SANGAMO BIOSCIENCES INC
10-Q, 2000-08-11
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH
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<PAGE>   1

                                    FORM 10-Q

                                  UNITED STATES
                        SECURITY AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


(Mark One)

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended JUNE 30, 2000


                                       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 000-30171


                            SANGAMO BIOSCIENCES, INC.
        (exact name of small business issuer as specified in its charter)


            DELAWARE                                       68-0359556
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)


                           501 CANAL BLVD, SUITE A100
                           RICHMOND, CALIFORNIA 94804
                    (Address of principal executive offices)


                                 (510) 970-6000
              (Registrant's telephone number, including area code)


        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities 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 [ ] No [ X]

        Indicate the number of shares outstanding of each of the issuer's
classes of the common stock, as of the latest practical date.

        Common Stock, $.001 Par Value - 22,077,052 - shares outstanding as of
July 31, 2000




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<PAGE>   2

                                      INDEX

                            SANGAMO BIOSCIENCES, INC.

PART I. FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited)

          Condensed Balance Sheets -- December 31, 1999 and June 30, 2000

          Condensed Statements of Operations -- Three and six months ended
          June 30, 2000 and 1999

          Condensed Statements of Cash Flows -- Six months ended June 30,
          2000 and 1999

          Notes to Condensed Financial Statements -- June 30, 2000


Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations


PART II.  OTHER INFORMATION

Item 2.   Changes in Securities and Use of Proceeds

Item 6.   Exhibits and Reports on Form 8-K


SIGNATURES

This report contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's strategy, financial
performance and revenue sources. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Risk Factors" and elsewhere in
this report.




                                       2
<PAGE>   3

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


                            SANGAMO BIOSCIENCES, INC.
                            CONDENSED BALANCE SHEETS
                    (In thousands, except per share amounts)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                              JUNE 30,      DECEMBER 31,
                                                                2000            1999
                                                              --------      ------------
<S>                                                           <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                  $ 39,586       $    251
   Short-term investments                                       15,903          7,252
   Accounts receivable                                             362            562
   Prepaid expenses                                                432            171
                                                              --------       --------
      Total current assets                                      56,283          8,236
Property and equipment, net                                      1,377            612
Long-term investments                                           11,591             --
Other assets                                                       542            314
                                                              --------       --------
      Total assets                                            $ 69,793       $  9,162
                                                              ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities                      $     38       $    348
Accrued compensation and employee benefits                         134            182
Deferred revenue                                                   905            500
                                                              --------       --------
       Total current liabilities                                 1,077          1,030
Note payable                                                        --            250

Stockholders' equity:
Convertible preferred stock, $.01 par value, 5,000,000
shares authorized, issuable in series, -0- and 4,855,917
issued and outstanding at June 30, 2000 and December
31, 1999, respectively;                                             --         15,187

Common stock, $.01 par value, 80,000,000 shares
authorized, 22,030,476 and 6,132,060 shares issued
and outstanding at June 30, 2000 and December 31,
1999, respectively                                              88,311          3,258

Note receivable from stockholder                                   (94)          (125)
Deferred stock compensation                                     (6,352)        (1,736)
Accumulated deficit                                            (13,232)        (8,785)
Accumulated other comprehensive income                              83             83
                                                              --------       --------
   Total stockholders' equity                                   68,716          7,882
                                                              --------       --------
Total liabilities and stockholders' equity                    $ 69,793       $  9,162
                                                              ========       ========
</TABLE>


See accompanying notes.




                                       3
<PAGE>   4


                            SANGAMO BIOSCIENCES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                     JUNE 30,                         JUNE 30,
                                                          ----------------------------     ----------------------------
                                                              2000             1999            2000            1999
                                                          ------------     -----------     ------------     -----------
<S>                                                       <C>              <C>             <C>              <C>
REVENUES:
  Federal government research grants                      $        147     $       288     $        459     $       501
  Collaboration agreements                                         600             200            1,095             450
                                                          ------------     -----------     ------------     -----------
    Total revenues                                                 747             488            1,554             951

OPERATING EXPENSES:
Research and development (excludes $602 and $73
for the three months ended June 30, 2000 and 1999,
respectively, and $1,037 and $145 for the six months
ended June 30, 2000 and 1999, respectively, of stock
based compensation expense)                                      1,738             909            4,131           1,968

General and administrative (excludes $524 and $58
for the three months ended June 30, 2000 and 1999,
respectively, and $920 and $116 for the six months
ended June 30, 2000 and 1999, respectively, of stock
based compensation expense)                                        595             301              965             603

Amortization of stock-based compensation                         1,126             131            1,957             261
                                                          ------------     -----------     ------------     -----------
    Total operating expenses                                     3,459           1,341            7,053           2,832
                                                          ------------     -----------     ------------     -----------
    Loss from operations                                        (2,712)           (853)          (5,499)         (1,881)
Interest income                                                  1,004              22            1,196              47
Interest expense                                                   (17)             (5)            (139)             (9)
                                                          ------------     -----------     ------------     -----------
NET LOSS                                                  $     (1,725)    $      (835)    $     (4,442)    $    (1,843)
Deemed dividend upon issuance of
   convertible preferred stock                                      --              --            1,500              --
                                                          ------------     -----------     ------------     -----------
Net loss attributable to common shareholders              $     (1,725)    $      (835)    $     (5,942)    $    (1,843)
                                                          ============     ===========     ============     ===========
Basic and diluted net loss per common share               $      (0.08)    $     (0.14)    $      (0.43)    $     (0.31)
                                                          ============     ===========     ============     ===========
Shares used in basic and diluted
   net loss per common share                                20,763,777       5,965,786       13,790,776       5,918,084
                                                          ============     ===========     ============     ===========
</TABLE>


See accompanying notes.




                                       4
<PAGE>   5

                            SANGAMO BIOSCIENCES, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
               (In thousands, except share and per share amounts)
                                   (Unaudited)



<TABLE>
                                                                       SIX MONTHS ENDED
                                                                            JUNE 30,
                                                                    ----------------------
                                                                      2000           1999
                                                                    --------       -------
<S>                                                                 <C>            <C>
OPERATING ACTIVITIES:
Net loss                                                            $ (4,443)      $(1,843)
Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation and amortization                                        146            73
   Amortization of stock-based compensation                            1,957           261
   Issuance of common stock for technology                             1,050            --
      and services rendered
   Changes in operating assets and liabilities:
      Accounts receivable                                                200             2
      Prepaid expenses and other assets                                 (489)           15
      Accounts payable and accrued liabilities                          (358)         (311)
      Accrued compensation and employee benefits                          --            31
      Deferred revenue                                                   405            --
                                                                    --------       -------
         Net cash used in operating activities                        (1,532)       (1,772)
INVESTING ACTIVITIES:
Purchases of investments                                             (31,542)           --
Maturities of short-term investments                                  11,300         1,808
Purchases of property and equipment                                     (912)         (229)
                                                                    --------       -------
      Net cash provided by (used in) investing activities            (21,154)        1,579
FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock                  1,500            --
Proceeds from issuance of common stock                                48,103             9
Repayment of note payable                                               (250)           --
Proceeds from issuance of convertible debenture                       12,637            --
Note receivable from stockholder                                          31
                                                                    --------       -------
      Net cash provided by financing activities                       62,021             9
                                                                    --------       -------
      Net increase (decrease) in cash and equivalents                 39,335          (184)
Cash and equivalents, beginning of period                                251         1,250
                                                                    --------       -------
Cash and equivalents, end of period                                 $ 39,586       $ 1,066
                                                                    ========       =======

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest                                              $      2       $     9
                                                                    ========       =======

NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred compensation related to stock options                      $  1,957       $   261
                                                                    ========       =======
Deemed dividend upon issuance of convertible preferred stock        $  1,500       $    --
                                                                    ========       =======
Conversion of convertible debentures and accrued interest into
common stock                                                        $ 12,637       $    --
                                                                    ========       =======
</TABLE>


See accompanying notes.




