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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
281/364-1150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $0.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation System on March
20, 1997 was $84,247,590*.
The number of shares of registrant's Common Stock outstanding as of March 20,
1997 was 13,664,252.
DOCUMENTS INCORPORATED BY REFERENCE: Registrant's Proxy Statement for the 1997
Annual Meeting of Stockholders is incorporated by reference in Part III, Items
10, 11, 12 and 13 of this Form 10-K.
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* Excludes 1,628,882 shares of Common Stock held by directors, executive
officers and stockholders whose ownership exceeds ten percent of the shares
outstanding on March 20, 1997. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant or that such person is controlled by or under common control with the
registrant.
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GENEMEDICINE, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I
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Item 1. Business............................................................. 1
Overview............................................................. 1
Scientific and Industry Background................................... 2
GeneMedicine Non-Viral Gene Therapy Technology....................... 2
Product Development.................................................. 4
Strategic Alliances.................................................. 7
Licensing and Research Agreements.................................... 8
Patents and Proprietary Technology................................... 8
Commercialization and Manufacturing.................................. 9
Government Regulation................................................ 10
Competition.......................................................... 12
Product Liability Insurance.......................................... 12
Risk Factors......................................................... 12
Human Resources...................................................... 17
Executive Officers................................................... 17
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 Stockholder Matters 20
Item 6. Selected Financial Information....................................... 21
Item 7. Managements's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 22
Item 8. Financial Statements and Supplementary Data.......................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 23
PART III
Item 10. Directors and Executive Officers..................................... 24
Item 11. Executive Compensation............................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 24
Item 13. Certain Relationships and Related Transactions....................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 25
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, the early stage of the GeneMedicine, inc.'s development and
technological uncertainty, future capital needs and uncertainty of additional
funding, dependence on collaborative partners and licenses, the failure of
existing or future partnerships to be successful, uncertainty of patent
protection, uncertainty of government regulatory requirements, level of
competition and rapid technological change, as well as those set forth in "Risk
Factors" and elsewhere in this Form 10-K.
OVERVIEW
GeneMedicine, inc. ("GeneMedicine" or the "Company") is engaged in the
discovery and development of a new class of pharmaceutical products that
incorporate genes ("gene medicines"). The Company's gene medicines are designed
to be well-characterized pharmaceutical products that are directly administered
to patients to cause the production and distribution of therapeutic proteins
within the body. Gene therapy requires the safe and convenient introduction of
genes into specific cells of the body, the achievement of sustained therapeutic
levels of the desired protein, and the control of gene function so that protein
production can be modified based on the patient's needs.
Gene medicines are intended for both acute and chronic use. They are designed
to be administered through convenient and conventional routes, including
intramuscular injection, inhalation and intravenous injection. The Company's
initial business focus is the development of gene medicines for treating certain
cancers, musculoskeletal disorders, and pulmonary diseases, as well as in the
development of nucleic acid vaccines for the prophylactic treatment of viral and
bacterial infections. GeneMedicine intends to develop and commercialize its
products through corporate alliances with major pharmaceutical and biotechnology
companies.
GeneMedicine has established a broad proprietary position in non-viral gene
therapy that includes: several key gene delivery and gene expression
technologies; technology related to the manufacture of gene medicines; and, the
use of certain genes to treat certain disease indications. The Company's core
gene delivery technology includes lipid-, peptide-, carbohydrate-, and polymer-
based systems, each of which can be applied to specific clinical targets. Gene
medicines also incorporate novel DNA sequences that may be used to control the
tissue-specificity, duration and level of functioning of administered genes.
The Company has developed patented GeneSwitch(TM) technology that may be used to
turn off or to activate the expression of previously administered therapeutic
genes in specific cells. GeneMedicine has created high-yield, low-cost and
scaleable integrated manufacturing processes for the production of its gene
medicines for clinical use.
The development of cancer gene medicines at the Company is being conducted
through a corporate alliance with Boehringer Mannheim Group, a part of Corange
International Ltd ("Corange"). Current efforts are focused on the development
of the Company's Interleukin-2 ("IL-2") Gene Medicine for the treatment of head
and neck cancer. In January 1997, GeneMedicine received clearance from the U.S.
Food and Drug Administration ("FDA") to commence a Phase I clinical trial using
its IL-2 Gene Medicine that it is developing for the treatment of head and neck
cancer. GeneMedicine anticipates commencing the Phase I clinical trial in the
first half of 1997 to study the safety and tolerability of the product. In
addition, GeneMedicine received clearance from the FDA late in the fourth
quarter of 1996 to commence a Phase I clinical trial for the Company's Insulin
Like Growth Factor-I ("IGF-I") Gene Medicine which is intended for the treatment
of diabetic motor neuropathy. The IGF-I Gene Medicine has further potential
broad application in the treatment of muscle disorders and neuropathies that
afflict large patient populations and are not adequately addressed by current
therapies, if at all. GeneMedicine anticipates commencing the Phase I clinical
trial for its IGF-I Gene Medicine in the first half of 1997 to study the safety
and tolerability of this product.
