertain and involve complex legal and factual questions. To date, there has emerged no consistent policy regarding the breadth of claim allowed in biotechnology patents. Patent applications in the United States are maintained in secrecy until a patent issues, and the Company cannot be certain that others have not filed applications for technology covered by the Company's patent applications or that the Company was first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to compounds or processes that block or compete with those of the Company. There can be no assurance that third parties will not assert patent or other intellectual property infringement claims against the Company with respect to its products or technology or other matters. There may be third-party patents and other intellectual property relevant to the Company's products and technology which are not known to the Company. A number of the gene sequences or proteins encoded by certain of those sequences that the Company is investigating or may use in its products are or may become patented by others. As a result, the Company may be required to obtain licenses to such gene sequences or other technology in order to test, use or market products that contain proprietary gene sequences or encode proprietary proteins. For example, in connection with its anemia program, the Company anticipates that it may need to obtain a license to a gene for human erythropoietin. There can be no assurance that the Company will be able to obtain this or any other license on terms favorable to the Company, if at all. 16 19 Patent litigation is becoming more widespread in the biotechnology industry. Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to the Company, to protect trade secrets owned by the Company, or to determine the scope and validity of proprietary rights of third parties. Although no third party has asserted that the Company is infringing such third party's patent rights or other intellectual property, there can be no assurance that litigation asserting such claims will not be initiated, that the Company would prevail in any such litigation, or that the Company would be able to obtain any necessary licenses on reasonable terms, if at all. Any such claims against the Company, with or without merit, as well as claims initiated by the Company against third parties, can be time-consuming and expensive to defend or prosecute and to resolve. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. In addition, to the extent outside collaborators apply technological information developed independently by them or by others to the Company's product development programs or apply Avigen's technologies to other projects, disputes may arise as to the ownership of proprietary rights to such technologies. The Company also relies on a combination of trade secret and copyright law, employee and third-party nondisclosure agreements, and other protective measures to protect intellectual property rights pertaining to its products and technology. There can be no assurance, however, that these agreements will provide meaningful protection of the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. In addition, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that the Company will be able to protect its intellectual property successfully. PRODUCT LIABILITY INSURANCE The manufacture and sale of medical products entail significant risk of product liability claims. The Company currently does not carry product liability insurance, although it intends to obtain such coverage prior to beginning clinical trials. There can be no assurance that such coverage will be adequate to protect the Company from any liabilities it might incur in connection with the sale of the Company's products. In addition, the Company may require increased product liability coverage as products are commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business and results of operations. EMPLOYEES As of September 21, 1998, the Company had 44 full-time employees, 11 of whom have Ph.D. or M.D. degrees, including 35 employees in research and development, and 9 in general administration and finance. The Company also relies on a number of part-time employees and consultants. None of the Company's employees is represented by a collective bargaining agreement nor has the Company ever experienced a work stoppage. The Company believes that its relationship with its employees is good. SCIENTIFIC ADVISORY BOARD The Company has established a Scientific Advisory Board, consisting of experts in the field of medicine, genetics and molecular biology, which reviews and evaluates the Company's research programs and advises the Company with respect to technical matters in fields in which the Company is involved. The members of the Scientific Advisory Board are prominent scholars in their field and, as a result, may serve as consultants to a wide variety of companies. The Company's Scientific Advisory Board includes: Jef D. Boeke, Ph.D., is a professor of Molecular Biology and Genetics at The Johns Hopkins University School of Medicine. Dr. Boeke co-invented the capsid targeted viral inactivation technology that provides a basis for Avigen's antiviral product development program. and has authored more than 100 publications. 17 20 Katherine A. High, M.D., is the William H. Bennett Associate Professor of Pediatrics at the University of Pennsylvania and the Director of Research of the Hematology Division at Children's Hospital of Philadelphia. She is an expert in both the basic science and clinical aspects of hemophilia. Mark A. Israel, M.D., is Professor of Neurological Surgery and Pediatrics and Director, the Preuss Laboratory of Molecular Neuro-oncology at the University of California, San Francisco. Dr. Israel's research focuses on the molecular and cellular biology of tumors of the nervous system. Yuichi Iwaki, M.D., Ph.D., is Professor of Urology and Surgery at the University of Southern California. He also is Director, Transplantation Immunology and Immunogenetic Laboratory at the University of Southern California and is a Director of Avigen, Inc. Y.W. Kan, M.D., D.Sc., is the Louis K. Diamond Professor of Hematology at the University of California at San Francisco. He also is an Investigator of the Howard Hughes Medical Institute. Dr. Kan was the 1991 recipient of the Albert Lasker Clinical Medical Research Award and is noted as a leader in the fields of sickle cell anemia and thalassemia. Mark Kay, M.D., Ph.D., is a faculty member at the University of Washington. Dr. Kay was a recipient of the Upjohn Achievement Award for Excellence in Clinical Pharmacology and the Henry Christian Award for Excellence in Research. Dr. Kay was honored recently as an electee to the Board of Directors of the newly formed American Society of Gene Therapy. Dr. Kay is also a member of the editorial boards at Gene Therapy and Human Gene Therapy. As of August 1, 1998, Dr. Kay assumed the position of Director -- Program in Human Gene Therapy, and Associate Professor -- Department of Pediatrics and Genetics at Stanford University School of Medicine. Keiya Ozawa, M.D., Ph.D., is a professor of Molecular Biology, Institute of Hematology, at Jichi Medical School in Japan, where he has established a research and preclinical program in gene therapy. Dr. Ozawa is regarded as one of the leading authorities on gene therapy in Japan and is responsible for drafting the Japanese government's gene therapy guidelines. Jeffrey M. Rosen, Ph.D., is a professor of Cell Biology at Baylor College of Medicine. Dr. Rosen is an internationally recognized expert in the field of gene expression, and his research focuses primarily on the mechanisms of tissue-specific gene expression in the mammary and prostate glands. ITEM 2. PROPERTIES THE COMPANY The Company's facility, located in Alameda, California, is an approximately 23,000 square foot facility leased through May 2003. The Company believes that it will be able to renew the lease of this facility or find suitable alternate facilities in the same general area without a material disruption of its operations. Within the 23,000 square foot facility, the Company completed in October 1996 of a 7,000 square foot expansion of its research and development facilities and administration offices. ITEM 3. LEGAL PROCEEDINGS (a) No material legal proceedings to which Avigen was a party or of which any of its property was the subject were pending during fiscal 1998. (b) No material legal proceedings were terminated during fiscal 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 21 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of the Company's common stock commenced trading in the over-the-counter market on the NASDAQ National Market on May 22, 1996, under the symbol "AVGN". The Company has never paid cash dividends and does not anticipate paying cash dividends in the forseeable future. The following table sets forth, for fiscal periods indicated, the range of high and low intraday sale prices available for the fiscal year 1997 and 1998.
1997 HIGH LOW ---- ------ ------ Year End 6/30/97........................................... $7.375 $3.25
1998 HIGH LOW ---- ------ ------ Year End 6/30/98........................................... $5 $1.875
As of September 21, 1998, there were approximately 120 holders of record of the Company's Common Stock. 19 22 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED JUNE 30, ----------------------------------------------- OCTOBER 22, 1992 (INCEPTION) 1998 1997 1996 TO JUNE 30, 1995 ------------- ------------- ------------- ---------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Grant revenue................. $ -0- $ 98 $ 87 $ 178 Expenses: Research and development... 6,235 4,033 2,550 5,780 General and administrative........... 2,990 2,351 1,102 3,155 ---------- ---------- ---------- ------- 9,225 6,384 3,652 8,935 ---------- ---------- ---------- ------- Loss from operations.......... (9,225) (6,286) (3,565) (8,757) Interest income (expense) (net)...................... 365 (710) (531) (40) Other income (expense)........ (17) (2) (1) 189 ---------- ---------- ---------- ------- Net loss...................... $ (8,877) $ (5,578) $ (4,097) $(8,608) ---------- ---------- ---------- ------- Net loss per share............ $ (1.22) $ (.77) ========== ========== Proforma net loss per share... -- -- $ (.80) ---------- ---------- ---------- Shares used in per share calculation................ 7,298,271 7,286,146 5,141,951 ========== ========== ========== BALANCE SHEET DATA: Cash, cash equivalents and investments in marketable securities................. $ 4,477 $ 13,039 $ 16,443 $ 203 Working capital............... 4,635 11,936 15,364 (916) Total assets.................. 5,997 14,760 17,532 1,841 Capital lease obligations: Current.................... 587 396 31 4 Long-term.................. 860 1,084 176 214 Deficit accumulated during development stage.......... (27,160) (18,283) (12,705) (8,608) Stockholders' equity.......... 3,583 12,341 16,027 184
20 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a difference include, but are not limited to, those discussed herein and in "Risk Factors" in Part I. OVERVIEW Since its inception, the Company has devoted substantially all of its resources to research and development activities. The Company is a development stage company and has not received any revenue from the sale of products. The Company does not anticipate generating revenue from the sale of products in the foreseeable future. The Company expects its source of revenue, if any, for the next several years to consist of government grants and payments under collaborative arrangements. The Company has incurred losses since its inception and expects to incur substantial losses over the next several years due to ongoing and planned research and development efforts, including preclinical studies and clinical trials. At June 30, 1998 the Company had an accumulated deficit of $27.2 million. RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 1996, 1997 AND 1998. Grant revenue increased from $87,000 for the year ended June 30, 1996 to $98,000 for the year ended June 30, 1997, and decreased to -0- for the year ended June 30, 1998. Grant revenue for 1996, 1997 and 1998 consisted of reimbursements under a NIH grant. Revenues earned under research grants are determined by the timing of the award from the issuing agency. As a result, research grant revenue earned in one period is not predictive of research grant revenue to be earned in future periods. The Company's research and development expenses increased from $2.6 million for the year ended June 30, 1996 to $4 million for the year ended June 30, 1997, and increased to $6.2 million for the year ended June 30, 1998. The increase from fiscal 1996 to fiscal 1997 was due primarily to increases in personnel, employee related expenses, outside labs, temporary employees and increases in depreciation expense. The increase from fiscal 1997 to fiscal 1998 was due primarily to increases in personnel and temporary employees. The Company expects research and development spending to increase significantly over the next several years as the Company expands research and product development efforts. General and administrative expenses increased from 1.1 million for the year ended June 30, 1996 to 2.4 million for the year ended June 30, 1997 and increased to 3.0 million for the year ended June 30, 1998. The increase from fiscal 1996, fiscal 1997 and fiscal 1998 was due primarily to increases in executive personnel and costs associated with operating as a public company. General and administrative expenses are expected to increase as the level of the Company's activities increases but to decrease as a percentage of total expenses, with the expansion of the research and development efforts. Interest expense decreased from $581,000 for the year ended June 30, 1996 to $70,000 for the year ended June 30, 1997 and increased to $222,000 for the year ended June 30, 1998. The decrease from fiscal 1996 to fiscal 1997 was due primarily to the interest expense incurred related to the Company's bridge financing for the initial public offering in fiscal year 1996. The increase from fiscal 1997 to 1998 was due primarily to the Company's utilization of the equipment lease line. Interest income increased from $50,000 for the year ended June 30, 1996 to $780,000 for the year ended June 30, 1997 and decreased to $587,000 for the year ended June 30, 1998. The increase from fiscal 1996 to fiscal 1997 was due primarily to the investment of the proceeds of the initial public offering. The decrease from fiscal 1997 to fiscal 1998 was due primarily to the decreasing balance of the proceeds of the initial public offering. 