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<PAGE>   6

SANGAMO BIOSCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000



NOTE 1-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six-month
periods ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000. For further information,
refer to the financial statements and footnotes thereto for the year ended
December 31, 1999, included in the Company's Registration Statement on Form S-1
as filed with the SEC and the prospectus dated April 6, 2000 included therein.


NOTE 2-BASIC AND DILUTED NET LOSS PER SHARE

Net loss per share is presented under the requirements of Financial Accounting
Standards Board ("FAS") No. 128, "Earnings per Share". Basic loss per share is
computed based on the weighted average shares of common stock outstanding
(excluding shares subject to repurchase) and excludes any effects of options,
warrants, and convertible securities. Potentially dilutive securities such as
options, warrants, and convertible preferred stock, have also been excluded from
the computation of diluted net loss per share as their effect is antidilutive.

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                JUNE 30,                 JUNE 30,
                                                          --------------------     --------------------
                                                            2000         1999        2000         1999
                                                          --------     -------     --------     -------
<S>                                                       <C>          <C>         <C>          <C>
Historical:
Net loss attributable to common stockholders              $ (1,725)    $  (835)    $ (5,943)    $(1,843)
                                                          ========     =======     ========     =======

Basic and diluted:
   Weighted-average shares of common stock outstanding      21,378       6,036       14,308       5,986
   Less: weighted-average shares subject to repurchase        (614)        (71)        (517)        (68)
                                                          --------     -------     --------     -------
Shares used in computing basic and diluted net loss
      per common share                                      20,764       5,966       13,791       5,918
                                                          ========     =======     ========     =======
Basic and diluted net loss per common share               $  (0.08)    $ (0.14)    $  (0.43)    $ (0.31)
                                                          ========     =======     ========     =======
</TABLE>




                                       6
<PAGE>   7

NOTE 3 - DEFERRED STOCK COMPENSATION

During the years ended December 31, 1997, 1998 and 1999, in connection with the
grant of stock options to employees and directors, Sangamo recorded deferred
stock compensation totaling $449,000, $780,000 and $1.5 million, respectively,
representing the difference between the fair value of common stock on the date
such options were granted and the exercise price. During the six months ended
June 30, 2000 Sangamo recorded additional deferred stock compensation of $6.6
million in connection with grants of stock options subsequent to December 31,
1999. These amounts are included as a reduction of stockholders' equity and are
being amortized over the vesting period of the individual options, generally
four years, using an accelerated vesting method. The accelerated vesting method
provides for vesting of portions of the overall award at interim dates and
results in higher vesting in earlier years than straight-line vesting. The fair
value of Sangamo common stock for purposes of this calculation was determined
based on the business factors underlying the value of common stock on the date
such option grants were made. Sangamo recorded amortization of deferred stock
compensation of $46,000, $410,000 and $519,000, for the years ended December 31,
1997, 1998 and 1999, respectively. During the second quarter of 2000, Sangamo
recorded a total of $1.1 million in stock-based compensation charges, as
compared to $131,000 during the same period in the prior year. For the six-month
period ended June 30, 2000, Sangamo recorded a total of $2.0 million in
stock-based compensation charges, as compared to $261,000 during the same period
in the prior year. At June 30, 2000, Sangamo had a total of $6.3 million
remaining to be amortized over the vesting periods of the stock options. The
Company also recognized compensation expense related to options granted to
non-employees. Such options are valued based on the fair value of the Company's
common stock when the options vest. During the six months ended June 30, 2000,
the Company recognized $290,000 of expense related to options granted to
non-employees.


NOTE 4 - DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK

In January 2000, Sangamo sold 333,333 shares of its Series C convertible
preferred stock to an investor for net proceeds of $1.5 million. Subsequent to
the commencement of the initial public offering process, Sangamo re-evaluated
the fair value of its stock as of January 2000 and determined it to be more than
the issue price of $4.50 per share. Accordingly, the incremental fair value,
limited to the amount of the proceeds received of $1.5 million, is deemed to be
the equivalent of a preferred stock dividend. Sangamo recorded the deemed
dividend at the date of issuance by offsetting charges and credits to preferred
stock, without any effect on total stockholders' equity. The preferred stock
dividend increases the loss applicable to common stockholders in the calculation
of basic net loss per share for the six-month period ended June 30, 2000.


NOTE 5-STRATEGIC PARTNERSHIP




                                       7
<PAGE>   8

In January 2000, the Company announced that it had entered into a strategic
partner agreement with Edwards Lifesciences Corporation, formerly the
CardioVascular Group of Baxter Healthcare Corporation for the development of
ZFPs in cardiovascular and peripheral vascular diseases. Under this agreement,
Edwards purchased a $5 million convertible debenture, and provided $1 million in
initial research funding which was recorded as deferred revenue and will be
recognized as revenue as related research services are performed. In March 2000,
Edwards purchased a $7.5 million convertible debenture upon exercise of an
option for a right of first refusal for three years to negotiate a license for
additional ZFP-Therapeutics in cardiovascular and peripheral vascular diseases.
These debentures converted into common stock upon consummation of the public
offering. In the future, Sangamo may receive milestone payments, royalties and
additional research funding from this agreement.


NOTE 6 - INITIAL PUBLIC OFFERING OF COMMON STOCK

In April 2000, the Company completed an initial public offering of 3.5 million
newly issued shares of its common stock at a price of $15.00 per share receiving
net proceeds of $48.8 million. Simultaneously with the closing of the initial
public offering, the 5,217,408 shares of convertible preferred stock outstanding
at March 31, 2000 were automatically converted into 10,434,816 shares of common
stock. In addition, the $12.5 million convertible debentures, together with
accrued interest, with Edwards Lifesciences Corporation, also converted into
common stock at $15 per share.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operation," and elsewhere in this Form 10-Q that are not
historical are forward-looking statements and are subject to a number of risks
and uncertainties which could cause actual results to differ materially from
those discussed in the forward-looking statements.

OVERVIEW

Sangamo BioSciences, Inc. was incorporated in June 1995. Sangamo is a
biotechnology company focused on the research and development of novel
transcription factors for the regulation of genes. The Company's Universal Gene
Recognition(TM) technology enables the engineering of a specific class of
transcription factors known as zinc finger DNA binding proteins, or ZFPs. By
engineering ZFPs so that they can recognize a specific gene, Sangamo has created
ZFP transcription factors that can control gene expression and, consequently,
cell function. The Company intends to establish Universal Gene Recognition as a
widely used technology for commercial applications in pharmaceutical drug
discovery, human therapeutics, clinical diagnostics, and agricultural and
industrial biotechnology.