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SCIENTIFIC AND INDUSTRY BACKGROUND
Gene therapy is a method for the treatment or prevention of disease that uses
genes to provide the patient's cells with the genetic information necessary to
produce specific therapeutic proteins needed to correct or to modulate disease.
Each cell in the body has the ability to produce thousands of the different
proteins that are essential for cellular structure, function and growth. Genes
are segments of deoxyribonucleic acid ("DNA") present in each cell in the body,
which provide the information the cells use to produce proteins. Protein
production begins in the nucleus of the cell when the gene is copied
(transcribed) into a precursor ribonucleic acid (called pre-mRNA) which is
processed in the nucleus to ribonucleic acid ("RNA") known as "messenger RNA."
Messenger RNA then moves from the nucleus of the cell into the cell's cytoplasm,
where it is "translated" by the cell into protein. The process of transcription
and translation that results in protein production by the cell is called gene
expression.
Gene therapy approaches currently in development may be distinguished by the
methods used to transfer or deliver therapeutic genes to the patient. These
methods include the use of (i) cells genetically altered ex vivo (outside the
body) with viruses or other gene-transfer methods, (ii) viruses (such as
retrovirus and adenovirus) which have been genetically modified so that they
cannot reproduce and infect other cells, and (iii) synthetic formulations of
plasmids. The Company believes that ex vivo and virus-based gene therapy
approaches have significant clinical and commercial limitations. Both viral and
non-viral ex vivo approaches involve complex procedures whereby the target cells
must be removed from the patient, modified with the therapeutic gene, expanded
in number, cleansed of contaminants and then reintroduced into the patient. In
addition, most ex vivo and some in vivo gene therapies result in a permanent
genetic alteration of the cell, which generally precludes the ability to
modulate treatment in response to therapeutic needs. While a number of viral
gene therapies currently in development can potentially be suitable for direct
administration, safety issues may limit their further development. These include
adverse immune responses, inflammation and the development of antibodies that
may block the activity of the virus-based gene therapy and prevent repeated
administration.
Non-viral methods are based on the direct administration to patients of
plasmid-based gene expression systems that contain a therapeutic gene as well as
genetic sequences that direct the cell to transcribe and translate this gene
into a therapeutic protein. Plasmids are closed loops of DNA that can be
produced in bacteria through fermentation. In the majority of cases, plasmid-
based gene therapy requires the use of a synthetic gene delivery system to
deliver the gene expression system to the nucleus of specific target cells
within the body. Non-viral gene therapy systems can be administered by
conventional and convenient methods such as intramuscular injection, inhalation
or intravenous injection, can provide increased safety over viral gene therapy
approaches and can be degraded from the body by natural processes allowing the
gene medicine to be administered repeatedly.
The Company is developing non-viral plasmid-based gene medicines which it
believes will have significant clinical and commercial advantages over other
gene therapy methods. In addition to increased safety and the direct
administration benefits, these advantages include enhanced delivery of the
therapeutic gene to specific target cells, and the ability to control the level
and site of therapeutic protein production. The Company believes its gene
medicines can provide cost-effective and convenient treatments for a wide
variety of diseases and disorders without the safety concerns and practical
limitations that accompany certain virus-based or ex vivo gene therapies, as
well as protein drugs.
GENEMEDICINE NON-VIRAL GENE THERAPY TECHNOLOGY
A gene medicine contains three components: a therapeutic gene that codes for a
specific therapeutic protein; a gene delivery system that controls the location
of the gene within the body; and a plasmid-based gene expression system that may
serve to control the location, level and duration of expression of the
therapeutic gene as well as the location of the resultant protein.
Each biological target for gene therapy, such as muscle, solid tumors, the
lungs or the cells of the immune system, has a different structure and
biochemistry. The Company believes that for effective gene therapy each
biological target requires a specific gene delivery and gene expression system.
GeneMedicine is currently developing non-viral technology platforms, each
consisting of a gene delivery system and a gene expression system for several
target tissues including: skeletal muscle, solid tumors, lung airways, the
vascular endothelium, and liver hepatocyte cells.
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The gene delivery system brings the plasmid into contact with the desired
target cell, after which the plasmid is internalized into the cell across the
cellular membrane. This gene expression system then moves to the nucleus of the
cell, where gene expression begins, resulting in the production of a therapeutic
protein through the steps of transcription and translation. The Company can
engineer the gene expression system to control whether the resulting protein
will remain within the cell for an intracellular effect or whether it will be
secreted from the cell for either a local or systemic effect. The gene
expression system can also be adjusted to control the level of protein
production, as well as the location and duration of gene expression. The
Company's gene medicines are designed to produce therapeutic levels of protein
over a period of several days to several months.