21 24 LIQUIDITY AND CAPITAL RESOURCES In May 1996, the Company consummated an initial public offering (the "Offering") of 2,500,000 shares of Common Stock which raised approximately $17.7 million, net of expenses. In July 1996, the Company issued 250,000 additional shares of Common Stock in connection with the exercise of the underwriters' over-allotment option. Net proceeds from such sale were approximately $1,850,000. Prior to May 1996, the Company financed its operations primarily through private placements of Common Stock and Preferred Stock and a bridge financing which was completed on March 29, 1996 (the "1996 Bridge Financing"). Through March 31, 1996, the Company had raised approximately $11.0 million, net of financing costs, from the sale of Common Stock and Preferred Stock and $1.9 million from the 1996 Bridge Financing. In March 1996, the Company completed the 1996 Bridge Financing in which the Company issued $1,937,500 principal amount of promissory notes (the "Notes") and warrants to purchase 193,750 shares of Common Stock. The Notes accrued interest at the rate of 12% per year and were paid in June 1996 with a portion of the proceeds from the Company's initial public offering. The warrants expire in March 2001. The warrants were assigned a value of $300,000. This amount was reflected as a discount on the Notes and was accreted as additional financing (interest) expense over the term of the Notes. In connection with the 1996 Bridge Financing, the Company paid the placement agent a commission equal to 10% of the gross proceeds and warrants to purchase 19,375 shares of Common Stock. The placement agent warrants expire in May, 2001. At June 30, 1998, the Company had cash, cash equivalents and investments in marketable securities of approximately $4.5 million. The Company expects its cash requirements to increase significantly in future periods. The Company will require substantial funds to conduct the research and development activities and preclinical studies and clinical testing of its potential products and to market any products that are developed. The Company's facility is an approximately 23,000 square foot facility leased through May 2003. The Company believes that it will be able to renew the lease of this facility and find suitable alternate facilities in the same general area without a material disruption of its operations. Within the 23,000 square foot facility, the Company completed in October 1996 with the commencement of a 7,000 square foot expansion of its research and development facilities and administration offices. The construction cost was approximately $500,000. In November 1996, the Company secured a $2 million revolving line of credit with Wells Fargo Bank. In May 1997 the Company secured a $2 million capital lease from which $1.4 million was used as a sale-leaseback of existing equipment and for other leasehold improvements. To the extent the Company decides to develop its own manufacturing facilities, the Company would require substantial additional capital. The Company's cash requirements may vary materially from those now planned because of the results of research, development and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in the Company's existing research relationships, the ability of the Company to establish collaborative arrangements, the development of commercialization activities and arrangements and the purchase of additional capital equipment. The Company's common stock is traded on the Nasdaq National Market ("Nasdaq"). In order to maintain its listing on Nasdaq, the Company must maintain net tangible assets, market capitalization and public float at specified levels, and generally must maintain a minimum bid price of $1.00 per share. The Company believes that maintaining its listing on Nasdaq is central to its ability to raise additional funds as well as to provide liquidity to investors. The Company failed to meet the Nasdaq net tangible asset listing requirement at June 30, 1998. The Company will be required to generate sufficient revenue or raise additional capital to maintain Nasdaq listing requirements through second fiscal quarter 1999. The Company believes that the available cash and cash equivalents and short-term investments, will be sufficient to meet the Company's operating expenses and capital requirements for at least the next 12 months. The Company will be required to seek additional funds through public or private financings or collaborative arrangements with corporate partners. Issuances of additional equity securities could result in substantial dilution to stockholders. There can be no assurance that additional funding will be available on terms 22 25 acceptable to the Company, if at all. The failure to fund its capital requirements would have a material adverse effect on the Company's business. The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail. The Company is in the process of working with its software vendors to ensure that the software that the Company has licensed from third parties will operate properly in the year 2000 and beyond. In addition, the Company is working with its external suppliers and service providers to ensure that they and their systems will be able to support the Company's needs and, where necessary, interoperate with the Company's server and networking hardware and software infrastructure in preparation for the year 2000. Management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer systems improvements to be year 2000 compliant. However, significant uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance. Any year 2000 compliance problems of either the Company, its customers or vendors could have a material adverse effect on the Company's business, results of operations and financial condition. ITEM 8. FINANCIAL STATEMENTS The financial statements required by this item are set forth beginning at page F1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required is hereby incorporated by reference from the information contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be held November 19, 1998 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a) The following documents are filed as part of this Report on Form 10-K: (1) Financial Statements: Report of Ernst & Young LLP, Independent Auditors Balance Sheets 23 26 Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (2) Financial Statements schedules have been omitted from this report because the information is provided in the Financial Statements or is not applicable. 24 27 (3) Exhibits
EXHIBIT NUMBER EXHIBITS ------- -------- 3.1* Amended and Restated Certificate of Incorporation 3.2* Restated Bylaws of the Registrant 4.1* Specimen Common Stock Certificate 10.2* 1993 Stock Option Plan 10.3* 1996 Equity Incentive Plan 10.4* Form of Incentive Stock Option Grant 10.5* Form of Nonstatutory Stock Option Grant 10.6* 1996 Non-Employee Director Stock Option Plan 10.7* Form of Series C Investors' Rights Agreement 10.8* Form of Indemnification Agreement between the Registrant and its directors and executive officers 10.9* Form of Common Stock Warrant 10.10* Form of Series A Preferred Stock Warrant 10.11* Form of Series B Preferred Stock Warrant 10.12* Form of Series C Preferred Stock Warrant 10.13* Form of Series D Preferred Stock Warrant 10.14* Form of Series A Preferred Stock Subscription Agreement 10.15* Form of Series B Preferred Stock Subscription Agreement 10.16* Form of Series C Preferred Stock Subscription Agreement 10.17* Form of Unit Purchase Agreement 10.19* Form of Bridge Warrant 10.20* License Agreement between the Registrant and Research Corporation Technologies, Inc., dated May 15, 1992, as amended as of March 21, 1996 and April 26, 1996 10.21* License Agreement between the Registrant and The Johns Hopkins University, dated November 23, 1993, as amended as of March 21, 1996 10.22* License Agreement between the Registrant and The University of Manitoba, dated February 2, 1994 10.23* Form of Underwriters' Warrant 10.24* Lease Agreement between Registrant and Redding Management, Inc., dated September 15, 1992, as amended June 30, 1995 10.25* Registration Rights Agreement between the Registrant and certain stockholders named therein, dated November 1992 10.26* Registration Rights and Transfer Restriction Agreement between the Registrant and Research Corporation Technologies, Inc., The Indiana University Foundation and Arun Srivastava, dated May 15, 1992, as amended October 1992 10.27*+ Employment Agreement dated August 10, 1992, between the Company and John Monahan. 10.28*+ Employment Agreement dated October 19, 1992, between the Company and Wanda deVlaminck 10.29+ Employment Agreement dated August 14, 1996, between the Company and Thomas J. Paulson 10.30+ Employment Agreement dated October 23, 1996, between the Company and Robert M. Maurer
24 28
EXHIBIT NUMBER EXHIBITS ------- -------- 10.31+ Employment Agreement dated December 13, 1993, between the Company and Gary Kurtzman 10.32** Revolving line of credit signed November 22, 1996 with Wells Fargo Bank 10.33** Equipment lease dated May 22, 1997 with Transamerica Business Credit Corporation 10.34 Form of Common Stock and Warrant Purchase Agreement 11.1* Statement re: computation of net loss per share 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (Reference to the signature page herein) 27.1 Financial Data Schedule
- --------------- * Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 333-3220) and incorporated herein by reference. + Management Contract or Compensation Plan. (b) The Company has filed no reports on Form 8-K. ** Filed as an exhibit to the Registrant's Annual Report on Form 10-K (No. 0-28222) and incorporated herein by reference. 25 29 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 27, 1998 AVIGEN, INC. By: ------------------------------------ John Monahan, Ph.D. President, Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John Monahan and Philip J. Whitcome, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- President, Chief Executive September 27, 1998 - ----------------------------------------------------- Officer and Director John Monahan, Ph.D. (Principal Executive Officer) Chief Financial Officer September 27, 1998 - ----------------------------------------------------- Thomas J. Paulson Controller (Principal September 27, 1998 - ----------------------------------------------------- Accounting Officer) Glenn Bauer Chairman of the Board September 27, 1998 - ----------------------------------------------------- Philip J. Whitcome, Ph.D. Director September 27, 1998 - ----------------------------------------------------- Zola Horovitz, Ph.D. Director September 27, 1998 - ----------------------------------------------------- Yuichi Iwaki, M.D., Ph.D. Director September 27, 1998 - ----------------------------------------------------- Richard T. Pratt
26 30
SIGNATURE TITLE DATE --------- ----- ---- Director September 27, 1998 - ----------------------------------------------------- John K.A. Prendergast, Ph.D. Director September 27, 1998 - ----------------------------------------------------- Lindsay A. Rosenwald, M.D. Director September 27, 1998 - ----------------------------------------------------- Leonard P. Shaykin *By: ------------------------------------------------ John Monahan, Ph.D. Attorney-in-Fact
27 31 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. 29 Balance Sheets at June 30, 1997 and 1996.................... 30 Statements of Operations for Years Ended June 30, 1997, 1996 and 1995.................................................. 31 Statements of Stockholders' Equity for Years Ended June 30, 1997, 1996 and 1995....................................... 32 Statements of Cash Flows for Years Ended June 30, 1997, 1996 and 1995.................................................. 35 Notes to Financial Statements............................... 36
28 32 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Avigen, Inc. We have audited the accompanying balance sheets of Avigen, Inc. (a development stage company) as of June 30, 1998 and 1997 and the related statements of operations, stockholders' equity and cash flows each of the three years in the period ended June 30, 1998 and for the period from October 22, 1992 (inception) through June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avigen, Inc. at June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998 and for the period from October 22, 1992 (inception) through June 30, 1998, in conformity with generally accepted accounting principles. Walnut Creek, California August 13, 1998, except for Note 10, for which the date is September 24, 1998. 29 33 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION) ASSETS
JUNE 30, -------------------- 1998 1997 -------- -------- Current assets: Cash and cash equivalents................................. $ 1,280 $ 3,407 Investments in marketable securities...................... 3,197 9,632 -------- -------- Total current assets........................................ 4,477 13,039 Property and equipment, net................................. 1,359 1,651 Deposits and other assets................................... 161 70 -------- -------- Total assets...................................... $ 5,997 $ 14,760 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 244 $ 434 Accrued compensation and related expenses................. 147 117 Other accrued liabilities................................. 384 156 Current portion of capital lease obligations.............. 587 396 -------- -------- Total current liabilities................................... 1,362 1,103 Accrued rent................................................ 192 232 Capital lease obligations, less current portion............. 860 1,084 Commitments Stockholders' equity: Common stock, $.001 par value, 30,000,000 shares authorized, 7,305,858 shares issued and outstanding at June 30, 1998; 7,288,580 shares issued and outstanding at June 30, 1997....................................... 7 7 Additional paid-in capital................................ 30,782 30,704 Deferred compensation..................................... (46) (87) Deficit accumulated during the development stage.......... (27,160) (18,283) -------- -------- Total stockholders' equity.................................. 3,583 12,341 -------- -------- Total liabilities and stockholders' equity........ $ 5,997 $ 14,760 ======== ========
See accompanying notes. 30 34 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
PERIOD FROM OCTOBER 22, 1992 YEAR ENDED JUNE 30, (INCEPTION) -------------------------------------- THROUGH 1998 1997 1996 JUNE 30, 1998 ---------- ---------- ---------- ---------------- Grant revenue.......................... $ -- $ 98 $ 87 $ 363 Expenses: Research and development............. 6,235 4,033 2,550 18,598 General and administrative........... 2,990 2,352 1,102 9,599 ---------- ---------- ---------- -------- 9,225 6,385 3,652 28,197 ---------- ---------- ---------- -------- Loss from operations................... (9,225) (6,287) (3,565) (27,834) Interest expense....................... (222) (70) (581) (952) Interest income........................ 587 780 50 1,457 Other (expense) income................. (17) (1) (1) 169 ---------- ---------- ---------- -------- Net loss............................... $ (8,877) $ (5,578) $ (4,097) $(27,160) ========== ========== ========== ======== Historical basic and diluted net loss per share............................ $ (1.22) $ (.77) ========== ========== Pro forma basic and diluted net loss per share............................ $ (.80) ========== Shares used in historical basic and diluted per share calculation........ 7,298,271 7,286,146 ========== ========== Shares used in pro forma basic and diluted per share calculation........ 5,141,951 ==========