From the Company's inception through June 30, 2000, its activities related
primarily to establishing a research and development organization and developing
relationships with




                                       8
<PAGE>   9

corporate collaborators. Sangamo has incurred net losses since inception and
expects to incur losses in the future as research and development activities are
expanded. To date, Sangamo has funded operations primarily through the issuance
of equity securities, borrowings, payments from federal government research
grants, and from corporate collaborators. As of June 30, 2000, the Company had
an accumulated deficit of $13.2 million. Revenues consist primarily of federal
government research grant funding and revenues from corporate collaborators.
Since September 1998, Sangamo has signed collaborative research agreements with
a total of 19 corporate partners for Universal GeneTools(TM) engineered zinc
finger proteins. In January 2000, Sangamo announced a strategic partner
agreement with Edwards Lifesciences Corporation, formerly the CardioVascular
Group of Baxter Healthcare Corporation, for the development of
ZFP-Therapeutics(TM) in cardiovascular and peripheral vascular diseases. Under
this agreement, Edwards purchased a $5 million convertible note and provided $1
million in initial research funding. In March 2000, Edwards exercised an option
by purchasing a $7.5 million convertible note for a right of first refusal to
negotiate a license for additional ZFP-Therapeutics in cardiovascular and
peripheral vascular disease. The two notes, totaling $12.5 million in principal,
together with accrued interest, converted into common stock upon consummation of
the Company's initial public offering. In the future, Sangamo may receive
milestone payments, royalties and additional research funding from this
agreement.

Sangamo's losses to date have resulted principally from costs incurred in
research and development, general and administrative costs associated with
operations, and non-cash stock-based compensation expenses associated with stock
options granted to employees and consultants from January 1997 through the
closing of the initial public offering in April 2000. Research and development
expenses consist primarily of salaries and related personnel expenses,
subcontracted research expenses, and technology license expenses. All research
and development costs have been expensed as incurred. General and administrative
expenses consist primarily of salaries and related personnel expenses for
executive, finance and administrative personnel, professional fees, and other
general corporate expenses. As the Company adds personnel and incurs additional
costs related to the growth of the business, expenses are expected to increase.

The Company's quarterly operating results will depend on a number of factors,
including the delivery of products to corporate partners, the signing or
expiration of contracts with corporate partners or government research grants,
our success rate in achieving milestones with corporate partners, and the timing
and willingness of collaborators to commercialize products which would result in
royalties. As a consequence, quarterly operating results have fluctuated in the
past and are likely to do so in the future.


RESULTS OF OPERATIONS

Quarters ended June 30, 2000 and 1999




                                       9
<PAGE>   10

Total revenues. Total revenues consist of revenues from corporate collaboration
agreements and federal government research grants. Total revenues increased 53%
to $747,000 in the three months ended June 30, 2000 from $488,000 in the
corresponding period in 1999. Revenues from our collaboration agreements were
$600,000 in the three months ended June 30, 2000, compared with $200,000 in the
corresponding period in 1999. The increase in the three months ended June 30,
2000 was principally attributable to revenues recognized under a new contract
signed in January 2000 with Edwards Lifesciences Corporation. We expect revenues
from corporate collaborations to continue to increase as additional agreements
are signed or existing agreements are expanded. Federal government research
grant revenues were $147,000 in the three months ended June 30, 2000, compared
to $288,000 in the corresponding period in 1999. The decrease in the three
months ended June 30, 2000 was principally due to completion of federal research
government grants during the quarter. We plan to continue to apply for federal
government research grants in the future to support the development of
applications of our technology platform. Although we have received grants in the
past, we cannot assure you that applications will result in successful grants in
the future.

Research and development expenses. Research and development expenses were $2.3
million for the three months ended June 30, 2000 as compared to $1.0 million in
the corresponding period in 1999. Non-cash research and development expenses in
the second quarter in 2000 included $602,000 for stock-based deferred
compensation charges, as compared to $73,000 for deferred compensation during
the same quarter in 1999. Excluding the non-cash charges, total second quarter
2000 research and development expenses were $1.7 million as compared to $909,000
in the corresponding period in 1999. The increase in the 2000 period was
primarily for additional employee related expenses as we increased our
scientific staffing levels. We expect research and development expenses to
increase significantly in future periods, particularly as we continue to
increase the scientific staff to continue to develop the Universal Gene
Recognition(TM) technology and to meet the needs of our corporate collaborators.

General and administrative expenses. General and administrative expenses
increased from $359,000 in the three months ended June 30, 1999 to $1.1 million
in the corresponding period in 2000. Non-cash administrative expenses in the
second quarter of 2000 were $524,000 for a stock-based deferred compensation
charge compared to $58,000 for deferred compensation during the same quarter of
1999. Excluding the non-cash charges, total first quarter 2000 general and
administrative expenses were $595,000 as compared to $301,000 in 1999. The
increase was primarily attributable to increased labor costs to support our
expanded research and development activities and development of our Universal
Gene Recognition(TM) technology and costs associated with being a public
company. We expect that general and administrative expenses will increase in the
future to support continued growth of our research, development and
commercialization efforts.

Interest income (expense), net. Net interest income increased from $18,000 in
the three months ended June 30, 1999 to $987,000 in the corresponding period in
2000. The




                                       10
<PAGE>   11

increase in interest income and income expense resulted from higher average
interest-bearing balances resulting from our initial public offering and higher
debt balances during 2000.

Six Months ended June 30, 2000 and 1999

Total revenues. Total revenues consist of revenues from corporate collaboration
agreements and federal government research grants. Total revenues increased 63%
to $1.6 million in the six months ended June 30, 2000 from $951,000 in the
corresponding period in 1999. Revenues from collaboration agreements were $1.1
million in the six months ended June 30, 2000, compared with $450,000 in the
corresponding period in 1999. The increase in the six months ended June 30, 2000
was principally attributable to revenues recognized under a new contract signed
in January 2000 with Edwards Lifesciences Corporation. We expect revenues from
corporate collaborations to continue to increase as additional agreements are
signed or existing agreements are expanded. Federal government research grant
revenues were $459,000 in the six months ended June 30, 2000, compared to
$501,000 in the corresponding period in 1999, a decrease of $42,000. The
decrease in the six months ended June 30, 2000 was principally due to completion
of federal research government grants during the period. We plan to continue to
apply for federal government research grants in the future to support the
development of applications of our technology platform. Although we have
received grants in the past, we cannot assure you that applications will result
in successful grants in the future.

Research and development expenses. Research and development expenses were $5.2
million for the six months ended June 30, 2000 as compared to $2.1 million in
the corresponding period in 1999. Non-cash research and development expenses in
the six month period ended June 30, 2000 were $2.1 million including a one-time
expense of approximately $1.1 million for the issuance of common stock related
to the in-licensing of certain in-process technology and a stock-based deferred
compensation charges of $1.0 million, as compared to $145,000 for deferred
compensation during the same period in 1999. Excluding the non-cash charges,
total first half 2000 research and development expenses were $3.1 million as
compared to $2.0 million in the corresponding period in 1999. The increase in
the 2000 period was primarily for additional employee related expenses as we
increased our scientific staffing levels. We expect research and development
expenses to increase significantly in future periods, particularly as we
continue to increase the scientific staff to continue to develop the Universal
Gene Recognition(TM) technology and to meet the needs of our corporate
collaborators.