GeneMedicine anticipates that its gene expression systems will remain separate
from the cells' chromosomal DNA and degrade from the body. Use of the Company's
gene medicines is intended to be analogous to conventional pharmaceuticals
because they are designed to be administered repetitively to a patient according
to a dosing schedule that matches the extent and severity of the disease and can
also be used to treat acute or chronic diseases.
GENE DELIVERY SYSTEMS
GeneMedicine is developing gene delivery systems based on three broad classes
of materials-- lipids, polymers and peptides. The Company has certain rights to
materials in each of these classes.
Lipids
GeneMedicine has exclusive and co-exclusive licenses to in vivo gene therapy
uses of certain cationic lipid gene delivery technologies. The Company has
shown that gene delivery systems containing cationic lipid combined with
neutral lipids enhance the cellular uptake of plasmid-based gene expression
systems in animals. These lipid-based gene delivery systems have been
demonstrated to deliver genes to the endothelium and epithelium of the lung
after intravenous administration and inhalation, respectively, and also to
enhance the entry of genes into tumor cells after intratumoral administration.
Lipid-based gene delivery systems are being used by the Company in its IL-2
Gene Medicine product intended for the treatment of head and neck cancer and
by the Company's academic collaborators in a physician-initiated Phase I
clinical trial to deliver genes to cells lining the airways. The Company also
is pursuing the discovery and development of several novel classes of lipid
molecules for enhancing gene delivery to a variety of tissues.
Polymers
The Company has developed gene delivery systems that employ certain polymers
which, in certain formulations for conventional drugs, are approved for human
use. The Company has shown that these polymers interact with plasmids and
enhance the delivery of genes into muscle cells in vivo after intramuscular
administration. The Company is employing its proprietary polymeric PINC
(Protective, Interactive, Non-Condensing) gene delivery system in its IGF-I
Gene Medicine. The Company's scientists have demonstrated in animal models
that the use of polymeric PINC gene delivery systems can lead to a significant
increase in both the level and the reproductabilty of proteins produced in
muscle compared to the administration of plasmids formulated in saline (so-
called "naked" DNA).
Peptides
GeneMedicine is developing gene delivery systems made up of short peptides and
peptides containing simple sugars (glycopeptides). The peptides are designed
to bind to gene expression systems to form a tightly compacted complex, which
the Company believes is important for gene expression systems to gain access
to certain types of cells. The glycopeptides are designed to interact
specifically with natural receptors present on the surfaces of target cells
and to effect the entry of the gene expression system through the membrane and
into those cells. The Company also has developed certain gene delivery systems
designed to enhance the movement of the gene expression system to the cell
nucleus where gene expression occurs. The Company's research has shown that
these gene delivery systems are non-immunogenic in animals and are as
effective as adenoviruses for transferring genes into certain cells
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in vitro. The Company is developing glycopeptide gene delivery systems for
gene medicines targeting the hepatocyte cells in the liver after intravenous
administration.
GENE EXPRESSION SYSTEMS
The proprietary gene expression systems of GeneMedicine are designed to
provide therapeutic levels of protein expression at selected sites within the
body. These systems may incorporate cell-specific regulatory elements to cause
transcription in specific cells. The Company's gene expression systems also can
contain genetic elements that control the processing of the RNA transcripts to
messenger RNA, the stability of messenger RNA and the efficiency of secretion of
the gene product from the cell. Gene expression systems may contain
GeneSwitch(TM) technology to enable the expression of a therapeutic protein to
be regulated by administration of certain low molecular weight drugs.
Cell-Specific Promoters
GeneMedicine is developing plasmids containing cell-specific promoters that
allow gene expression to be restricted to certain cells within the body. Cell-
specific gene expression systems are being developed for several targets
including: certain tumors, skeletal muscle cells, the liver and the immune
system. The Company believes that cell-specific expression can enhance the
effectiveness, safety and reliability of gene therapy products.
RNA Processing
The Company has demonstrated that certain DNA sequences, when incorporated
into gene expression systems, can increase the duration and level of gene
expression in vitro and in vivo. Such genetic elements increase the
efficiency and accuracy of RNA processing, which leads to an increase in the
amount of messenger RNA produced from the gene expression system. These
genetic elements increase the stability of the messenger RNA. Particular
genetic elements increase the ability of messenger RNA to direct the synthesis
of the protein product. The Company has also shown that other DNA sequences,
when incorporated into gene expression systems, can control the secretion of a
gene product from several types of cells.