See accompanying notes. 31 35 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 1998 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B CONVERTIBLE PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL ------------------- ------------------ ---------------- PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ---------- ------ --------- ------ ------- ------ ---------- ------------ Balance at October 22, 1992 (inception)............................ -- $-- -- $-- -- $-- $ -- $-- Issuance of common stock at $.004 per share in November and December 1992................................. -- -- 896,062 1 -- -- 4 -- Issuance of common stock at $.554 per share from January to June 1993 for services rendered.................... -- -- 20,316 -- -- -- 11 -- Issuance of common stock at $.004 to $.222 per share from November 1992 to March 1993 for cash.................. -- -- 1,003,406 1 -- -- 54 -- Issuance of Class B common stock at $.004 per share in December 1992 for cash................................. -- -- -- -- 90,293 -- 1 -- Issuance of Series A preferred stock at $4.43 per share from March to June 1993 for cash (net of issuance costs of $410,900)......................... 678,865 1 -- -- -- -- 2,595 -- Issuance of Series A preferred stock at $3.85 per share in March 1993 for cancellation of note payable and accrued interest..................... 68,991 -- -- -- -- -- 266 -- Issuance of common stock at $.004 per share in November 1993 pursuant to antidilution rights.................. -- -- 22,869 -- -- -- 1 -- Issuance of Series A preferred stock at $4.43 per share from July to November 1993 for cash and receivable (net of issuance costs of $187,205).......... 418,284 -- -- -- -- -- 1,665 -- Issuance of Series B preferred stock at $5.54 per share in March 1994 for cash (net of issuance costs of $34,968)............................. 128,031 -- -- -- -- -- 674 -- Issuance of Series C preferred stock at $4.87 per share from July 1994 to June 1995 for cash and receivables (net of issuance costs of $259,620)............................ 739,655 1 -- -- -- -- 3,344 -- DEFICIT ACCUMULATED DURING THE TOTAL DEVELOPMENT STOCKHOLDERS' STAGE EQUITY ----------- ------------- Balance at October 22, 1992 (inception)............................ $ -- $ -- Issuance of common stock at $.004 per share in November and December 1992................................. -- 5 Issuance of common stock at $.554 per share from January to June 1993 for services rendered.................... -- 11 Issuance of common stock at $.004 to $.222 per share from November 1992 to March 1993 for cash.................. -- 55 Issuance of Class B common stock at $.004 per share in December 1992 for cash................................. -- 1 Issuance of Series A preferred stock at $4.43 per share from March to June 1993 for cash (net of issuance costs of $410,900)......................... -- 2,596 Issuance of Series A preferred stock at $3.85 per share in March 1993 for cancellation of note payable and accrued interest..................... -- 266 Issuance of common stock at $.004 per share in November 1993 pursuant to antidilution rights.................. -- 1 Issuance of Series A preferred stock at $4.43 per share from July to November 1993 for cash and receivable (net of issuance costs of $187,205).......... -- 1,665 Issuance of Series B preferred stock at $5.54 per share in March 1994 for cash (net of issuance costs of $34,968)............................. -- 674 Issuance of Series C preferred stock at $4.87 per share from July 1994 to June 1995 for cash and receivables (net of issuance costs of $259,620)............................ -- 3,345
32 36 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 1998 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B CONVERTIBLE PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL ------------------- ------------------ ---------------- PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ---------- ------ --------- ------ ------- ------ ---------- ------------ Issuance of Series C preferred stock at $4.87 per share in June 1995 for cancellation of notes payable........ 35,500 $-- -- $-- -- $-- $ 173 $-- Net loss from inception to June 30, 1995................................. -- -- -- -- -- -- -- -- ---------- --- --------- --- ------- --- ------- --- Balance at June 30, 1995................. 2,069,326 2 1,942,653 2 90,293 -- 8,788 -- Issuance of Series C preferred stock at $4.87 per share in July 1995 for cash (net of issuance costs of $26,000)... 41,042 -- -- -- -- -- 174 -- Issuance of Series D preferred stock at $7.09 per share from October 1995 to February 1996 for cash (net of issuance costs of $25,279)........... 205,351 -- -- -- -- -- 1,430 -- Issuance of Series D preferred stock at $7.09 per share in March 1996 in settlement of accounts payable....... 22,574 -- -- -- -- -- 160 -- Issuance of common stock at $.004 per share in March 1996 pursuant to antidilution rights.................. -- -- 17,630 -- -- -- 1 -- Issuance of stock options in February 1996 in settlement of certain accrued liabilities.......................... -- -- -- -- -- -- 137 -- Conversion of Class B common stock to common stock......................... -- -- 231,304 1 (90,293) -- (1) -- Issuance of warrants to purchase common stock in connection with 1996 bridge financing in March 1996.............. -- -- -- -- -- -- 300 -- Conversion of preferred stock to common stock in May 1996 (2,338,293) (2) 2,355,753 2 -- -- (1) -- Issuance of common stock at $8.00 per share in connection with the May 1996 initial public offering (net of issuance costs of $798,414 and underwriting discount of $1,500,000) -- -- 2,500,000 2 -- -- 17,699 -- DEFICIT ACCUMULATED DURING THE TOTAL DEVELOPMENT STOCKHOLDERS' STAGE EQUITY ----------- ------------- Issuance of Series C preferred stock at $4.87 per share in June 1995 for cancellation of notes payable........ $ -- $ 173 Net loss from inception to June 30, 1995................................. 8,608 8,608 -------- ------- Balance at June 30, 1995................. (8,608) 184 Issuance of Series C preferred stock at $4.87 per share in July 1995 for cash (net of issuance costs of $26,000)... -- 174 Issuance of Series D preferred stock at $7.09 per share from October 1995 to February 1996 for cash (net of issuance costs of $25,279)........... -- 1,430 Issuance of Series D preferred stock at $7.09 per share in March 1996 in settlement of accounts payable....... -- 160 Issuance of common stock at $.004 per share in March 1996 pursuant to antidilution rights.................. -- 1 Issuance of stock options in February 1996 in settlement of certain accrued liabilities.......................... -- 137 Conversion of Class B common stock to common stock......................... -- -- Issuance of warrants to purchase common stock in connection with 1996 bridge financing in March 1996.............. -- 300 Conversion of preferred stock to common stock in May 1996 -- (1) Issuance of common stock at $8.00 per share in connection with the May 1996 initial public offering (net of issuance costs of $798,414 and underwriting discount of $1,500,000) -- 17,702
33 37 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 1998 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B CONVERTIBLE PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL ------------------- ------------------ ---------------- PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ---------- ------ --------- ------ ------- ------ ---------- ------------ Proceeds from exercise of options in June 1996 -- $-- 6,178 $-- -- $-- $ 3 $ -- Repurchase of common stock -- -- (18,325) -- -- -- (1) -- Deferred compensation -- -- -- -- -- -- 164 (128) Net loss -- -- -- -- -- -- -- -- ---------- --- --------- --- ------- --- ------- ----- Balance at June 30, 1996 -- -- 7,035,193 7 -- -- 28,853 (128) Issuance of common stock at $8.00 per share in July 1996 in connection with the exercise of underwriters' over-allotment option (net of underwriting discount of $150,000) -- -- 250,000 -- -- -- 1,850 -- Proceeds from exercise of options -- -- 3,387 -- -- -- 1 -- Amortization of deferred compensation -- -- -- -- -- -- -- 41 Net loss -- -- -- -- -- -- -- -- ---------- --- --------- --- ------- --- ------- ----- Balance at June 30, 1997 -- -- 7,288,580 7 -- -- 30,704 (87) Proceeds from exercise of options -- -- 17,278 -- -- -- 10 -- Amortization of deferred compensation -- -- -- -- -- -- -- 41 Options granted for services -- -- -- -- -- -- 68 -- Net loss -- -- -- -- -- -- -- -- ---------- --- --------- --- ------- --- ------- ----- Balance at June 30, 1998 -- $-- 7,305,858 $ 7 -- -- $30,782 $ (46) ========== === ========= === ======= === ======= ===== DEFICIT ACCUMULATED DURING THE TOTAL DEVELOPMENT STOCKHOLDERS' STAGE EQUITY ----------- ------------- Proceeds from exercise of options in June 1996 $ -- $ 3 Repurchase of common stock -- (1) Deferred compensation -- 35 Net loss (4,097) (4,097) -------- ------- Balance at June 30, 1996 (12,705) 16,027 Issuance of common stock at $8.00 per share in July 1996 in connection with the exercise of underwriters' over-allotment option (net of underwriting discount of $150,000) -- 1,850 Proceeds from exercise of options -- 1 Amortization of deferred compensation -- 41 Net loss (5,578) (5,578) -------- ------- Balance at June 30, 1997 (18,283) 12,341 Proceeds from exercise of options -- 10 Amortization of deferred compensation -- 41 Options granted for services -- 68 Net loss (8,877) (8,877) -------- ------- Balance at June 30, 1998 $(27,160) $ 3,583 ======== =======
See accompanying notes. 34 38 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM OCTOBER 22, 1992 YEAR ENDED JUNE 30, (INCEPTION) ------------------------------ THROUGH 1998 1997 1996 JUNE 30, 1998 ------- -------- ------- ---------------- OPERATING ACTIVITIES Net loss.................................................... $(8,877) $ (5,578) $(4,097) $(27,160) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 678 558 412 2,354 Amortization of deferred compensation................... 41 41 35 116 Write-off of organization costs......................... -- -- -- 146 Noncash interest expense................................ -- -- 494 510 Common stock issued for services........................ -- -- -- 11 Stock options issued for services....................... 68 -- -- 68 Changes in operating assets and liabilities: Prepaids, deposits and other assets.................. (91) (35) 11 (161) Accounts payable, other accrued liabilities and accrued compensation and related expenses.......... 67 (341) 82 1,071 Accrued rent......................................... (39) (17) 75 192 ------- -------- ------- -------- Net cash used in operating activities....................... (8,153) (5,372) (2,988) (22,853) INVESTING ACTIVITIES Purchases of property and equipment......................... (387) (1,156) (57) (3,460) Disposal of property and equipment.......................... -- -- 47 47 Organization costs.......................................... -- -- -- (219) Purchase of marketable securities........................... (7,405) (22,514) (8,352) (38,270) Sale of marketable securities............................... 13,840 21,233 -- 35,073 ------- -------- ------- -------- Net cash provided by (used in) investing activities......... 6,048 (2,437) (8,362) (6,829) FINANCING ACTIVITIES Proceeds from notes payable................................. -- -- 200 2,133 Repayment of notes payable.................................. -- -- (200) (1,710) Proceeds from 1996 bridge financing......................... -- -- 1,937 1,937 Payment of bridge financing costs........................... -- -- (194) (194) Repayment of 1996 bridge financing.......................... -- -- (1,937) (1,937) Payments on capital lease obligations....................... (522) (165) (11) (706) Proceeds from sale-leaseback of equipment................... 490 1,437 -- 1,927 Proceeds from issuance of preferred stock, net of issuance costs..................................................... -- -- 1,738 9,885 Proceeds from issuance of common stock, net of issuance costs and repurchases..................................... 10 1,852 17,705 19,627 ------- -------- ------- -------- Net cash (used in) provided by financing activities......... (22) 3,124 19,238 30,962 Net (decrease) increase in cash and cash equivalents........ (2,127) (4,685) 7,888 1,280 Cash and cash equivalents, beginning of period.............. 3,407 8,092 203 -- ------- -------- ------- -------- Cash and cash equivalents, end of period.................... $ 1,280 $ 3,407 $ 8,091 $ 1,280 ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURE Issuance of preferred stock for cancellation of accounts payable, notes payable and accrued interest............... $ -- $ -- $ 160 $ 499 Issuance of stock options for repayment of certain accrued liabilities............................................... -- -- 137 137 Issuance of warrants in connection with bridge financing.... -- -- 300 300 Deferred compensation related to stock option grants........ -- -- 163 163 Purchase of property and equipment under capital lease financing................................................. -- -- -- 226 Cash paid for interest...................................... 222 70 87 459
35 39 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Avigen, Inc. (the "Company") was incorporated on October 22, 1992 in Delaware for the purpose of development and commercialization of gene-based therapeutic products. The Company's activities since inception have consisted principally of acquiring product rights, raising capital, establishing facilities and performing research and development. Accordingly, the Company is considered to be in the development stage. The Company expects to continue to have substantial losses over the next several years during its development state. The Company plans to meet its capital requirements primarily through issuances of equity securities, research and development contract revenue, and in the longer term, revenue from product sales. The Company intends to seek additional funding through public or private equity or debt financing, when market conditions allow. There can be no assurance that the Company will be able to enter into financing arrangements on acceptable terms or at all. Without such additional funding, the Company may be required to delay, reduce the scope of or eliminate one or more of its research or development programs. If the Company cannot raise additional capital, management will reduce its operations to continue as a going concern through at least June 30, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's marketable securities consist principally of available-for-sale government and corporate debt securities with a minimum short-term rating of A1/P1 and a minimum long-term rating of A and with maturities of less than one year. Realized and unrealized gains and losses have been insignificant to the results of operations and financial position of the Company. All investments are classified as available for sale. Total cash, cash equivalents, and marketable securities, at amounts which approximate fair value, are as follows (in thousands):
JUNE 30, ---------------- 1998 1997 ------ ------ Cash in banks.............................................. $1,280 $1,477 Corporate debt securities.................................. 486 8,361 Federal Home Loan Mortgage Obligations..................... 999 -- U.S. Treasury Notes........................................ 1,712 3,201 ------ ------ $4,477 $13,039 ====== ======