General and administrative expenses. General and administrative expenses
increased from $719,000 in the six months ended June 30, 1999 to $1.9 million in
the corresponding period in 2000. Non-cash administrative expenses in the first
half of 2000 were $920,000 for a stock-based deferred compensation charge
compared to $116,000 for deferred compensation during the same period of 1999.
Excluding the non-cash charges, total first half 2000 general and administrative
expenses were $965,000 as compared to $603,000 in 1999. The increase was
primarily attributable to increased labor costs to




                                       11
<PAGE>   12

support our expanded research and development activities and development of our
Universal Gene Recognition(TM) technology and costs associated with being a
public company. We expect that general and administrative expenses will increase
in the future to support continued growth of our research, development and
commercialization efforts.

Interest income (expense), net. Net interest income increased from $38,000 in
the six months ended June 30, 1999 to $1.1 million in the corresponding period
in 2000. The increase in net interest income resulted from higher average
interest-bearing balances and higher debt balances during 2000.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, Sangamo has financed operations primarily through sales of
preferred and common stock, including our initial public offering in April 2000,
federal government research grants, payments from corporate collaborators and
other financing activities such as a bank line of credit. As of June 30, 2000 we
had cash, cash equivalents, short and long-term investments totaling $67.1
million.

We used $1.5 million for operating activities in the six months ended June 30,
2000. This consisted of the net loss for the period of $4.4 million offset by
non-cash charges of $3.0 million relating to licensing and compensation
expenses, and other changes in operating assets and liabilities. We used $21.2
in investing activities for the six-month period ended June 30, 2000, which
resulted from purchases of short and long-term investments, as well as $912,000
invested in leasehold improvements and capital equipment purchases. Net cash
provided by financing activities in the period was $62.0 million, primarily from
the issuance of common shares in the Company's initial public offering,
convertible debentures to Edwards Lifesciences Corporation for $12.5 million,
and $1.5 million of Series C preferred stock. Simultaneously with the closing of
the initial public offering, the $12.5 million convertible debentures, together
with accrued interest, converted into common stock at $15 per share.

We believe that the net proceeds of the Company's initial public offering,
together with available cash resources, funds received under federal government
research grants and corporate collaborators are sufficient to finance our
existing operations for at least two years. Our capital requirements depend upon
a number of factors, including our ability to increase our revenues from
corporate partners and government grants, and the level and timing of our
research and development expenditures. We expect to devote substantial capital
resources to the development of our Universal Gene Recognition(TM) technology
platform over the next several years. We may need to raise substantial
additional capital to fund subsequent operations. Funding, however, may not be
available on favorable terms, if at all.

DISCLOSURE ABOUT MARKET RISK




                                       12
<PAGE>   13

Our exposure to market risk for changes in interest rates relates primarily to
our cash equivalents and short and long-term investments. The investments are
classified as available for sale. We do not use derivative financial instruments
in our investment portfolio. Our cash and investments policy emphasizes
liquidity and preservation of principal over other portfolio considerations. We
select investments that maximize interest income to the extent possible within
these guidelines. We satisfy liquidity requirements by investing excess cash in
securities with different maturities to match projected cash needs and limit
concentration of credit risk by diversifying our investments among a variety of
high credit-quality issuers. The portfolio includes investment grade marketable
securities with active secondary or resale markets. All short-term investments
have a fixed interest rate and are carried at market value, which approximates
cost. The following table represents the fair value balance of our cash, cash
equivalents, short-term investments and long-term investments by year of
expected maturity that are subject to interest rate risk as of June 30, 2000 (in
thousands, except for interest rates):

<TABLE>
<CAPTION>
                                                     2000            2001
                                                   ------          ------
<S>                                                <C>             <C>
Cash equivalents                                   39,586
Average interest rates                              6.51%

Short-term investments                             15,903
Average interest rates                              6.71%

Long-term investments                                              11,591
Average interest rates                                              7.05%
</TABLE>


NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This Quarterly Report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements that
are forward-looking in nature should be read with caution because they involve
risks and uncertainties, they are included, for example, in specific and general
discussions about:

     -  our strategy;

     -  sufficiency of our cash resources;

     -  revenues from existing and new collaborations;

     -  product development;

     -  our research and development and other expenses;

     -  our operational and legal risks; and

     -  our plans, objectives, expectations and intentions and any other
        statements that are not historical facts.

Various terms and expressions similar to them are intended to identify these
cautionary statements. These terms include: "anticipates," "believes,"
"continues," "could," "estimates," "expects," "intends," "may," "plans,"
"seeks," "should" and "will." Actual results may differ materially from those
expressed or implied in those statements. Such




                                       13
<PAGE>   14

forward-looking statements are subject to certain risks and uncertainties,
including the following:

Our gene regulation technology is unproven and if we are unable to use this
technology in all our intended applications, it would limit our revenue
opportunities.

Our technology involves new and unproven approaches to gene regulation. Although
we have generated some ZFP transcription factors for some gene sequences, we
have not created ZFP transcription factors for all gene sequences and we may not
be able to create ZFP transcription factors for all gene sequences which would
limit the usefulness of our technology. In addition, while we have demonstrated
the function of engineered ZFP transcription factors in cell cultures, we have
not done so in animals and humans and many other organisms, and the failure to
do so could restrict our ability to develop commercially viable products. If we
and our Universal GeneTools(TM) collaborators or strategic partners are unable
to extend our results to new gene sequences and experimental animal models, we
may be unable to use our technology in all its intended applications. Also,
delivery of ZFP transcription factors into cells in these and other environments
is limited by a number of technical challenges, which we may be unable to
surmount.

The utility of our ZFP transcription factors is in part based on the belief that
the regulation of gene expression may help scientists better understand the role
of human, animal, plant and other genes in drug discovery, as well as
therapeutic, diagnostic, agricultural and industrial biotechnology applications.
There is only a limited understanding of the role of genes in all these fields.
Life sciences companies have developed or commercialized only a few products in
any of these fields based on results from genomic research or the ability to
regulate gene expression. We, our Universal GeneTools(TM) collaborators or our
strategic partners may not be able to use our technology to identify and
validate drug targets or other targets in order to develop commercial products.

If our technology does prove to be effective, it still may not lead to
commercially viable products, which would reduce our revenue opportunities.

Even if our Universal GeneTools collaborators or strategic partners are
successful in identifying drug targets or other targets based on discoveries
made using our ZFP transcription factors, they may not be able to discover or
develop commercially viable products or may determine to pursue products that do
not use our technology. To date, no company has developed or commercialized any
therapeutic, diagnostic, agricultural or industrial biotechnology products based
on our technology. The failure of our technology to provide safe, effective,
useful or commercially viable approaches to the discovery and development of
these products would significantly limit our business plan and future growth.

Initial evaluations of our engineered ZFP transcription factors delivered to our




                                       14
<PAGE>   15

Universal Genetools(TM) collaborators have produced mixed results.

Some of our Universal GeneTools(TM) collaborators have been able to confirm the
potential utility of our gene regulation technology. Two of our collaborators,
Immunex Corporation and Millennium Pharmaceuticals, Inc., however, have not yet
been able to regulate gene expression using our technology. We have taken steps
to ascertain the reasons for these initial observations. We continue to work
with these collaborators to address and remedy any issues that may be associated
with the ZFP transcription factors, including redesign of the ZFP transcription
factors. These collaborators continue to evaluate our technology. Further, most
of our collaborators have not yet started testing or have not yet generated the
final results of their testing. The ZFP transcription factors that we have
generated for our other collaborators or our strategic partner may not function
as intended and the ZFP transcription factors engineered in the future for other
collaborators or strategic partners may not function as intended. If we are
unsuccessful in engineering ZFP transcription factors that achieve positive
results for our collaborators or strategic partners, this would significantly
harm our business by reducing our revenues.