Drug-Controlled GeneSwitch(TM)
The Company is developing gene-switch technology which has the capability to
turn off or activate the expression of previously administered therapeutic
genes in specific cells. The GeneSwitch(TM) technology is activated only by
certain antiprogestin drugs that are used in humans for various therapeutic
applications. Gene expression continues for as long as the drug is present
within the cell. Using a prototype of the GeneSwitch(TM), GeneMedicine has
demonstrated drug-controlled activation of therapeutic genes in animals in
several tissues. The Company has developed several cell-specific gene switches
that have been shown in vitro to provide for both drug-activated and cell-
specific gene expression.
PRODUCT DEVELOPMENT
The Company's initial business focus is the development of gene medicines for
treating certain cancers, musculoskeletal disorders, and pulmonary diseases, as
well as in development of nucleic acid vaccines for the prophylactic treatment
of viral and bacterial infections. GeneMedicine intends to develop and
commercialize its products through corporate alliances with major pharmaceutical
and biotechnology companies.
CANCER GENE MEDICINES
The development of cancer gene medicines at the Company is being conducted
through a corporate alliance with Boehringer Mannheim Group, a part of Corange
International Ltd. Current efforts are focused on the development of the
Company's IL-2 Gene Medicine for the treatment of head and neck cancer. More
than 40,000 patients in the United States and 75,000 patients in Europe are
diagnosed with head and neck cancer each year. While head and neck cancers are
slow to metastasize, current therapies do not provide effective treatment in
that recurrence of the tumor is common
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and mortality in the first five years after diagnosis is approximately 30
percent. The IL-2 Gene Medicine is intended to be used initially in conjunction
with surgery and radiotherapy to reduce disease recurrence and to extend
survival.
In late January 1997, GeneMedicine received clearance from the FDA to commence
a Phase I clinical trial using its IL-2 Gene Medicine. GeneMedicine anticipates
commencing the Phase I clinical trial in the first half of 1997 to study the
safety and tolerability of the product. There can be no assurance, however,
that Phase I testing of the IL-2 Gene Medicine will be completed successfully
within any specific time period, if at all. GeneMedicine has demonstrated using
animal models of head and neck cancer that its IL-2 Gene Medicine slows the rate
of tumor progression and increases animal survival.
The IL-2 Gene Medicine is comprised of a plasmid encoding the human IL-2 gene
and a proprietary lipid gene delivery system that enhances uptake of the gene
into the target cells after direct intratumoral injection. This product is
designed to provide sustained, localized expression of the IL-2 protein and to
promote an immune response against the tumor. The use of a lipid gene delivery
system is intended to enable repeated administration of the IL-2 gene in a safe
and effective manner. IL-2 is an important human cytokine that has multiple
functions and which plays a major role in the body's immune response to foreign
pathogens and tumors. A recombinant IL-2 protein product has FDA approval for
the treatment of renal cell carcinoma. In addition, the IL-2 protein has
demonstrated clinical responses in several other types of cancer. The
application of the recombinant protein in the treatment of cancer is limited by
its short half-life and by significant toxicity when administered systemically.
In contrast, the IL-2 Gene Medicine is designed to control the sustained
production of the IL-2 protein in the tumor mass, thereby avoiding potentially
harmful systemic levels of the IL-2 protein. The technologies developed for
therapy of solid tumors of the head and neck may be applicable to a wide range
of solid tumors and systemic metastases.
IGF-I GENE MEDICINE
The Company believes that several muscle and peripheral nerve disorders can be
treated effectively with gene medicines that cause the localized production of
therapeutic proteins after intramuscular administration. Furthermore, delivery
of certain gene medicines to muscle cells could cause the intended sustained
production and secretion of therapeutic proteins systemically. The Company has
developed proprietary polymer gene delivery systems that have been shown to
enhance the in vivo level and reproducibility of gene expression significantly
over naked DNA. The Company's primary focus in this product area is the
development of its IGF-I Gene Medicine.
GeneMedicine received clearance from the FDA late in the fourth quarter of
1996 to commence a Phase I clinical trial for the IGF-I Gene Medicine. The IGF-
I Gene Medicine has potential broad application in the treatment of muscle
disorders and neuropathies that afflict large patient populations and are not
adequately addressed by current therapies, if at all. GeneMedicine anticipates
commencing the Phase I clinical trial in the first half of 1997 to study the
safety and tolerability of this product. There can be no assurance, however,
that Phase I testing of the IGF-I Gene Medicine will be completed successfully
within any specific time period, if at all. The treatment of diabetic motor
neuropathy is one of the most significant potential applications for the IGF-I
Gene Medicine due to the large number of patients and chronicity of this type of
nerve disorder. Type II diabetics primarily are affected by this condition. The
severity of the neuropathy tends to be related to the severity and duration of
the patient's diabetes. Diabetes afflicts about seven million people in the
United States and a comparable number of people in Europe and other developed
countries. Approximately 15% of diabetic patients develop neuropathy, and about
20% of these patients develop some degree of motor nerve damage associated with
weakness and loss of muscle mass and diminished strength which may impede their
mobility or their ability to perform everyday tasks with their hands.