RESTRICTED CASH Deposits and other assets at June 30, 1998 include a $151,000 cash deposit maintained under the terms of an equipment lease. 36 40 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets, which range from five to seven years, using the straight-line method. Leasehold improvements and assets under capital leases are amortized over the lives of the related leases or their estimated useful lives, whichever is shorter, using the straight-line method. RESEARCH AND DEVELOPMENT COSTS Costs to develop the Company's products are expensed as incurred in accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," which establishes accounting and reporting standards for research and development. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires use of option valuation models that were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable and not for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. BASIC AND DILUTED NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of stock options, warrants, and convertible securities. Basic net loss per share is computed using the weighted-average number of common shares outstanding. Diluted net loss per share excludes the effect of the potential shares to be issued upon the assumed exercise of the options and warrants because the effect of inclusion of such shares would be antidilutive due to the loss for all periods presented. All net loss per share amounts for all periods have been presented, and where necessary, restated to conform to SFAS 128 requirements. The adoption of SFAS 128 did not have a material impact on the Company's earnings per share calculation for all periods presented. Pro forma net loss per share, as presented in the accompanying statements of operations, has been computed as described above and also gives effect to common equivalent shares from convertible preferred stock issued from the initial public offering that automatically converted upon completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. RECENT ACCOUNTING PRONOUNCEMENTS Effective July 1, 1998, the Company will be required to adopt Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; 37 41 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) however, the adoption of this statement is not expected to have a significant impact on the Company's financial position or results of operations. Effective for the financial statements for the year ended June 30, 1999, the Company will be required to adopt Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes Statement 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that public business enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Given that the Company operates in one segment, the adoption of SFAS 131 is expected to have no significant impact on the Company's results of operations, financial position or disclosure of segment information. 2. LICENSING AGREEMENTS The Company has entered into various license agreements with universities and medical research centers for the use of certain technologies related to its gene therapy product development programs. Generally, such agreements require the Company to pay the licensor a royalty on sales of products incorporating the licensed technology. Certain of these agreements require the Company to pay minimum royalties for specified periods and payments upon the achievement of specified milestones. These agreements are generally cancelable by the Company upon written notice without significant financial penalty, or by the licensor if the Company does not meet development milestones specified in the agreements. Certain of these license agreements provide for the achievement of development milestones at various times beginning in February 1997. In the event the Company fails to achieve such milestones or to obtain extensions, certain of the license agreements may be terminated by the licensor with relatively short notice to the Company. Termination of any of the Company's license agreements could have a material adverse effect on the Company's business. The Company entered into an exclusive license agreement for the use of patented technology with Research Corporation Technology ("RCT"). This agreement requires the Company to achieve certain development milestones in order to continue to use the technology. The Company must exercise its best efforts to commercially develop, promote and sell products covered by the licensed patent rights, and is obligated to file an Investigational New Drug application ("IND"), by the end of 1998 and a product license application or a new drug application by the end of 2000. In the event the Company fails to achieve any of these milestones by their applicable deadlines, the Company has the right to pay RCT additional fees of up to $250,000 to extend certain of the deadlines for specified periods. RCT may terminate the agreement if the Company becomes insolvent or bankrupt or fails to perform any of its obligations under the agreement. 3. NOTES PAYABLE In March 1996, the Company completed a bridge financing pursuant to which it issued $1,938,000 principal amount of bridge notes payable including $295,000 to certain stockholders and members of the Board of Directors and warrants to purchase 193,750 shares of common stock (see Note 5). The bridge notes were paid, together with interest at the rate of 12% per annum, following the completion of the Company's May 1996 initial public offering. 38 42 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS LEASES The Company leases its facility under a noncancelable operating lease agreement. The lease agreement has variable payment terms; however, the Company is recognizing rent expense on a straight-line basis over the life of the lease which expires in May 2003. The Company has also entered into various capital leases for property and equipment. The Company secured a $2 million capital lease facility of which approximately $1.4 million was used by the Company in fiscal 1997 to complete a sale-leaseback transaction for a portion of its property and equipment. In fiscal 1998, approximately $490,000 of this lease facility was used to finance equipment under an additional sale-leaseback transaction. At June 30, 1998, approximately $110,000 is available under this facility for future equipment financings. The property and equipment financed under the sale-leaseback transactions were sold at net book value; therefore, no gain or loss was realized from these transactions. At June 30, 1998, the Company also has $3 million available under capital lease facilities for future property and equipment financings. Future minimum lease payments under noncancelable operating and capital leases having terms in excess of one year are as follows (in thousands):
CAPITAL OPERATING LEASES LEASE ------- --------- Year ending June 30: 1999................................................... $ 752 $ 420 2000................................................... 828 420 2001................................................... 119 420 2002................................................... -- 420 2003................................................... -- 367 Thereafter............................................. -- -- ------ ------ Total minimum lease payments........................... 1,699 $2,045 ====== Less amount representing interest...................... (251) ------ Present value of minimum lease payments................ 1,447 Less current portion of capital lease obligations...... (587) ------ Long-term capital lease obligations.................... $ 860 ======
Rent expense for fiscal 1998 was $425,000 ($398,000 in 1997 and $377,000 in 1996). LINE OF CREDIT The Company has a $2 million revolving line of credit with a financial institution that bears interest at the bank's prime rate. As of June 30, 1998, no amounts have been drawn from these available funds. This line of credit expires on September 30, 1998 and is collateralized by cash and investments. 5. STOCKHOLDERS' EQUITY COMMON STOCK In May 1996, the Company consummated an initial public offering of 2,500,000 shares of common stock which raised approximately $17.7 million in cash, net of expenses. In May 1996, in contemplation of the initial public offering, the Company filed an Amended and Restated Certificate of Incorporation to effect a one for 4.43 reverse stock split of all outstanding shares of common stock, preferred stock, stock options and warrants. All shares and per share data in the accompanying financial statements have been adjusted retroactively to give effect to the reverse stock split. The Amended 39 43 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) and Restated Certificate of Incorporation also reduced the authorized stock of the Company such that the Company is authorized to issue 5,000,000 shares of preferred stock, and 30,000,000 shares of common stock. WARRANTS At June 30, 1998, the Company had outstanding warrants to purchase shares of common stock as follows (see Note 7 for a description of warrants issued to related parties):
SHARES EXERCISE PRICE EXPIRATION DATE - ------ -------------- --------------- 61,014 $4.87 November 1998 78,065 $5.36 June 2000 - September 2005 14,548 $6.11 March 1999 193,750 $6.40 March 2001 19,375 $7.04 March 2001 4,513 $7.09 November 2005 45,272 $7.80 March 2001 250,000 $9.60 May 2001 - ------- ----------------------------- 666,537 $4.87 - 9.60 November 1998 - November 2005 ======= =============================
The warrants to acquire 193,750 shares of common stock at an exercise price of $6.40 were when issued in connection with a bridge financing transaction ("the bridge warrants") in March 1996. The bridge warrants were assigned a value of $300,000 which was reflected as a discount on the bridge notes and was accreted as additional financing (interest) expense over the term of the bridge notes. Management has determined that the fair value of all other warrants is not material. STOCK OPTION PLANS In October 1993, the Company established a Stock Option Plan (the "1993 Plan") under which incentive and nonqualified stock options may be granted to key employees, directors and consultants of the Company to purchase up to 338,600 shares of common stock. Under the 1993 Plan, options may be granted at a price per share not less than the fair market value at the date of grant as determined by the Board of Directors. In May 1996, the 1993 Plan was superseded by the 1996 Stock Option Plan. 40 44 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) In May 1996, the Company established a Stock Option Plan ("1996 Plan") which provides for grants of options to employees, directors and consultants of the Company to purchase up to 1,300,000 shares of common stock. Under the 1996 Plan, options may be granted at a price per share not less than the fair market value at the date of grant. Options granted generally have a maximum term of 10 years from the grant date and become exercisable over four years. Option activity under the 1993 and 1996 Plans was as follows:
OUTSTANDING OPTIONS ------------------------------------------- WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE SHARES RANGE PER SHARE ------- -------------- -------------- Outstanding at June 30, 1994........... 63,204 $ .44 $ .44 Granted.............................. 115,237 .44 - .66 .44 Canceled............................. (16,930) .44 .44 ------- Outstanding at June 30, 1995........... 161,511 .44 - .66 .44 Granted.............................. 193,476 .44 - .71 .53 Canceled............................. (65,611) .44 - .66 .46 Exercised............................ (6,178) .44 - .49 .46 ------- Outstanding at June 30, 1996........... 283,198 .44 - .71 .52 Granted.............................. 551,127 3.63 - 4.00 3.86 Canceled............................. (4,066) .44 - 3.38 .94 Exercised............................ (3,387) .44 - .71 .50 ------- Outstanding at June 30, 1997........... 826,872 .44 - 4.00 1.94 Granted.............................. 234,025 2.13 - 3.88 2.84 Canceled............................. (74,456) .44 - 3.88 3.23 Exercised............................ (17,278) .44 - .71 .60 ------- ------------ ----- Outstanding at June 30, 1998........... 969,163 $ .44 - 4.00 $2.05 ======= ============ =====
In July 1995, the Company granted a member of its Board of Directors an option to purchase 515,248 shares of common stock at $0.49 per share, exercisable for five years from the date of grant. The shares vest in equal monthly installments over 36 months. The shares issuable upon exercise of such options may be issued prior to vesting but such shares are subject to repurchase at the original price per share upon termination of services to the Company. Such grant was made outside of the 1993 and 1996 Plans. In March 1996, the Board of Directors adopted and in April 1996 the stockholders approved the 1996 Equity Incentive Plan (the "Incentive Plan") and reserved 600,000 shares of common stock for issuance thereunder. The Incentive Plan provides for grants of incentive stock options to employees and nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights to employees and consultants of the Company. No options, restricted stock awards, stock bonuses or stock appreciation rights have been granted under the Incentive Plan. In March 1996, the Board of Directors adopted and in April 1996 the stockholders approved the 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") and reserved 200,000 shares of common stock for issuance there under. The Directors' Plan provides for automatic grants of options to purchase shares of common stock to non-employee directors of the Company. The Directors' Plan was effective upon the closing of the initial public offering. As of June 30, 1998, options to purchase 70,000 shares of common stock 41 45 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) at $3.25 - $6.00 per share, exercisable for five years from the date of grant, have been granted under the Directors' Plan. None of the options granted under the Directors' Plan have been exercised at June 30, 1998. The following table summarizes information with regard to stock options outstanding at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF REMAINING EXERCISE EXERCISE EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE - --------------- --------- ---------------- ---------------- ------- ---------------- $.44 - .71 764,416 6.94 $ .50 701,572 $ .50 2.13 - 3.50 274,400 9.37 2.89 39,435 2.92 3.63 - 3.88 316,595 8.34 3.64 125,492 3.63 4.00 - 6.00 199,000 8.39 4.35 73,049 4.32 --------- ------- 1,554,411 939,548 ========= =======
At June 30, 1998, 580,005, 600,000 and 130,000 options were available for future grant under the 1996 Plan, the Incentive Plan and the Director Plan, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
YEAR ENDED JUNE 30, -------------------- 1998 1997 ------- ------- Expected volatility...................................... 3.3917 .8448 Risk free interest rate.................................. 5.51% 6.44% Life of options in years................................. 5 5 Expected dividend yield.................................. -- --
The weighted-average grant-date fair value of options granted during fiscal 1998 and 1997 was $2.75 and $2.78, respectively. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net loss per share would have been increased to the pro forma amounts indicated in the table below (in thousands except per share amounts):
YEAR ENDED JUNE 30 ------------------ 1998 1997 ------- ------- Net loss -- as reported $(8,876) $(5,578) Net loss -- pro forma (9,460) (5,936) Net loss per share basic and diluted -- as reported (1.22) (.77) Net loss per share basic and diluted -- pro forma (1.30) (.81)
Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, the resulting pro forma compensation cost may not be representative of that expected in future years. For certain options granted during fiscal 1996, the Company recognized as deferred compensation the excess of the deemed value for financial reporting purposes of the common stock issuable upon the exercise of such options over the aggregate exercise price of such options. Total deferred compensation of $163,000 is being amortized by changes to operations over the vesting period for such options. 42 46 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN In September 1997, the Company adopted the 1997 Employee Stock Purchase Plan ("Purchase Plan"). A total of 360,000 shares of common stock have been reserved for issuance under the Purchase Plan. As of June 30, 1998, there have been no employee contributions to the Purchase Plan. 6. BALANCE SHEET DETAIL Accrued liabilities consist of the following (in thousands):
JUNE 30 ------------ 1998 1997 ---- ---- Accrued consulting fees..................................... $157 $ 75 Accrued license fees........................................ 98 75 Other....................................................... 129 6 ---- ---- $384 $156 ==== ====
Property and equipment consist of the following (in thousands):
JUNE 30 ------------------ 1998 1997 ------- ------- Leasehold improvements................................... $ 1,116 $ 1,116 Leasehold improvements under capital lease............... 485 485 Office equipment under capital lease..................... 145 127 Furniture under capital lease............................ 154 143 Laboratory equipment under capital lease................. 1,736 1,379 ------- ------- Property and equipment................................... 3,635 3,249 Accumulated depreciation and amortization................ (2,276) (1,598) ------- ------- Net property and equipment............................... $ 1,359 $ 1,651 ======= =======
Accumulated amortization of assets under capital leases was $1,200,000 and $745,000 at June 30, 1998 and 1997, respectively. 7. RELATED PARTY TRANSACTIONS As part of its continuous program of research an development, the Company retains consultants to advise the Company. Certain of the consultants are holders of the Company's common stock or options to purchase common stock. Consulting expenses relating to these stockholders and option holders were $141,000, $174,000, and $275,000, for fiscal 1998, 1997 and 1996, respectively. The amounts payable to these consultants at June 30, 1998 and 1997 were $157,000, and $75,000, respectively. In fiscal 1998, the Company paid a Board member $100,000 for consulting services related to services performed for the Company. A stockholder and Director of the Company (the "Director") is an officer and sole stockholder of the Placement Agent. In connection with various preferred stock offerings, the Placement Agent received commissions and expense reimbursements of $815,000, and warrants to purchase up to 91,415 shares of the Company's common stock at exercise prices ranging from $4.87 to $7.04 (see Note 5). 43 47 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS (CONTINUED) During fiscal 1996, entities managed by the Director and another member of the Board of Directors loaned the Company $200,000 which was repaid in December 31, 1996. In connection with these agreements, the Company issued warrants to purchase 4,513 shares of its common stock with an exercise price of $7.09 per share (see Note 5). The Director has personally guaranteed the Company's lease on the office and laboratory facilities (see Note 4). The Company has entered into non-exclusive agreements with Maxzen Medical Technologies ("Maxzen") for the purpose of identifying potential investors in Japan. The Director of the Company is affiliated with Maxzen. Under the terms of the agreements, Maxzen receives commissions, payable in cash and warrants, based on investments in the Company initiated by Maxzen. Through June 30, 1998, Maxzen has earned commissions under the agreements amounting to $299,000 and warrants for the purchase of 172,682 shares of common stock at prices ranging from $4.87 to $7.80 (see Note 5). 8. INCOME TAXES Significant components of the Company's deferred tax assets are as follows (in thousands):
JUNE 30 ------------------- 1998 1997 -------- ------- Net operating loss carryforward $ 8,664 $ 5,762 Research and development credit carryforwards 992 621 Depreciation 546 231 Capitalized research and development 1,048 674 Other 133 141 -------- ------- Gross deferred tax assets 11,388 7,429 Valuation allowance (11,388) (7,429) -------- ------- Net deferred tax assets $ -- $ -- ======== =======
Due to the Company's history of losses, a valuation allowance has been provided against the full amount of deferred tax assets. The valuation allowance increased by $3,959,000, $2,258,000, and $1,501,000 for fiscal 1998, 1997, and 1996, respectively. At June 30, 1998, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $24,400,000 and $6,144,000, respectively, which expire in fiscal years ended June 30, 1999 through June 30, 2013. At June 30, 1998, the Company has research and development credit carryforwards for federal tax purposes of approximately $746,000, which expire in fiscal years ended June 30, 2009 through June 30, 2013. Because of the "change in ownership" provisions of the Internal Revenue Code of 1986, utilization of the Company's tax net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. 44 48 AVIGEN, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE PROFIT SHARING/401(k) PLAN In January 1996, the Company adopted a Tax Deferred Savings Plan under Section 401(k) of the Internal Revenue Code (the "Plan") for all full-time employees. Eligible employees can contribute amounts to the Plan via payroll withholding, subject to certain limitations. The Company's contributions to the Plan are discretionary. The Company has made no contributions to the Plan through June 30, 1998. 10. SUBSEQUENT EVENT In August and September 1998, the Company issued 1,196,615 shares of common stock in a private placement which resulted in cash proceeds of approximately $2.7 million. The Company also issued warrants to these investors to acquire 239,323 shares at an exercise price ranging from $2.18 to $3.67 per share. The warrants expire in August and September 2003. 45 EX-10.34 2 COMMONT STOCK AND WARRANT PURCHASE AGREEMENT 1 AVIGEN, INC. COMMON STOCK AND WARRANT PURCHASE AGREEMENT SEPTEMBER 30, 1998 2 [NOTICE TO PURCHASERS IN ALL STATES: IN MAKING AN INVESTMENT DECISION PURCHASERS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.] 3 TABLE OF CONTENTS
PAGE SECTION 1. AUTHORIZATION OF SALE OF THE SECURITIES................................................................ 1 SECTION 2. AGREEMENT TO SELL AND PURCHASE THE SECURITIES.......................................................... 1 2.1 Sale of Units................................................................................... 1 2.2 Separate Agreement.............................................................................. 1 SECTION 3. CLOSING AND DELIVERY................................................................................... 2 (i) Closing....................................................................... 2 3.2 Delivery of the Units at the Closing............................................................ 2 3.3 Subsequent Sales of Shares...................................................................... 2 SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY............................................... 2 4.1 Organization and Qualification.................................................................. 2 4.2 Due Execution, Delivery and Performance of the Agreements....................................... 2 4.3 Issuance, Sale and Delivery of the Shares and the Warrants...................................... 3 4.4 Additional Information.......................................................................... 3 4.5 No Material Change.............................................................................. 3 4.6 SEC Reports..................................................................................... 3 SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS............................................ 4 SECTION 6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS................................................. 5 SECTION 7. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING..................................................... 6 7.1 Receipt of Payment.............................................................................. 6 7.2 Representations and Warranties Correct.......................................................... 6 7.3 Covenants Performed............................................................................. 6 7.4 No General Solicitation; Blue Sky............................................................... 6 SECTION 8. CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING................................................... 6 8.1 Representations and Warranties Correct.......................................................... 6 8.2 Covenants Performed............................................................................. 6 SECTION 9. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT......................................... 6 9.1 Registration Procedures and Expenses............................................................ 6 9.2 Transfer of Securities After Registration....................................................... 8 9.3 Legends......................................................................................... 8 9.4 Indemnification................................................................................. 8
i 4 9.5 Termination of Conditions and Obligations...................................................... 10 9.6 Information Available.......................................................................... 10 9.7 Changes in Purchaser Information............................................................... 11 9.8 Liquidated Damages............................................................................. 11 SECTION 10. BROKER'S FEE......................................................................................... 11 SECTION 11. NOTICES.............................................................................................. 11 SECTION 12. MISCELLANEOUS........................................................................................ 12 12.1 Waivers and Amendments......................................................................... 12 12.2 Headings....................................................................................... 12 12.3 Severability................................................................................... 12 12.4 Governing Law.................................................................................. 12 12.5 Counterparts................................................................................... 12 12.6 Successors and Assigns......................................................................... 13 12.7 Entire Agreement............................................................................... 13 12.8 Payment of Fees and Expenses................................................................... 13
ATTACHMENTS: Exhibit A - Schedule of Purchasers Exhibit B - Form of Warrant Exhibit C - Schedule of Exceptions Appendix I - Stock Certificate and Warrant Questionnaire Appendix II - Registration Statement Questionnaire Appendix III - Purchaser's Certificate of Subsequent Sale ii 5 COMMON STOCK AND WARRANT PURCHASE AGREEMENT THIS AGREEMENT ("Agreement") is made as of the 30th day of September 30, 1998 (the "Effective Date"), by and among AVIGEN, INC., a Delaware corporation with its principal place of business at 1201 Harbor Bay Parkway, Suite #1000, Alameda, California 94502 (the "Company"), UI-USA, Inc. (the "Placement Agent") and each of those persons and entities, severally and not jointly, listed as a Purchaser on the Schedule of Purchasers attached as Exhibit A hereto. Such persons and entities are hereinafter collectively referred to herein as "Purchasers" and each individually as a "Purchaser." AGREEMENT In consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, the Placement Agent and each Purchaser (severally and not jointly) hereby agree as follows: SECTION 1. AUTHORIZATION OF SALE OF THE SECURITIES. Subject to the terms and conditions of this Agreement, the Company has or before the Closing (as defined below) will have authorized the sale and issuance of (a) up to 2,000,000 shares of its Common Stock (the "Common Stock"), (b) Warrants, each in substantially the form attached hereto as Exhibit B (each a "Warrant" and collectively the "Warrants"), to purchase up to 600,000 shares the "Warrant Shares") of the Company's Common Stock. The shares of Common Stock sold hereunder and the Common Stock issuable upon exercise of the Warrants and the UI-USA Warrants together shall be referred to herein as the "Shares." The Shares and the Warrants shall be referred to herein as the "Securities." SECTION 2. AGREEMENT TO SELL AND PURCHASE THE SECURITIES. 2.1 SALE OF UNITS. At the Closing (as defined in Section 3), the Company will sell to each Purchaser, and each Purchaser will purchase from the Company, at a purchase price equal to five (5) times the closing price of the Company's stock as quoted on NASDAQ on the Closing Date plus twelve and one-half ($0.125) cents per "Unit," the number of Units set forth next to such Purchaser's name on the Schedule of Purchasers attached hereto as Exhibit A (the "Schedule of Purchasers"). As used herein, a Unit is comprised of (i) five shares of Common Stock, and (ii) one warrant to purchase one share of Common Stock. 2.2 SEPARATE AGREEMENT. Each Purchaser shall severally, and not jointly, be liable for only the purchase of the Units that appear on Exhibit A hereto and that relate to such Purchaser. The Company's agreement with each of the Purchasers is a separate agreement, and the sale of Units to each of the Purchasers is a separate sale. SECTION 3. 1. 6 CLOSING AND DELIVERY. (i) CLOSING. The Closing of the purchase and sale of ___________ of the Units pursuant to this Agreement (the "Initial Units") shall be held on August 7, 1998, at the offices of Cooley Godward LLP, 5 Palo Alto Square, 3000 El Camino Real, Palo Alto, California, or on such other date and place as may be agreed to by the Company and the Purchasers. The closing of the purchase and sale of the Initial Units, together with each subsequent closing of the purchase and sale of any of the Securities pursuant to Section 3.3 shall herein be referred to collectively as the "Closing." The Company shall give at least two (2) business days prior written notice to the Purchasers, in a manner provided for in Section 11 hereof, of the date, time and location of the Closing. At or prior to the Closing, each Purchaser shall execute any related agreements or other documents required to be executed hereunder, dated as of the date of the Closing (the "Closing Date"). 