If our competitors develop, acquire or market technologies or products that are
more effective than ours, this would reduce or eliminate our commercial
opportunity.

Any products that we or our collaborators or strategic partners develop using
our Universal Gene Regulation(TM) technology platform will participate in highly
competitive markets. Even if we are able to generate ZFP transcription factors
that achieve useful results, competing technologies may prove to be more
effective or less expensive which would limit or eliminate our revenue
opportunities. Competing technologies may include other methods of regulating
gene expression. Universal Gene Recognition has broad application in the life
sciences, and competes with a broad array of new technologies and approaches
being applied to genetic research by many companies. Competitive technologies
include those used to map and sequence DNA, analyze the expression of genes in
cells or tissues, determine gene function, discover new genes, analyze genetic
information and regulate genes. Our competitors include biotechnology companies
with:

     -  competing proprietary technology;

     -  substantially greater capital resources than ours;

     -  larger research and development staffs and facilities than ours;

     -  greater experience in product development and in obtaining regulatory
        approvals and patent protection; and

     -  greater manufacturing and marketing capabilities than we do.

These organizations also compete with us to:

     -  attract qualified personnel;

     -  attract parties for acquisitions, joint ventures or other
        collaborations; and



                                       15
<PAGE>   16

     -  license the proprietary technologies of academic and research
        institutions that are competitive with our technology which may preclude
        us from pursuing similar opportunities.

Accordingly, our competitors may succeed in obtaining patent protection or
commercializing products before us. In addition, any products that we develop
may compete with existing products or services that are well-established in the
marketplace.

Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research and development efforts.

We are a small company with 55 employees, and our success depends on our
continued ability to attract, retain and motivate highly qualified management
and scientific personnel, and our ability to develop and maintain important
relationships with leading academic and other research institutions and
scientists. Competition for personnel and academic and other research
collaborations is intense. The success of our technology development programs
depends on our ability to attract and retain highly trained personnel. If we
lose the services of personnel with these types of skills, it could impede
significantly the achievement of our research and development objectives. If we
fail to negotiate additional acceptable collaborations with academic and other
research institutions and scientists, or if our existing collaborations are
unsuccessful, our technology development programs may be delayed or may not
succeed.

At present the scope of our needs is somewhat limited to the expertise of
personnel who are able to engineer ZFP transcription factors and apply them to
gene regulation. In the future, we will need to hire additional personnel and
develop additional academic collaborations as we continue to expand our research
and development activities and to work on some of our planned projects because
these activities and projects will require additional expertise in disciplines
applicable to the products we would develop with them. Further, our planned
activities will require existing management to develop additional expertise. We
do not know if we will be able to attract, retain or motivate the required
personnel to achieve our goals.

We may have difficulty managing our growth, which may slow our growth rate or
give rise to inefficiencies which would reduce our profits.

We have recently experienced, and expect to continue to experience, growth in
the number of our employees and the scope of our operating and financial
systems. This growth has resulted in an increase in responsibilities for both
existing and new management personnel. Our ability to manage growth effectively
will require us to continue to implement and improve our operational, financial
and management information systems and to recruit, train, motivate and manage
our employees. We may not be able to manage our growth and expansion, and the
failure to do so may slow our growth rate or give rise to inefficiencies which
would reduce our profits.




                                       16
<PAGE>   17

We are at an early stage of development and may not succeed or become
profitable.

We began operations in 1995 and are at an early stage of development. We have
incurred significant losses to date, and our revenues have been limited to
federal government research grants and Universal GeneTools(TM) collaborators and
a strategic partner. Our Universal GeneTools(TM) collaborators are evaluating
our initial ZFP transcription factors. If the initial ZFP transcription factors
do not provide sufficient value to those collaborators, then they may not
continue to work with us. This may also impair our ability to attract additional
collaborators. As a result, our business is subject to all of the risks inherent
in the development of a new technology, which includes the need to:

     -  attract additional new Universal GeneTools(TM) collaborators and
        strategic partners;

     -  attract and retain qualified scientific and technical staff and
        management, particularly scientific staff with expertise to further
        apply and develop our early stage technology;

     -  attract and enter into research collaborations with academic and other
        research institutions and scientists;

     -  obtain sufficient capital to support the expense of developing our
        technology platform and developing, testing and commercializing
        products;

     -  develop a market for our products; and

     -  successfully transition from a company with a research focus to a
        company capable of supporting commercial activities.

In addition to competitive pressures, problems frequently encountered with
research, development and commercialization of new technologies and products
will likely affect us. Most of our ZFP design and testing procedures take place
on a relatively small scale. In the future, we intend to apply ZFP design and
testing procedures at a scale involving hundreds of genes per year. We may not
be able to successfully or efficiently achieve this scale. In addition, while we
have had success in applying ZFP gene regulation in our laboratories, we may
have difficulty in transferring our technology to our collaborators and
strategic partners laboratories.

We anticipate continuing to incur operating losses for at least two years. If
material losses continue for a longer period, we may be unable to continue our
operations.

We have generated operating losses since we began operations in 1995. The extent
of our future losses and the timing of profitability are highly uncertain, and
we may not be profitable in the foreseeable future. We have been engaged in
developing our Universal Gene Recognition(TM) technology since inception, which
has and will continue to require significant research and development
expenditures. To date, we have generated our revenues from federal government
research grants, Universal GeneTools(TM) collaboration agreements and a
strategic partnership agreement. As of June 30, 2000, we had an accumulated
deficit of approximately $13.2 million. Even if we succeed in increasing our
current product and research revenue or developing additional commercial
products, we expect to incur losses in the near future and may continue to incur
losses for at least the




                                       17
<PAGE>   18

next two years. These losses may increase as we expand our research and
development activities. If the time required to generate significant product
revenues and achieve profitability is longer than we currently anticipate, we
may not be able to sustain our operations.

We may require financing beyond the proceeds of the recent public offering. If
we are unable to obtain this financing, we will be unable to develop our
technology and products.

We do not know whether we will require additional financing, or that, if
acquired, it will be on terms favorable to our stockholders or us. We have
consumed substantial amounts of cash to date and expect capital outlays and
operating expenditures to increase over the next several years as we expand our
infrastructure and research and development activities. We may raise this
financing through public or private financings or additional Universal
GeneTools(TM) collaborations, strategic partnerships or licensing arrangements.
If additional financing becomes necessary in the future, it would likely be at
least tens of millions of dollars.

While we believe our current financial resources and the proceeds of the recent
offering should be adequate to sustain our operations for two years, it is not
possible to estimate our financial requirements thereafter. However, to the
extent we concentrate our efforts on proprietary human therapeutics, we will
require FDA approval and extensive clinical trials of our potential products.
This process may cost in excess of $100 million per product.

Our technology infrastructure is not yet complete and any delay or failure to
complete it could prevent us from efficiently delivering ZFP transcription
factors to our Universal Genetools(TM) collaborators or strategic partners.