GeneMedicine has shown in a series of animal models that its IGF-I Gene
Medicine promotes nerve and muscle growth and provides sustained expression of
the IGF-I protein for several weeks after a single administration. The IGF-I
Gene Medicine incorporates the human IGF-I gene with one of the Company's
proprietary gene delivery systems, a polymeric PINC system that enables gene
delivery to skeletal muscle, and a proprietary muscle-specific gene expression
system. This product is designed to provide sustained, localized expression of
the IGF-I protein after direct intramuscular injection to repair nerves and
restore muscle mass and strength. The product's non-viral gene delivery system
is intended to reduce the likelihood of an immunogenic response and thereby
allows for repeat administration
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over a prolonged period of time.
IGF-I is an important natural protein found throughout the body. Under normal
conditions, it stimulates and regulates development and repair of both nerves
and muscles. Nerve damage can result from diseases such as diabetes or as
complications from interventional treatments like cancer chemotherapy. Other
conditions in which nerves become dysfunctional include: nerve injuries, e.g.,
carpal tunnel syndrome, cubital tunnel syndrome, Bell's palsy, and vertebral
disk compression; and trauma to the limbs. Muscle atrophy and weakness may
develop even if nerves are normal. A major cause of weakness and loss of muscle
mass is disuse atrophy, which results from muscles not being used, for example,
due to prolonged casting or to limitation of motion associated with joint
disease. After joint replacement, one of the major impediments to full recovery
is loss of muscle mass around the joint, brought on by lack of mobility and/or
pain.
Although the therapeutic potential of the IGF-I protein has been known for
some time, development of a medicinal product has been hampered by the
challenge of delivering the protein to its site of action. Systemic
application of IGF-I protein has been reported as resulting in undesired and
often unacceptable side effects. In contrast, the Company's IGF-I Gene Medicine
is intramuscularly administered at or close to the site of damage. This provides
the muscle cells with the genetic information needed for those cells to produce
the IGF-I protein over a sustained period of time that is then available to
promote local nerve repair and muscle growth.
In muscle atrophy studies conducted by GeneMedicine, animals treated with the
IGF-I Gene Medicine showed preserved muscle mass and strength. Additional
animal experiments demonstrated the effectiveness of the IGF-I Gene Medicine in
accelerating the restoration of nerve conductivity to normal levels after nerve
injury. The Company is entering human clinical trials of the IGF-I Gene
Medicine on the basis of these and other pre-clinical studies and the
overwhelming medical need for effective therapies to treat nerve and muscle
disorders.
PULMONARY GENE MEDICINES
The Company's current efforts to develop gene medicines for indications of the
pulmonary system are directed at the conditions of alpha-1 antitrypsin
deficiency and asthma. GeneMedicine is employing its proprietary technology to
develop products based on lipid gene delivery systems and lung epithelium-
specific gene expression systems for administration by nebulization.
GeneMedicine has provided one of its proprietary lipid gene delivery systems
and alpha-1 antitrypsin ("AAT") gene expression systems to scientists at
Vanderbilt University. Under a physician-initiated Investigational New Drug
Application (" IND"), researchers at Vanderbilt have incorporated the AAT gene
in these systems and are conducting Phase I human clinical studies of this gene
medicine as part of a study on the possible treatment for AAT deficiency, a
significant contributor to the development of emphysema. Approximately 160,000
people in the United States have AAT deficiency and about 23,000 of these people
are at risk for hereditary emphysema. GeneMedicine retains the right to
commercialize this product.
NUCLEIC ACID VACCINES
GeneMedicine is adapting its expertise in the delivery and control of
expression of genes to opportunities in the field of nucleic acid vaccines. The
prospective advantages of nucleic acid vaccines include: more precise antigenic
control and greater specificity of the body's immune reaction against the
intended disease-causing agent; the ability to express several antigens for
protection from the same disease or multiple diseases; and, long-term antigenic
memory and better control of the type of immune response the body will have
against an infectious agent.
In addition, nucleic acid vaccines may be created to provide immunization
against diseases where no vaccine currently exists, and with costs and
compliance potentially better than traditional vaccine approaches. The Company
has identified potential gene candidates and appropriate animal models and has
begun to conduct its initial research in the field.
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STRATEGIC ALLIANCES
The Company intends to develop and commercialize all of its products in
corporate partnerships with major biotechnology and pharmaceutical companies.