3.2 DELIVERY OF THE UNITS AT THE CLOSING. At the Closing, the Company shall deliver to each Purchaser stock certificates and Warrants registered in the name of such Purchaser, or in such nominee name(s) as designated by such Purchaser, representing the number of shares of Common Stock and Warrants to be purchased by such Purchaser at the Closing as set forth in the Schedule of Purchasers. The name(s) in which the stock certificates and Warrants are to be issued to each Purchaser are set forth in the Stock Certificate and Warrant Questionnaire in the form attached hereto as Appendix I, as completed by each Purchaser. 3.3 SUBSEQUENT SALES OF SHARES. At any time on or before the 30th day following the closing of the Initial Units, the Company may sell up to the balance of the authorized Securities not sold at the closing of the Initial Units. All such sales shall be made on the terms and conditions set forth in this Agreement, including, without limitation, the representations and warranties by such Purchasers as set forth in Section 5. Any Securities sold pursuant to this Section 3.3 shall be deemed to be "Securities" for all purposes under this Agreement and any purchasers thereof shall be deemed to be "Purchasers" for all purposes under this Agreement. SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. Except as set forth on the Schedule of Exceptions attached hereto as Exhibit C, the Company hereby represents and warrants to, and covenants with, the Purchasers and the Placement Agent as follows: 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to conduct its business as it is currently being conducted. 2. 7 4.2 DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENTS. The Company's execution, delivery and performance of this Agreement have been duly authorized under Delaware law by all requisite corporate action by the Company, and will not violate any law or the Company's Amended and Restated Certificate of Incorporation or Bylaws of the Company or any material provision of any material indenture, mortgage, agreement, contract or other material instrument to which the Company is a party or by which the Company or any of its properties or assets is bound as of the date hereof, or result in a breach of or constitute (upon notice or lapse of time or both) a default under any such material indenture, mortgage, agreement, contract or other material instrument or result in the creation or imposition of any lien, security interest, mortgage, pledge, charge or other encumbrance, of any material nature whatsoever, upon any properties or assets of the Company. Upon the execution and delivery, and assuming the valid execution and delivery of this Agreement by each of the Purchasers, this Agreement will constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of the Company in Section 8.4 hereof may be legally unenforceable. 4.3 ISSUANCE, SALE AND DELIVERY OF THE SHARES AND THE WARRANTS. When issued and paid for in accordance with this Agreement or the applicable form of Warrant, the Securities will be validly issued and outstanding, fully paid and non-assessable, and will be issued in compliance with all applicable federal and state securities laws and the applicable rules of the National Association of Securities Dealers. 4.4 ADDITIONAL INFORMATION. The Company represents and warrants that the information contained in the following documents, which the Company has furnished to the Purchasers, or will furnish if requested by the Purchasers prior to the Closing, is or will be true and correct in all material respects as of their respective filing dates: (a) the Company's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997 (without exhibits unless specifically requested); (b) the Company's Quarterly Reports on Form 10-Q required to be filed with the SEC for the three-month periods ended September 30, 1997, December 31, 1997 and March 31, 1998 (without exhibits unless specifically requested); (c) the Company's Current Reports on Form 8-K filed with the SEC since December 31, 1997, if any; and (d) Notice of Annual Meeting and Proxy Statement for the Company's 1997 Annual Meeting of Stockholders. 4.5 NO MATERIAL CHANGE. As of the date hereof, there has been no material adverse change in the financial condition or results of operations of the Company since March 31, 1998, except that the Company continues to incur losses. 3. 8 4.6 SEC REPORTS. (a) The Company has filed with the Commission all reports ("SEC Reports") required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All of the SEC Reports filed by the Company comply in all material respects with the requirements of the Exchange Act. None of the SEC Reports contains, as of the respective dates thereof, any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made. All financial statements contained in the SEC Reports have been prepared in accordance with generally accepted accounting principles consistently applied throughout the period indicated ("GAAP"). Each balance sheet presents fairly in accordance with GAAP the financial position of the Company as of the date of such balance sheet, and each statement of operations, of stockholders' equity and of cash flows presents fairly in accordance with GAAP the results of operations, the stockholders' equity and the cash flows of the Company for the periods then ended. (b) No event has occurred since March 31, 1998 requiring the filing of an SEC Report that has not heretofore been filed and furnished to the Purchasers. (c) The SEC Reports and this Agreement taken together as a whole will not, as of the Closing Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein, or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading (other than information relating to the Placement Agent furnished by the Placement Agent expressly for use in the Agreement as to which the Company makes no representation or warranty). SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS. Each Purchaser, severally and not jointly, represents and warrants to and covenants with the Company that: (a) Purchaser, taking into account the personnel and resources it can practically bring to bear on the purchase of the Securities contemplated hereby, either alone or together with the advice of such Purchaser's purchaser representative, is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in shares presenting an investment decision like that involved in the purchase of the Securities, including investments in securities issued by the Company, and has requested, received, reviewed and considered, either alone or with such Purchaser's purchaser representative, all information Purchaser deems relevant in making an informed decision to purchase the Securities. (b) Purchaser is acquiring the Securities being acquired by Purchaser pursuant to this Agreement in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any of such Securities or any arrangement or understanding with any other persons regarding the distribution of such Securities, except in compliance with Section 5(c). 4. 9 (c) Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the securities purchased hereunder except in compliance with the Securities Act of 1933, as amended (the "Securities Act"), applicable blue sky laws, and the rules and regulations promulgated thereunder. (d) Purchaser has completed or caused to be completed the Stock Certificate and Warrant Questionnaire and the Registration Questionnaire, attached hereto as Appendix I and Appendix II, respectively, for use in preparation of the Registration Statements to be filed by the Company, and the answers thereto are true and correct to the best knowledge of Purchaser as of the date hereof and will be true and correct as of the effective date of the applicable Registration Statement (provided that Purchaser shall be entitled to update such information by providing notice thereof to the Company prior to the effective date of such Registration Statement). (e) Purchaser has, in connection with its decision to purchase the Securities, relied with respect to the Company and its affairs solely upon the information delivered to Purchaser as described in Sections 4.4 and 5(a) above and the representations and warranties of the Company contained herein. (f) Purchaser is an "accredited Purchaser" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act or a Qualified Institutional Buyer within the meaning of Rule 144A promulgated under the Securities Act. (g) Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. Upon the execution and delivery of this Agreement by Purchaser, this Agreement shall constitute a valid and binding obligation of Purchaser, enforceable in accordance with its terms, except (i) as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally, (ii) as limited by equitable principles generally, including any specific performance, and (iii) as to those provisions of Section 9.4 relating to indemnity or contribution. (h) If Purchaser is not a U.S. Person, such Purchaser hereby represents that such Purchaser is satisfied as to the full observance of the laws of such Purchaser's jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Agreement, including (i) the legal requirements with such Purchaser's jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale, or transfer of the Securities. Such Purchaser's subscription and payment for, and such Purchaser's continued beneficial ownership of, the Securities will not violate any applicable securities or other laws of such Purchaser's jurisdiction. SECTION 6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement, all covenants, agreements, representations and warranties made by the Company and each Purchaser herein and 5. 10 in the certificates for the securities delivered pursuant hereto shall survive the execution of this Agreement, the delivery to the Purchasers of the securities being purchased and the payment therefor. SECTION 7. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The Company's obligation to complete the sale and issuance of the Securities and deliver shares of Common Stock and Warrants to each Purchaser, individually, as set forth in the Schedule of Purchasers shall be subject to the following conditions to the extent not waived by the Company: 7.1 RECEIPT OF PAYMENT. The Company shall have received payment, by check or wire transfer of immediately available funds, in the full amount of the purchase price for the number of Units being purchased by such Purchaser at the Closing as set forth in the Schedule of Purchasers. 7.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by such Purchaser in Section 5 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 7.3 COVENANTS PERFORMED. All covenants, agreements and conditions contained herein to be performed by such Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects. 7.4 NO GENERAL SOLICITATION; BLUE SKY. The Company shall have received such assurances as it may reasonably request from the Placement Agent that the Shares were not offered or sold by any form of general solicitation or advertising and a list from the Placement Agent of states where Shares are being sold. SECTION 8. CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING. Each Purchaser's obligation to accept delivery of the Units and to pay for the securities evidenced thereby shall be subject to the following conditions to the extent not waived by such Purchaser: 8.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 4 hereof shall be true and correct when made, and shall be true and correct as of the Closing Date. 8.2 COVENANTS PERFORMED. All covenants, agreements and conditions contained herein to be performed by the Company shall have been performed or complied with in all material respects. SECTION 9. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT. 9.1 REGISTRATION PROCEDURES AND EXPENSES. The Company is obligated to do the following: (a) Within the later to occur of (i) thirty (30) days following the Closing Date for the Initial Units or (ii) September 30, 1998, the Company shall use its reasonable efforts to 6. 11 prepare and file with the Commission a registration statement in order to register with the Commission the sale by the Purchasers, from time to time, of the Shares through Nasdaq or the facilities of any national securities exchange on which the Company's Common Stock is then traded, or in privately-negotiated transactions (a "Registration Statement"). The Company will use its reasonable efforts to ensure that the Registration Statement is declared effective within 60 days of the filing date of filing of the Registration Statement with the Commission. (b) The Company shall use reasonable efforts to prepare and file with the Commission (i) such amendments and supplements to the Registration Statement and the prospectus used in connection therewith, (ii) such SEC Reports and (iii) such other filings required by the Commission, as may be necessary to keep the Registration Statement continuously effective until the earlier of (i) second anniversary of the first date on which no Warrants remain unexercised or unexpired or (ii) date on which all Securities held by and issuable to Purchasers may be sold during any ninety (90) period under Rule 144 (or successor rule promulgated by the SEC); provided, however, that in the event of a Suspension Period (as defined below), the Company shall extend the period of effectiveness of such Registration Statement by the aggregate number of days of each such Suspension Period. The Company may suspend use of the prospectus when it deems necessary, in its reasonable judgment, until such time as the Company subsequently authorizes use of the prospectus (each such period, a "Suspension Period"). Upon the declaration of a Suspension Period, the Company shall use reasonable best efforts to end the Suspension Period as quickly as possible. Notwithstanding the foregoing, the Company shall not allow a Suspension Period to continue for more than 60 days unless the Company shall deliver to the Purchasers a second notice, which shall have the effect of extending the Suspension Period by up to an additional 30 days. In no event shall the Company extend a Suspension Period beyond such 90 day period. The Company shall not under any circumstances be entitled to exercise its rights under this subparagraph to effect a Suspension Period more than two times in any 12 month period. Each Purchaser agrees that such Purchaser will not sell any Shares pursuant to the prospectus beginning at the time the Company gives such Purchaser notice of the suspension of the prospectus and ending at the time the Company gives such Purchaser notice of the termination of the Suspension Period. Each Purchaser further agrees to promptly notify the Company of the sale of all of such Purchaser's Securities. (c) In order to facilitate the public sale or other disposition of all or any of the shares by each Purchaser, the Company shall furnish to each Purchaser with respect to the Shares registered under the Registration Statement such number of copies of prospectuses and preliminary prospectuses as such Purchaser reasonably requests in conformity with the requirements of the Securities Act. (d) The Company shall file documents required of the Company for normal blue sky clearance in states specified in writing by each Purchaser; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented. (e) Other than fees and expenses, if any, of counsel or other advisers to the Purchasers, which fees and expenses shall be borne by the Purchasers except as provided under Section 12.8 below, the Company shall bear all expenses (exclusive of underwriting discounts and commissions) in connection with the procedures in paragraphs (a) through (d) of this Section 9.1. 