Part of our strategy involves building additional technology infrastructure to
support our Universal Gene Recognition(TM) technology. This strategy includes
the continued research and development of improved and automated processes for
design and production of our ZFP transcription factors. In addition, we intend
to continue to assemble large collections, or libraries, of ZFPs for use in
pharmaceutical target discovery. Because this infrastructure is an important
part of our platform, any delay or failure to complete it could slow our growth
and our ability to advance our strategic initiatives.

Our Universal Genetools(TM) collaboration agreements with companies are of
limited scope, and if we are not able to expand the scope of our existing
collaborations or enter into new ones, our revenues will be negatively impacted
and our research initiatives may be slowed or halted.

Our Universal GeneTools(TM) collaborations are important to us because they
permit us to introduce our technology to many companies by supplying them with a
specified ZFP transcription factor for a payment without licensing any of our
technology. The




                                       18
<PAGE>   19

collaboration agreements, however, are of limited scope. Under most of our
current Universal GeneTools(TM) collaborations we receive a payment for
supplying ZFP transcription factors for gene targets specified by the companies.
These companies are not obligated to make continuing payments to us in
connection with their research efforts or to pursue any product development
program with us. As a result, we may not develop long-term relationships with
these companies that could lead to additional revenues. If we are not able to
expand the scope of our existing collaborations or enter into new ones, we may
have reduced revenues and be forced to slow or halt research initiatives.

Commercialization of our technologies depends on strategic partnering with other
companies, and if we are not able to find strategic partners in the future, we
may not be able to develop our technologies or products, which could slow our
growth and decrease our revenues.

We expect to rely, to some extent, on our strategic partners to provide funding
in support of our research and to perform some independent research, preclinical
and clinical testing. We currently have only one strategic partner. Our
technology is broad based and we do not currently possess the resources
necessary to develop and commercialize potential products that may result from
our technologies, or the resources or capabilities to complete any approval
processes that may be required for the products, therefore we must enter into
additional strategic partnerships to develop and commercialize products.

We may require significant time to secure additional collaborations or strategic
partners because we need to effectively market the benefits of our technology to
these future collaborators and strategic partners, which uses the time and
efforts of research and development personnel and our management. Further, each
collaboration or strategic partnering arrangement will involve the negotiation
of terms that may be unique to each collaborator or strategic partner. These
business development efforts may not result in a collaboration or strategic
partnership.

If we do not enter into additional strategic partnering agreements, we will
experience reduced revenues and may not develop or commercialize our products.
The loss of our current or any future strategic partnering agreement would not
only delay or terminate the potential development or commercialization of any
products we may derive from our technologies but also delay or terminate our
ability to test ZFP transcription factors for specific genes. If any strategic
partner fails to conduct the collaborative activities successfully and in a
timely manner, the preclinical or clinical development or commercialization of
the affected product candidates or research programs could be delayed or
terminated.

Our existing strategic partnering agreement is, and we would expect any future
arrangement to be based on the achievement of milestones. Under the strategic
partnering agreements, we expect to receive revenue for the research and
development of a therapeutic product based on achievement of specific
milestones. Achieving these milestones will depend, in part, on the efforts of
our strategic partner as well as our own.




                                       19
<PAGE>   20

In contrast, our current Universal GeneTools(TM) collaboration agreements only
pay us to supply ZFP transcription factors for the collaborators independent
use, rather than for future results of the collaborators efforts. If we or any
strategic partner fails to meet specific milestones, then the strategic
partnership can be terminated which could decrease our revenues.

Our Universal Genetools(TM) collaborators and strategic partners may decide to
adopt alternative technologies or may be unable to develop commercially viable
products using our technology, which would negatively impact our revenues and
our strategy to develop these products.

Our collaborators or strategic partners may adopt the alternative technology of
our competitors which could decrease the marketability of our technology.
Because many of our Universal GeneTools(TM) collaborators or strategic partners
are likely to be working on more than one research project, they could choose to
shift their resources to projects other than those they are working on with us.
If they do so, that would delay our ability to test our technology and would
delay or terminate the development of potential products based on our gene
regulation technology. Further, our collaborators and strategic partners may
elect not to develop products arising out of our collaborative and strategic
partnering arrangements or to devote sufficient resources to the development,
manufacturing, marketing or sale of these products. If any of these events
occur, we may not be able to develop our technologies or commercialize our
products.

We intend to conduct proprietary research programs to discover therapeutic
product candidates. These programs increase our risk of product failure, may
significantly increase our research expenditures, and may involve conflicts with
our collaborators and strategic partners.

Conducting proprietary research programs may not generate corresponding revenue
and may create conflicts with our collaborators or strategic partners. The
implementation of this strategy will involve substantially greater business
risks and the expenditure of significantly greater funds than our current
research activities. In addition, these programs will require substantial
commitments of time from our management and staff. Moreover, we have no
experience in preclinical or clinical testing, obtaining regulatory approval or
commercial-scale manufacturing and marketing of therapeutic products, and we
currently do not have the resources or capability to manufacture therapeutic
products on a commercial scale. In order for us to commercialize these products
directly, we would need to develop, or obtain through outsourcing arrangements,
the capability to execute all of these functions, market and sell products. We
do not have these capabilities, and we may not be able to develop or otherwise
obtain the requisite preclinical, clinical, regulatory, manufacturing, marketing
and sales capabilities.

In addition, disagreements with our Universal GeneTools(TM) collaborators or
strategic partners could develop over rights to our intellectual property with
respect to our proprietary research activities. Any conflict with our
collaborators or strategic partners




                                       20
<PAGE>   21

could reduce our ability to enter into future collaboration or strategic
partnering agreements and negatively impact our relationship with existing
collaborators and strategic partners, which could reduce our revenue and delay
or terminate our product development.

Because it is difficult and costly to protect our proprietary rights, and third
parties have filed patent applications that are similar to ours, we cannot
ensure the proprietary protection of our technologies and products.

Our commercial success will depend in part on obtaining patent protection of our
technology and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in patents we own or license.

We are a party to various license agreements that give us rights under specified
patents and patent applications. We currently hold an exclusive sublicense for
ZFP transcription factor technology which is limited to using the technology in
human and animal healthcare. The scope of this license may be subject to
dispute. We may need to license additional rights to commercialize our
technology outside human and animal healthcare. Similarly, our current licenses,
and our future licenses will, contain performance obligations. If we fail to
meet those obligations, the licenses could be terminated. If we are unable to
continue to license these technologies on commercially reasonable terms, or at
all, we may be forced to delay or terminate our product development and research
activities.

With respect to our present and any future sublicenses, since our rights derive
from those granted to our sublicensor, we are subject to the risk that our
sublicensor may fail to perform its obligations under the master license or fail
to inform us of useful improvements in, or additions to, the underlying
intellectual property owned by the original licensor.

We are unable to exercise the same degree of control over intellectual property
that we license from third parties as we exercise over our internally developed
intellectual property. We generally do not control the prosecution of patent
applications that we license from third parties; therefore, the patent
applications may not be prosecuted in a timely manner. The degree of future
protection for our proprietary rights is uncertain and we cannot ensure that:

     -  we or our licensors were the first to make the inventions covered by
        each of our pending patent applications;

     -  we or our licensors were the first to file patent applications for these
        inventions;

     -  others will not independently develop similar or alternative
        technologies or reverse engineer any of our products, processes or
        technologies;




                                       21
<PAGE>   22

     -  any of our pending patent applications will result in issued patents;

     -  any patents issued or licensed to us or our Universal GeneTools
        collaborators or strategic partners will provide a basis for
        commercially viable products or will provide us with any competitive
        advantages or will not be challenged and invalidated by third parties;

     -  we will develop additional products, processes or technologies that are
        patentable; or

     -  the patents of others will not have an adverse effect on our ability to
        do business.