There can be no assurance, however, that the Company's current or future
partnership arrangements will be successful or established on favorable terms.
Should any corporate partner fail to develop or commercialize successfully any
product to which it has rights, or any of the partner's products to which
GeneMedicine has rights, the Company's business may be adversely affected. In
addition, there can be no assurance that any of these collaborations will be
continued or result in successfully commercialized products. Failure of a
corporate partner to continue funding any particular program could delay or halt
the development or commercialization of any products arising out of such
program. The Company's Roche Alliance (defined below) will end in accordance
with its terms in April 1997. In addition, there can be no assurance that the
corporate partners will not pursue alternative technologies or develop
alternative products either on their own or in collaboration with others,
including the Company's competitors, as a means for developing treatments for
the diseases targeted by the Company's programs.
In July 1995, GeneMedicine entered into a corporate partnership agreement with
Corange International Ltd., the parent company of the Boehringer Mannheim Group
("Boehringer Mannheim"), providing for research and development of gene
medicines to treat head and neck tumors and melanoma (the "BM Alliance").
GeneMedicine also granted Boehringer Mannheim an option exercisable within the
initial three years of the BM Alliance to expand the collaboration to include
additional cancer indications. Boehringer Mannheim may exercise its option by
agreeing to fund additional research and development at GeneMedicine
commensurate with the initial BM Alliance. Pursuant to the BM Alliance,
Boehringer Mannheim agreed to fund $25 million of research and development at
GeneMedicine at the rate of $5 million a year and make an aggregate equity
investment in GeneMedicine of $20 million at the rate of $4 million a year. The
prices per share for common equity investments by Boehringer Mannheim for the
years 1996 through 1999 are based upon the average closing price for the 15
consecutive trading days immediately preceding February 1 for each year, with
the purchase in 1996 at a 20 percent premium. In no case are the purchase prices
to be less than $7.50 per share. Research and development funding of $4.6
million and $5 million were received in 1995 and 1996, respectively. The first
three $4 million equity investments were made in July 1995, February 1996 and
February 1997 in which 444,444, 418,629 and 533,333 common shares were issued at
$9.00, $9.56 and $7.50 per share, respectively. All payments to the Company
beginning in 1997 are subject to the achievement of certain milestones. If
GeneMedicine meets the milestones under the BM Alliance, it may be entitled to
additional milestone payments of up to $7.5 million. If GeneMedicine fails to
reach certain milestones after the fifth anniversary of the agreement, it may
have to fund an additional year of research at its own expense, not to exceed $5
million.
Under the BM Alliance, when products enter Phase II clinical testing,
GeneMedicine may elect either to receive up to 50 percent of profits by agreeing
to share development and commercialization expenses or to receive royalty
payments based on worldwide product sales. In addition, if Boehringer Mannheim
exercises its option for additional cancer indications, GeneMedicine may, at its
option, elect to have Boehringer Mannheim make additional Common Stock purchases
at the rate of $4 million per year beginning in the year 2000 and continuing for
up to three years.
In April 1994, the Company and Syntex (U.S.A.) Inc., now a subsidiary of Roche
Holding Ltd. ("Roche"), entered into a corporate partnership for the development
of gene medicines for certain inflammatory and immunological disorders (the
"Roche Alliance") providing for a three-year research program. This alliance
will end in accordance with its terms in April 1997. Pursuant to the Roche
Alliance, GeneMedicine obtained a worldwide co-exclusive license, with the right
to sublicense, from Roche its cationic lipid gene delivery technology (DOTMA)
for in vivo gene therapy uses. In connection with the commencement of the Roche
Alliance, Roche purchased 3,750,000 shares of the Company's Series B Preferred
Stock. The Series B Preferred Stock is convertible into Common Stock on a 3.5-
to-one basis by the holder at any time and by the Company (i) upon the Company's
Common Stock trading at an average price of $14.00 or more per share for 30
consecutive trading days, (ii) upon completion of a public offering with minimum
gross proceeds of $10 million at a minimum price of $14.00 per share or (iii)
after April 8, 1998. The 3,750,000 shares of Series B Preferred Stock are
convertible into an aggregate of 1,071,428 shares of Common Stock. The holders
of the Series B Preferred Stock are entitled to receive an aggregate liquidation
preference of $15 million, after which assets would be distributed ratably to
the holders of Common Stock. The liquidation preference also applies in the
event of a merger or sale of all
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or substantially all of the Company's assets. In connection with the same
transaction, Roche also acquired a five-year warrant to purchase 1,071,428
shares of the Company's Common Stock at an exercise price of $21.00 per share.