7. 12 For purposes of this Section 9.1, the term "Purchaser" shall also refer to the Placement Agent. 9.2 TRANSFER OF SECURITIES AFTER REGISTRATION. Each Purchaser agrees that such Purchaser will not effect any disposition of the Shares or the Warrants that would constitute a sale within the meaning of the Securities Act, except: (i) pursuant to the Registration Statement, in which case such Purchaser shall submit the certificates evidencing the Shares to the transfer agent accompanied by a separate "Purchaser's Certificate" (A) in the form of Appendix III attached hereto, (B) executed by such Purchaser or by an officer of, or other authorized person designated by, such Purchaser, and (C) to the effect that (1) the Shares have been sold in accordance with the Registration Statement and (2) the requirement of delivering a current prospectus has been satisfied; or (ii) in a transaction exempt from registration under the Securities Act, in which case such Purchaser shall, prior to effecting such disposition, submit to the Company an opinion of counsel in form and substance reasonably satisfactory to the Company to the effect that the proposed transaction is in compliance with the Securities Act. For purposes of this Section 9.2, the term "Purchaser" shall also refer to the Placement Agent. 9.3 LEGENDS. Each certificate representing Shares shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER WRITTEN EVIDENCE IN THE FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. 9.4 INDEMNIFICATION. As used in this Section 9.4 the following terms shall have the following respective meanings: (a) "Selling Stockholder" shall mean a Purchaser of Securities under this Agreement, including the Placement Agent, and any transferee of such a Purchaser who is entitled to resell Shares pursuant to the Registration Statement; (b) "Registration Statement" shall include any final prospectus, exhibit, supplement or amendment included in or relating to the Registration Statement referred to in Section 9.1; and 8. 13 (c) "Untrue Statement" shall include any untrue statement or alleged untrue statement, or any omission or alleged omission to state in the Registration Statement a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company agrees to indemnify and hold harmless each Selling Stockholder and the Placement Agent from and against any losses, claims, damages or liabilities to which such Selling Stockholder or the Placement Agent may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any Untrue Statement on or after the effective date of the Registration Statement, or arise out of any failure by the Company to fulfill any undertaking included in the Registration Statement and the Company will reimburse such Selling Stockholder or the Placement Agent for any reasonable legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable to such Selling Stockholder or the Placement Agent in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon, an Untrue Statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder or the Placement Agent, respectively, specifically for use in preparation of the Registration Statement, or the failure of such Selling Stockholder or the Placement Agent, respectively, to comply with the covenants and agreements contained in Section 9.1 or 9.2 hereof respecting sale of the Shares or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Selling Stockholder or the Placement Agent, respectively, prior to the pertinent sale or sales by the Selling Stockholder or the Placement Agent, respectively. Each Purchaser, severally and not jointly, agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any failure to comply with the covenants and agreements contained in Section 9.1 or 9.2 hereof respecting sale of the Shares, or any Untrue Statement contained in the Registration Statement on or after the effective date thereof if such Untrue Statement was made in reliance upon and in conformity with written information furnished by or on behalf of such Purchaser specifically for use in preparation of the Registration Statement, and such Purchaser will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided that in no event shall any indemnity by a Purchaser under this Section 9.4 exceed the gross proceeds received by such Purchaser from the sale of Shares covered by such Registration Statement. The Placement Agent agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the 9. 14 Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any failure to comply with the covenants and agreements contained in Section 9.1 or 9.2 hereof respecting sale of the Shares, or any Untrue Statement contained in the Registration Statement on or after the effective date thereof if such Untrue Statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Placement Agent specifically for use in preparation of the Registration Statement, and the Placement Agent will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided that in no event shall any indemnity by the Placement Agent under this Section 9.4 exceed the gross proceeds received by the Placement Agent from the sale of Shares covered by such Registration Statement. Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 9.4, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and such indemnifying person shall have been notified thereof, such indemnifying person shall be entitled to participate therein, and, to the extent it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof, such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel for all indemnified parties. 9.5 TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent imposed by Section 4, Section 5 or this Section 9 upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares when such Shares shall have been sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares or at such time as an opinion of counsel satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 9.6 INFORMATION AVAILABLE. So long as the Registration Statement is effective covering the resale of Shares owned by the Purchasers or the Placement Agent, the Company will furnish, upon request, to the Purchasers and the Placement Agent: (a) as soon as practicable after available (but in the case of the Company's Annual Report to Stockholders, within 120 days after the end of each fiscal year of the 10. 15 Company), one copy of (i) its Annual Report to Stockholders (which Annual Report shall contain financial statements audited in accordance with generally accepted auditing standards certified by a national firm of certified public accountants); (ii) its Annual Report on Form 10-K; (iii) its quarterly reports on Form 10-Q (the foregoing, in each case, excluding exhibits); and (iv) its current reports on Form 8-K, if any; (b) upon the request of any Purchaser or the Placement Agent, all exhibits excluded by the parenthetical to subparagraph (a)(iii) of this Section 9.6, in the form generally available to the public; and (c) upon the reasonable request of any Purchaser or the Placement Agent, an adequate number of copies of the prospectuses to supply to any other party requiring such prospectuses. 9.7 CHANGES IN PURCHASER INFORMATION. Each Purchaser agrees to promptly notify the Company of any changes in the information set forth in the Registration Statement regarding Purchaser or such Purchaser's plan of distribution set forth in such Registration Statement. The Placement Agent agrees to promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Placement Agent or its plan of distribution set forth in such Registration Statement. 9.8 LIQUIDATED DAMAGES. The Company acknowledges and agrees that the Purchasers will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if the Company fails to fulfill its obligations hereunder and a Registration Statement is not declared effective by the Commission on or before 60 days after the Filing Date (the "Registration Date"), then the Company shall pay to each Purchaser, as liquidated damages and not as a penalty for each thirty day (30) period (the "Liquidation Period") during which the Securities remain unregistered beyond the Registration Date either (i) the number of shares of the Company's Common Stock equal to one percent (1.0%) (the "Liquidation Amount") of the aggregate purchase price paid for the Shares purchased under the Agreement divided by the market value (determined as of the close of business on the last tracking date of the Liquidation Period) of a share of Common Stock ( the "Liquidation Shares"), or, at the option of the Company, (ii) a cash payment equal to the Liquidation Amount. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Agreement. The Company shall notify each Purchaser within five (5) days of the Liquidation Period and the Company shall pay the Liquidation Amount due on the Securities to each Purchaser of record as at the end of each Liquidation Period on the first business day of each month in which such Liquidation Amount shall accrue. SECTION 10. BROKER'S FEE. The Company and each Purchaser (severally and not jointly) hereby represent that, except for amounts to be paid to the Placement Agent by the Company as described in Section 21.8 hereof, there are no brokers or finders entitled to compensation in connection with the sale of the Units, and shall indemnify each other for any such fees for which they are responsible. 11. 16 SECTION 11. NOTICES. ALL NOTICES, REQUESTS, CONSENTS AND OTHER COMMUNICATIONS HEREUNDER SHALL BE IN WRITING, SHALL BE SENT BY CONFIRMED FACSIMILE OR MAILED BY FIRST-CLASS REGISTERED OR CERTIFIED AIRMAIL, OR NATIONALLY RECOGNIZED OVERNIGHT EXPRESS COURIER, POSTAGE PREPAID, AND SHALL BE DEEMED GIVEN WHEN SO SENT IN THE CASE OF FACSIMILE TRANSMISSION, OR WHEN SO RECEIVED IN THE CASE OF MAIL OR COURIER, AND ADDRESSED AS FOLLOWS: (a) if to the Company, to: Avigen, Inc. 1201 Harbor Bay Parkway, Suite #1000 Alameda, California 94502 Attention: Chief Executive Officer Facsimile: (510) 748-7155 with a copy so mailed to: Cooley Godward LLP Five Palo Alto Square, 4th Floor Palo Alto, California 94306 Attention: Alan C. Mendelson Facsimile: (650) 849-7400 or to such other person at such other place as the Company shall designate to the Purchasers and the Placement Agent in writing; and (b) if to the Purchasers or the Placement Agent, at the address as set forth at the end of this Agreement, or at such other address or addresses as may have been furnished to the Company in writing. SECTION 12. MISCELLANEOUS. 12.1 WAIVERS AND AMENDMENTS. Neither this Agreement nor any provision hereof may be changed, waived, discharged, terminated, modified or amended except upon the written consent of the Company and holders of at least a majority of the Shares. 12.2 HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 12.3 SEVERABILITY. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12.4 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts entered into and performed entirely in California by California residents, without regard to conflicts of law principles. 12. 17 12.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. 12.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 12.7 ENTIRE AGREEMENT. This Agreement and other documents delivered pursuant hereto, including the exhibits, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 12.8 PAYMENT OF FEES AND EXPENSES. Each of the Company and the Purchasers shall bear its own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby (the "Offering"); provided, that the Company shall reimburse the Purchaser for the reasonable fees and expenses of one special counsel to the Purchasers. The fees and expenses of the special counsel to the Purchasers for which the Company shall be liable hereunder shall in no event exceed $10,000 in the aggregate. Purchasers acknowledge that the Placement Agent will receive a commission equal to $____[5%] per Unit sold in the Offering. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 13. 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. COMPANY: AVIGEN, INC. By:_____________________________________ President and Chief Executive Officer Address: 1201 Harbor Parkway, Suite #1000 Alameda, CA 94502 Facsimile: (510) 748-7155 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. COMPANY: PLACEMENT AGENT: AVIGEN, INC. UI-USA By:_______________________________ By:_________________________________ President and Chief Executive Officer Name:_______________________________ Address: 1201 Harbor Parkway, Suite #1000 Title:______________________________ Alameda, CA 94502 Facsimile:(510) 748-7155 Address:____________________________ ____________________________ ____________________________ 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. COMPANY: PURCHASER: AVIGEN, INC. By:_______________________________ By:_________________________________ President and Chief Executive Officer Name:_______________________________ Address: 1201 Harbor Parkway, Suite #1000 Title:______________________________ Alameda, CA 94502 Facsimile:(510) 748-7155 Address:____________________________ ____________________________ ____________________________ Attention:____________________ Telephone: 21 EXHIBIT A SCHEDULE OF PURCHASERS 22 EXHIBIT B FORM OF WARRANT 23 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. AVIGEN, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK No. 1998-C << 1>>>> Shares FOR VALUE RECEIVED, AVIGEN, INC., a Delaware corporation (the "Company"), with its principal office at 1201 Harbor Bay Parkway, #1000, Alameda, California 94502, hereby certifies that << 3>> ("Holder"), or its assigns, is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time before 5:00 p.m. (Pacific Time) on the expiration date of [five years from closing date]; provided, however, that the expiration date shall be extended by one day for each day since the issuance of this Warrant on which there has been effective a Suspension Period, as that term is defined in the Common Stock and Warrant Purchase Agreement dated August ___, 1998, pursuant to which this Warrant was issued (the "Expiration Date"), the number of fully paid and nonassessable shares of Common Stock of the Company set forth above, subject to adjustment as hereinafter provided. Holder may purchase such number of shares of Common Stock at a purchase price per share (as appropriately adjusted pursuant to Section 6 hereof) of _____ Dollars and _____ Cents ($____) (the "Exercise Price"). The term "Common Stock" shall mean the aforementioned Common Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein. SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date by presentation and surrender hereof to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper payment of the Exercise Price in lawful money of the United States of America in the form of a check, subject to collection, for the number of Warrant Shares specified in the Purchase Form. If this Warrant should be exercised in part only, the 1. 24 Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase Form, together with proper payment of the Exercise Price, at such office, Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to Holder. The Company shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of the Warrant Shares. SECTION 2. RESERVATION OF SHARES. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale (other than as provided in the Company's certificate of incorporation and any restrictions on sale set forth herein or pursuant to applicable federal and state securities laws) and free and clear of all preemptive rights. SECTION 3. FRACTIONAL INTEREST. The Company will not issue a fractional share of Common Stock upon exercise of a Warrant. Instead, the Company will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: multiply the current market price of a full share by the fraction of a share and round the result to the nearest cent. The current market price of a share of Common Stock for purposes of this Section only is the Quoted Price (as defined in Section 6(b) below) of the Common Stock on the last trading day prior to the exercise date. SECTION 4. ASSIGNMENT OR LOSS OF WARRANT. (a) Except as provided in Section 9, Holder shall be entitled, without obtaining the consent of the Company, to assign its interest in this Warrant in whole or in part to any person or persons. Subject to the provisions of Section 9, upon surrender of this Warrant to the Company or at the office of its stock transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment (any such assignee will then be a "Holder" for purposes of this Warrant) and, if Holder's entire interest is not being assigned, in the name of Holder, and this Warrant shall promptly be canceled. (b) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 2. 25 SECTION 5. RIGHTS OF HOLDER. Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. SECTION 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the beginning of certain events, as follows: (a) Adjustment for Change in Capital Stock. If at any time after the date hereof the Company: (A) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (B) subdivides its outstanding shares of Common Stock into a greater number of shares; (C) combines its outstanding shares of Common Stock into a smaller number of shares; (D) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (E) issues by reclassification of its Common Stock any shares of its capital stock; then the number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price in effect immediately prior to such action shall be adjusted so that Holder may receive upon exercise of this Warrant and payment of the same aggregate consideration the number of shares of capital stock of the Company which Holder would have owned immediately following such action if Holder had exercised this Warrant immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. (b) Current Market Price. The "current market price" per share of Common Stock on any date is the average of the Quoted Prices of the Common Stock for the 30 consecutive trading days commencing 45 trading days before the date in question. The "Quoted Price" of the Common Stock is the last reported sales price of the Common Stock as reported by 3. 26 the Nasdaq National Market, or the primary national securities exchange on which the Common Stock is then quoted; provided, however, that if the Common Stock is neither traded on the Nasdaq National Market nor on a national securities exchange, the price referred to above shall be the price reflected on the Nasdaq National Market, or if the Common Stock is not then traded on the Nasdaq National Market, the price reflected in the over-the counter market as reported by the National Quotation Bureau, Inc. or any organization performing a similar function. (c) Minimum Adjustment. No adjustment in the Exercise Price of this Section 6 shall be required unless such adjustment would require an increase or decrease of at least twenty-five cents ($.25) in such Exercise Price; provided, however, that any adjustments which by reason of this subsection are not required to be made, shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6 shall be made to the nearest cent or to the nearest share, as the case may be. (d) Deferral of Issuance or Payment. In any case in which an event covered by this Section 6 shall require that an adjustment in the Exercise Price be made effective as of a record date, the Company may elect to defer until the occurrence of such event (i) issuing to Holder, if this Warrant is exercised after such record date, the shares of Common Stock and other capital stock of the Company, if any, issuable upon such exercise over and above the shares of Common Stock or other capital stock of the Company, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment, and (ii) paying to Holder by check any amount in lieu of the issuance of fractional shares pursuant to Section 3. (e) When No Adjustment Required. No adjustment need be made for a change in the par value of the Common Stock. To the extent this Warrant becomes exercisable into cash, no adjustment need be made thereafter as to the cash, and interest will not accrue on the cash. (f) Notice of Certain Actions. In the event that: (A) the Company shall authorize the issuance to all holders of its Common Stock of rights, warrants, options or convertible securities to subscribe for or purchase shares of its Common Stock or of any other subscription rights, warrants, options or convertible securities; or (B) the Company shall authorize the distribution to all holders of its Common of evidences of its indebtedness or assets (other than dividends paid in or distributions of the Company's capital stock for which the Exercise Price shall have been adjusted pursuant to subsection (a) of this Section 6 or cash dividends or cash distributions payable out of consolidated current or retained earnings as shown on the books of the Company and paid in the ordinary course of business); or (C) the Company shall authorize any capital reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in par value of the Common Stock) or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or change 4. 27 of the Common Stock outstanding), or of the conveyance or transfer of the properties and assets of the Company as an entirety or substantially as an entirety; or (D) the Company is the subject of a voluntary or involuntary dissolution, liquidation or winding-up procedure; or (E) the Company proposes to take any action that would require an adjustment of the Exercise Price pursuant to this Section 6; then the Company shall cause to be mailed by first-class mail to Holder, at least twenty (20) days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date as of which the holders of Common Stock of record to be entitled to receive any such rights, warrants or distributions are to be determined, or (y) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up. SECTION 7. OFFICERS' CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of Section 6, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office an officers' certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officers' certificate shall be signed by the chairperson, president or chief financial officer of the Company and by the secretary or any assistant secretary of the Company. Each such officers' certificate shall be made available at all reasonable times for inspection by Holder. SECTION 8. RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR MERGER. In the event of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock) or in the event of any consolidation or merger of the Company with or into another corporation (other than a merger in which the Company is the continuing corporation and that does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in the event of any sale, lease, transfer or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that Holder shall have the right thereafter, by exercising this Warrant, to purchase the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been received upon exercise of this Warrant immediately prior to such reclassification, capital reorganization, change, consolidation, merger, sale or conveyance. Any such provision shall include provisions for adjustments in respect of such shares of stock and other securities and property that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this 5. 28 Section 8 shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization, or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for, or of, a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of subsection (a) of Section 6. SECTION 9. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This Warrant may not be exercised and neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be offered, sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or Blue Sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such Warrant Shares are acquired pursuant to a registration statement that has been declared effective under the Act, and applicable blue sky laws shall bear a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Any certificate for any Warrant Shares issued at any time in exchange or substitution for any certificate for any Warrant Shares bearing such legend (except a new certificate for any Warrant Shares issued after the acquisition of such Warrant Shares pursuant to a registration statement that has been declared effective under the Act) shall also bear such legend unless, in the opinion of counsel for the Company, the Warrant Shares represented thereby need no longer be subject to the restriction contained herein. The provision of this Section 9 shall be binding upon all subsequent holders of certificates for Warrant Shares bearing the above legend and all subsequent holders of this Warrant, if any. SECTION 10. MODIFICATION AND WAIVER. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated other than by an instrument in writing signed by the Company and by Holder. 6. 29 SECTION 11. NOTICES. Any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. SECTION 12. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to its conflicts of laws principles. 7. 30 IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed by its duly authorized officer and to be dated as of August ___, 1998. AVIGEN, INC. By:_________________________________ [Name] [Title] 8. 31 PURCHASE FORM Dated ___________, 19____ The undersigned hereby irrevocably elects to exercise the within Warrant No. 1998-C<< 1>> to purchase _________ shares of Common Stock and hereby makes payment of $_____________ in payment of the exercise price thereof. HOLDER By:_________________________________ Print Name:_________________________ Title:______________________________ 1. 32 ASSIGNMENT FORM Dated _________, 19____ FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers unto _______________________________________________ (the "Assignee"), (please type or print in block letters) ________________________________________________________________________________ (insert address) its right to purchase up to _______ shares of Common Stock represented by this Warrant No. 1996-C<< 1>> and does hereby irrevocably constitute and appoint ____________________________ attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. HOLDER By:_________________________________ Print Name:_________________________ Title:______________________________ 1. 33 EXHIBIT C SCHEDULE OF EXCEPTIONS The inclusion of any matter as part of this Schedule should not be interpreted as indicating that the Company has determined that such matter is necessarily material to the Purchaser. SECTIONS 4.4; 4.5; AND 4.6 ADDITIONAL INFORMATION; NO MATERIAL CHANGE; SEC REPORTS [The Company is currently exploring potential strategic transactions such as corporate partnerships, collaborations and mergers and acquisitions. There can be no assurance that the Company's efforts in this regard will result in the consummation of any such transaction.] 34 APPENDIX I AVIGEN, INC. STOCK CERTIFICATE AND WARRANT QUESTIONNAIRE Pursuant to Section 3 of the Agreement, please provide us with the following information: 1. The exact name that your Shares and Warrants ______________________ are to be registered in (this is the name that will appear on your stock certificate(s) and warrant(s)). You may use a nominee name if appropriate: 2. The relationship between the Purchaser of ______________________ the Securities and the Registered Holder listed in response to item 1 above: 3. The mailing address of the Registered Holder listed in response to item 1 above: ______________________ ______________________ ______________________ 4. The Social Security Number or Tax ______________________ Identification Number of the Registered Holder listed in the response to item 1 above: 35 APPENDIX II AVIGEN, INC. REGISTRATION STATEMENT QUESTIONNAIRE In connection with the preparation of the Registration Statement, please provide us with the following information: 1. Please state your or your organization's name exactly as it should appear in the Registration Statement: 2. Please provide the following information, as of August ___, 1998: (1) (2) Number of Shares Number of shares, if any, which will be owned which are being included after completion of sale of Shares included in the Registration Statement in the Registration Statement
3. Have you or your organization had any position, office or other material relationship within the past three years with the Company or its affiliates other than as disclosed in the Proxy Statement in connection with the Company's 1997 Annual Meeting of Stockholders? Yes [ ] No [ ] If yes, please indicate the nature of any such relationships: - -------------------------------------------------------------------------------- 36 APPENDIX III PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE The undersigned, an officer of, or other person duly authorized by - -------------------------------------------------------------------------------- [fill in official name of _____________________________ hereby certifies that he/she [said institution] is individual or institution] the Purchaser of the Shares evidenced by the attached stock certificate(s) and as such, sold such Shares on ____________________________in accordance with registration statement [date] number _________________________________________________________________ and the [fill in the number of or otherwise identify registration statement] requirement of delivering a current prospectus and current annual, quarterly and reports (Forms 10-K, 10-Q, and 8-K) by the Company has been complied with in connection with such sale. Print or Type: Name of Purchaser (Individual or Institution): Name of Individual representing Purchaser (if an Institution): Title of Individual representing Purchaser (if an Institution): Signature by: Individual Purchaser or Individual representing Purchaser: EX-23.1 3 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1993 Stock Option Plan, 1996 Stock Option Plan, Nonstatutory Stock Option, 1996 Equity Incentive Plan, and the 1996 Non-Employee Directors' Stock Option Plan of Avigen, Inc. of our report dated August 13, 1998, with respect to the financial statements of Avigen, Inc. included in the Annual Report on Form 10-K for the year ended June 30, 1998. /s/ Ernst & Young LLP Walnut Creek, California September 28, 1998 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 1,340,311 3,297,331 0 0 0 4,637,642 3,635,479 2,276,374 5,996,747 2,221,214 0 0 0 7,306 0 5,996,747 0 0 0 (8,876,499) 0 0 365,025 (8,860,046) 16,453 (8,876,499) 0 0 0 (8,876,499) (1.22) 0
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