Others have filed and in the future are likely to file patent applications that
are similar to ours. We are aware that there are academic groups and other
companies that are attempting to develop technology which is based on the use of
zinc finger and other DNA binding proteins, and that these groups and companies
have filed patent applications. Several patents have been issued, although
Sangamo has no current plans to use the associated inventions. More
particularly, we are aware of pending patent applications with claims directed
to zinc finger libraries and methods of designing zinc finger DNA binding
proteins. These applications are not issued patents. If the pending claims were
granted in their present form, however, they could interfere with our right to
commercialize our products and processes. If these or other patents issue, it is
possible that the holder of any patent or patents granted on these applications
may bring an infringement action against our collaborators, strategic partner or
us claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes. The costs of litigating the claim could be
substantial. Moreover, we cannot predict whether our Universal GeneTools
collaborators, strategic partners or we would prevail in any actions. In
addition, if the relevant patent claims were upheld as valid and enforceable and
our products or processes were found to infringe the patent or patents, we could
be prevented from making, using or selling the relevant product or process
unless we could obtain a license or were able to design around the patent
claims. While we believe that our proprietary intellectual property would give
us substantial leverage to secure a cross-license, it is uncertain that any
license required under that patent or patents would be made available on
commercially acceptable terms, if at all. We believe that there may be
significant litigation in the genomics industry regarding patent and other
intellectual property rights which could subject us to litigation. If we become
involved in litigation, it could consume a substantial portion of our managerial
and financial resources.

We have received an unsolicited invitation to license existing patented
technology from a third party which contained an allegation of infringement.
Upon careful analysis of the technology, we have determined that we already own
rights to the technology or that our scientific and commercial interests would
not benefit from the acquisition of rights to it. Further, we believe that the
making, using or selling of our products and processes need not infringe any
claims in the proffered patents. Accordingly, we have declined to enter into
license negotiations with these parties. It is possible, however, that these
parties will bring future actions against us, our Universal GeneTools(TM)
collaborators or our strategic partners alleging infringement of their patents.
As detailed above, the outcome of any litigation, particularly lawsuits
involving biotechnology patents, is difficult to predict and




                                       22
<PAGE>   23

likely to be costly regardless of the outcome. In these circumstances, the risks
of a negative impact on our business can neither be clearly defined nor entirely
eliminated.

We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. Trade secrets, however, are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able to
adequately protect our trade secrets or other proprietary information or enforce
these confidentiality agreements.

Our Universal GeneTools(TM) collaborators, strategic partners and scientific
advisors have rights to publish data and information in which we may have
rights. If we cannot maintain the confidentiality of our technology and other
confidential information in connection with our collaborations and strategic
partnerships, then we may not be able to receive patent protection or protect
our proprietary information.

Our potential therapeutic products are subject to a lengthy and uncertain
regulatory process, and if these potential products are not approved, we will
not be able to commercialize those products.

The Food and Drug Administration, or FDA, must approve any therapeutic and some
diagnostic products based on ZFP technology before it can be marketed in the
United States. The process for receiving regulatory approval is long and
uncertain, and even if we had a potential product, this product may not
withstand the rigors of testing under the regulatory approval processes. Before
commencing clinical trials in humans, we must submit and receive approval from
the FDA of an Investigational New Drug Application. Clinical trials are subject
to oversight by institutional review boards and the FDA and these trials must
meet particular conditions, such that they:

     -  must be conducted in conformance with the FDA's good clinical practice
        regulations;

     -  must meet requirements for institutional review board oversight;

     -  must meet requirements for informed consent;

     -  are subject to continuing FDA oversight;

     -  may require large numbers of test subjects; and

     -  may be suspended by us or the FDA at any time if it is believed that the
        subjects participating in these trials are being exposed to unacceptable
        health risks or if the FDA finds deficiencies in the Investigational New
        Drug application or the conduct of these trials.

We must also demonstrate that the product is safe and effective in the patient
population that will be treated. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations that could delay, limit or
prevent regulatory clearances. In addition, we may encounter delays or
rejections based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may




                                       23
<PAGE>   24

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 our potential products or us. Additionally, we have no
experience in conducting and managing the clinical trials necessary to obtain
regulatory approval.

In addition, we may also require approval from the Recombinant DNA Advisory
Committee, or RAC, which is the advisory board to the National Institutes of
Health, or NIH, focusing on clinical trials involving gene transfer.

We have not submitted an application with the FDA or any other regulatory
authority for any product candidate, and neither the FDA nor any other
regulatory authority has approved any therapeutic, diagnostic, agricultural or
industrial product candidate developed with our technology for commercialization
in the United States or elsewhere.

Regulatory approval, if granted, may be limited to specific uses or geographic
areas which could limit our ability to generate revenues.

Regulatory approval may limit the indicated use for which we can market a
product. Further, once regulatory approval for a product is obtained, it and its
manufacturer are subject to continual review. Discovery of previously unknown
problems with a product or manufacturer may result in restrictions on the
product, manufacturer and manufacturing facility, including withdrawal of the
product from the market. In Japan and Europe, regulatory agencies also set or
approve prices.

Even if regulatory clearance of a product is granted, this clearance is limited
to those specific states and conditions for which the product is useful as
demonstrated through clinical trials. We cannot ensure that any therapeutic
product developed by us, alone or with others, will prove to be safe and
effective in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance.

Outside the United States, our ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory authorities
so we cannot predict whether or when we would be permitted to commercialize our
product. These foreign regulatory approval processes include all of the risks
associated with FDA clearance described above.

Laws or public sentiment may limit our production of genetically engineered
agricultural products in the future, and these laws could reduce our ability to
sell these products.

Genetically engineered products are currently subject to public debate and
heightened regulatory scrutiny, either of which could prevent or delay
production of agricultural products. We may develop genetically engineered
agricultural products for ourselves or with our strategic partners. The field
testing, production and marketing of genetically engineered plants and plant
products are subject to federal, state, local and foreign governmental
regulation. Regulatory agencies administering existing or future regulations




                                       24
<PAGE>   25

or legislation may not allow production and marketing of our genetically
engineered products in a timely manner or under technically or commercially
feasible conditions. In addition, regulatory action or private litigation could
result in expenses, delays or other impediments to our product development
programs or the commercialization of resulting products.

The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as applied to foods developed through traditional
plant breeding. Genetically engineered food products, however, will be subject
to premarket review if these products raise safety questions or are deemed to be
food additives. Governmental authorities could also, for social or other
purposes, limit the use of genetically engineered products created with our gene
regulation technology.

Even if we are able to obtain regulatory approval of genetically engineered
products, our success will also depend on public acceptance of the use of
genetically engineered products including drugs, plants and plant products.
Claims that genetically engineered products are unsafe for consumption or pose a
danger to the environment may influence public attitudes. Our genetically
engineered products may not gain public acceptance. The subject of genetically
modified organisms has received negative publicity in Europe, which has aroused
public debate. The adverse publicity in Europe could lead to greater regulation
and trade restrictions on imports of genetically altered products. If similar
adverse public reaction occurs in the United States, genetic research and its
resulting products could be subject to greater domestic regulation and could
decrease the demand for our technology and products.