LICENSING AND RESEARCH AGREEMENTS
ROCHE
The Company has a worldwide co-exclusive license, with the right to
sublicense, from Roche to its DOTMA technology for in vivo gene therapy uses.
The rights under this agreement would continue even though the Company's Roche
Alliance will end in accordance with its terms in April 1997.
BAYLOR COLLEGE OF MEDICINE
The Company has several agreements with Baylor College of Medicine ("Baylor")
pursuant to which the Company has exclusive rights to certain current and future
gene therapy technologies developed by the Company's founding scientists and
their collaborators, as well as access to certain additional technology as it is
developed by such individuals.
The Company has exclusive consulting agreements in the area of gene therapy
with three of its founders who are currently faculty members at Baylor. The
Company also has collaborative research agreements with various members of
Baylor's Departments of Cell Biology, Molecular Genetics, Pediatrics,
Dermatology and Medicine to develop certain gene expression systems, gene
delivery systems and novel genes for gene therapy. These collaborative research
agreements provide GeneMedicine with exclusive worldwide commercial rights to
any product, process or invention developed pursuant to such agreements.
UNIVERSITY OF CALIFORNIA
GeneMedicine has an exclusive, worldwide license from the University of
California to certain gene delivery technologies and improvements developed by
Dr. Frank C. Szoka, Jr., one of the Company's founders, at the University of
California, San Francisco ("UCSF"). Dr. Szoka's laboratory at UCSF is developing
gene delivery systems to transport genes across membranes for delivery to their
targeted cells and organs. GeneMedicine also has an exclusive consulting
relationship with Dr. Szoka in the field of gene therapy.
VANDERBILT UNIVERSITY
In November 1994, the Company entered into a research agreement with
Vanderbilt University ("Vanderbilt") to support non-viral gene therapy research
and clinical development for pulmonary disorders. As part of the agreement, the
Company has certain rights to related gene therapy inventions made by
researchers at the Center for Lung Research (the "Center"). In consideration for
these rights, the Company provides annual funding to support certain research
within the Center. In November 1994, the Company also entered into a clinical
trial agreement with Vanderbilt University to provide clinical materials for an
AAT gene therapy Phase I clinical trial which began in August 1995. GeneMedicine
has manufactured gene expression systems for this trial under the FDA's current
GMP conditions and has supplied a DOTMA-based gene delivery system. In addition,
the Company has a worldwide exclusive license to certain technologies developed
at Vanderbilt University.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's business.
The Company's policy is to file patent applications and protect technology,
inventions and improvements to inventions that are commercially important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technology innovations and licensing opportunities to develop and
maintain its competitive position. To date, the Company has filed or
participated as a licensee in the filing of numerous patent applications in the
United States relating to the Company's technology, as well as foreign
counterparts of certain of these applications in many countries. The Company has
licensed from Roche certain rights under certain U.S. and foreign patents
claiming the use of DOTMA for both in vitro and in
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vivo gene delivery. The Company also has licensed from Baylor rights under a
patent covering all gene therapy applications of the Company's GeneSwitch(TM)
technology and a patent claiming the use of a muscle-specific gene expression
system.
The Company presently has proprietary rights to only a limited number of
genes, and the Company may need to obtain licenses to other gene sequences or
technology to which it currently has no proprietary rights. There can be no
assurance that the Company will be able to obtain such licenses on commercially
reasonable terms, or at all. If required licenses are not available to the
Company, the Company may not be able to develop or market certain products.
The patent positions of pharmaceutical and biotechnology firms are generally
uncertain and involve complex legal and factual questions. To date, there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents. Consequently, although the Company is currently
prosecuting several patent applications in the United States and worldwide, the
Company does not know whether such applications will result in the issuance of
any patents, or, if issued, whether any such patents will provide sufficient
protection against competitors with similar technology, or whether such patents
will be challenged successfully or circumvented. Patent applications in the
United States are maintained in secrecy until a patent issues, and the Company
cannot be certain that others have not filed patent applications for technology
covered by the Company's or its licensors' pending applications or that the
Company or its licensors were the first to file patent applications for such
technology. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to,
compounds or processes that block or compete with those of the Company. The
Company is aware of patent applications filed or patents issued to third parties
relating to gene therapy technologies. The Company's development efforts are at
an early stage, however, and the Company presently is unable to evaluate whether
any such patent applications or patents will have any effect on its products in
development.
Patent litigation is becoming more widespread in the biotechnology industry
and it is not possible to predict how any such litigation will affect the
Company. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company or to determine the scope and validity of the
proprietary rights of third parties. Such litigation could result in substantial
costs to and diversion of resources by the Company and may have a material
adverse impact on the Company. There can be no assurance that any of the
Company's issued or licensed patents would be held valid by a court of competent
jurisdiction or that efforts to defend any of such patents by the Company will
be successful.