If conflicts arise between us and our collaborators, strategic partners,
scientific advisors or directors, these parties may act in their self-interest,
which may limit our ability to implement our strategies.

If conflicts arise between us and our corporate or academic collaborators,
strategic partners or scientific advisors or directors, the other party may act
in its self-interest which may limit our ability to implement our strategies.
Some of our Universal GeneTools(TM) or academic collaborators or strategic
partners are conducting multiple product development efforts within each area
that is the subject of the collaboration with us. Generally, in each of our
collaborations, we have agreed not to conduct independently, or with any third
party, any research that is competitive with the research conducted under our
collaborations. Our collaborations may cause us to limit the areas of research
that we pursue, either alone or with others. Our collaborators or strategic
partners, however, may develop, either alone or with others, products in related
fields that are competitive with the products or potential products that are the
subject of these collaborations. Competing products, either developed by the
collaborators or strategic partners or to which the collaborators or strategic
partners have rights, may result in their withdrawal of support for our product
candidates.




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Some of our collaborators or strategic partners could also become competitors in
the future. Our collaborators or strategic partners could develop competing
products, preclude us from entering into collaborations with their competitors,
fail to obtain timely regulatory approvals, terminate their agreements with us
prematurely or fail to devote sufficient resources to the development and
commercialization of products. Any of these developments could harm our product
development efforts.

Our collaborations with outside scientists may be subject to change which could
limit our access to their expertise.

We work with scientific advisors and collaborators at academic research
institutions. These scientists are not our employees and may have other
commitments that would limit their availability to us. Although our scientific
advisors generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose
their services. Although our scientific advisors and academic collaborators sign
agreements not to disclose our confidential information, it is possible that
some of our valuable proprietary knowledge may become publicly known through
them.

If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.

Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and regulations
could be significant.

Anti-takeover provisions in our certificate of incorporation and Delaware law
could prevent a potential acquiror from buying your stock.

Anti-takeover provisions of Delaware law, in our certificate of incorporation
and equity benefit plans may make a change in control of our company more
difficult, even if a change in control would be beneficial to our stockholders.
These provisions may allow our board of directors to prevent or make changes in
the management and control of our company. In particular, our board of directors
will be able to issue up to 5,000,000 shares of preferred stock with rights and
privileges that might be senior to our common stock, without the consent of the
holders of the common stock. Further, without any further vote or action on the
part of the stockholders, the board of directors will have the authority to
determine the price, rights, preferences, privileges and restrictions of the
preferred stock. This preferred stock, if it is ever issued, may have preference
over and harm the rights of the holders of common stock. Although the issuance
of this preferred stock will provide




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us with flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. Similarly, our authorized but
unissued common stock is available for future issuance without stockholder
approval. In addition, our certificate of incorporation:

     -  states that stockholders may not act by written consent but only at a
        stockholders' meeting;

     -  establishes advance notice requirements for nominations for election to
        the board of directors or proposing matters that can be acted upon at
        stockholders' meetings; or

     -  limits who may call a special meeting of stockholders.

Our stock price may be volatile, which could result in substantial losses for
investors purchasing shares of common stock.

Volatility in the biotechnology market could cause you to incur substantial
losses. Prior to the Company's public offering, you could not buy or sell our
common stock publicly. An active public market for our common stock may not
develop or be sustained. The market price of our common stock may be highly
volatile. The market prices of securities of biotechnology companies are
currently highly volatile. The market price of our common stock may fluctuate
significantly in response to the following factors, some of which are beyond our
control:

     -  changes in market valuations of similar companies, since many
        biotechnology companies have recently registered their securities to
        trade publicly and may create a more volatile trading sector;

     -  announcements by us or our competitors of new or enhanced products,
        technologies or services or significant contracts, acquisitions,
        strategic relationships, joint ventures or capital commitments;

     -  regulatory developments;

     -  additions or departures of key personnel;

     -  deviations in our results of operations from the estimates of securities
        analysts; and

     -  future sales of our common stock or other securities.

Our stock price could be adversely affected by additional shares becoming
available for sale.

Sales of a substantial number of shares of our common stock, or the perception
that these sales could occur, could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. In addition, we have entered into registration rights
agreements with some investors that entitle these investors to have their shares
registered for sale in the public market. The exercise of these rights could
affect the market price of our common stock.




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Insiders have substantial control over Sangamo and could delay or prevent a
change in corporate control.

The interest of management could conflict with the interest of our other
stockholders. Our executive officers, directors and principal stockholders own,
in the aggregate, a significant percentage of our outstanding common stock. As a
result, these stockholders, if they choose to act together, will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
could have the effect of delaying or preventing a change of control of Sangamo,
which in turn could reduce the market price of our stock.



PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The effective date of our first Registration Statement on Form S-1 filed under
the Securities Act of 1933, as amended, relating to the initial public offering
of our common stock was April 6, 2000. On the same date, we signed an
underwriting agreement with Lehman Brothers, Chase H&Q, ING Barings LLC, and
William Blair & Co., the managing underwriters for the initial public offering
and the representatives of the underwriters named in the underwriting agreement,
for the initial public offering of 3,500,000 shares of our common stock at an
initial public offering price of $15 per share. The offering commenced on April
6, 2000 and was closed on April 10, 2000. The initial public offering resulted
in gross proceeds of $52.5 million. We received net proceeds of $48.8 million
after deducting underwriting discounts of $3.7 million. Expenses related to the
offering totaled approximately $1.4 million.

Concurrently with the closing of the initial public offering, the 5,217,408
shares of convertible preferred stock outstanding at March 31, 2000 were
automatically converted into 10,434,816 shares of common stock. In addition, the
$12.5 million convertible debenture, together with accrued interest, with
Edwards Lifesciences Corporation, also converted into common stock at $15 per
share.

From the time of receipt through June 30, the Company has used the net proceeds
from its initial public offering of Common Stock of the Company to invest in
short-term and long-term, interest bearing, investment grade securities and has
used its existing cash balances to fund the general operations of the Company.
The proceeds will be used for general corporate purposes, including working
capital and product development. A portion of the net proceeds may also be used
to acquire or invest in complementary business or products or to obtain the
right to use complementary technologies. The Company has no agreements or
commitments with respect to any such acquisition or investments and the Company
is not currently engaged in any material negotiations with respect to any such
transaction. None of the Company's net proceeds of the Offering were paid
directly or




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indirectly to any director, officer, general partner of the Company or their
associates, persons owning 10% or more of any class of equity securities of the
Company, or an affiliate of the Company. We expect that our use of proceeds from
the offering will conform to the intended use of proceeds as described in our
initial public offering prospectus dated April 6, 2000.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 27: Financial Data Schedule.

Reports: The Company did not file any reports on Form 8-K during the three
months ended June 30, 2000.




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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



SANGAMO BIOSCIENCES, INC.               Dated: August 9, 2000



                                        /s/ Edward O. Lanphier II
                                        ----------------------------------------
                                        Edward O. Lanphier II
                                        President, Chief Executive Officer


                                        /s/ Shawn K. Johnson
                                        ----------------------------------------
                                        Shawn K. Johnson
                                        Director of Finance
                                        Principal Accounting Officer




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