The Company also relies on trade secrets, know-how, improvements to
technology, confidentiality agreements and the pursuit of collaborative and
licensing opportunities to develop and maintain its competitive position. There
can be no assurance that third parties will not independently develop equivalent
proprietary information or techniques, will not gain access to the Company's
trade secrets or disclose such technology to the public, or that the Company can
maintain and protect unpatented proprietary technology. The Company requires its
employees, consultants, collaborators and other advisors to execute
confidentiality agreements upon commencement of employment or other
relationships with the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's technology in the event of unauthorized use or disclosure of such
information, or that the parties to such agreements will not breach such
agreements.
COMMERCIALIZATION AND MANUFACTURING
GeneMedicine currently operates no manufacturing facilities for commercial
production. GeneMedicine intends to develop and commercialize its gene medicines
through alliances with pharmaceutical and major biotechnology companies.
Furthermore, the Company may rely on corporate partners, licensees or other
entities for commercial scale manufacturing and marketing of its products. There
can be no assurance, however, that the Company will be able to reach
satisfactory arrangements with such parties or that such arrangements will
continue and not be terminated. In addition, there can be no assurance that any
such arrangement will be successful or that its partners will be able to develop
adequate manufacturing capabilities for commercial scale quantities of gene
medicines. Furthermore, the large scale manufacturing of gene therapy products
has not been demonstrated by any party.
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The Company has developed proprietary manufacturing processes for production
of plasmid and formulated gene medicine for use in early clinical trials. The
Company has manufactured plasmids under current Good Manufacturing Practices
("cGMP") conditions for a physician-initiated clinical trial at Vanderbilt. The
Company has developed processes to produce its gene medicines in accordance with
cGMP standards for pre-clinical development as well as clinical research. The
Company's plasmids are produced in bacterial cells utilizing traditional
fermentation and purification techniques. The Company believes that certain
physical and physicochemical characteristics of its gene expression systems will
enable each of its products to be produced and purified using consistent methods
that will minimize the cost and risk of the manufacturing process. The processes
used by the Company are new and there can be no assurance that such processes
will be effective, accurate or cost effective.
GOVERNMENT REGULATION
The production and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous regulation by the FDA. Such products are regulated under the Federal
Food, Drug, and Cosmetic Act, and biological products, in addition to being
subject to certain provisions of this act, are regulated under the Public Health
Service Act. These laws and the regulations promulgated thereunder govern, among
other things, testing, manufacturing, safety, efficacy, labeling, storage,
record keeping, and advertising and promotional practices involving drugs and
biological products. At the FDA, the Center for Biologics Evaluation and
Research is responsible for the regulation of biological products and has
handled the regulation of most gene therapy products to date. At the present
time, the Company believes that its products will be regulated by the FDA and
comparable foreign regulatory bodies as biologics.
In addition to the FDA requirements, the National Institutes of Health ("NIH")
has established guidelines for research involving recombinant DNA molecules,
which are utilized by the Company and certain of its collaborators in their
research. These guidelines apply to all recombinant DNA research which is
conducted at or supported by the NIH. Under current guidelines, proposals to
conduct clinical research involving gene therapy which is conducted at
institutions supported by the NIH must be filed with the Recombinant DNA
Advisory Committee and the NIH.
The steps required before a new pharmaceutical agent may be marketed in the
United States generally include (i) preclinical laboratory tests and in vivo
preclinical studies, (ii) the submission to the FDA of an IND for human clinical
testing, which must become effective before human clinical trials commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product, (iv) the submission to the FDA of a New Drug
Application ("NDA") for a drug or a Product License Application and
Establishment License Application ("PLA/ELA") for a biologic and (v) FDA
approval of the NDA or PLA/ELA prior to any commercial sale or shipment of the
drug or biologic, respectively. In the case of drugs, in addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered with the FDA. Domestic manufacturing establishments are
subject to biennial inspections by the FDA and must comply with GMP regulations
enforced by the FDA through its facilities inspection program for both drugs and
biologics. Manufacturers of pharmaceutical products also may be subject to state
regulations.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product.
Compounds must be produced according to applicable GMP and preclinical safety
tests must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practices. The results of the preclinical tests,
together with manufacturing information and analytical data, are submitted to
the FDA as part of an IND, which must become effective before human clinical
trials may be commenced. The IND will automatically become effective 30 days
after receipt by the FDA unless the FDA indicates prior to the end of the 30-day
period that it does not wish the trials to proceed as outlined in the IND. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns
before clinical trials can proceed. There can be no assurance that submission of
an IND will result in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational product to
healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical
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Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety, and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be reviewed and approved by an independent
Institutional Review Board at the institution at which the study will be
conducted. The Institutional Review Board will consider, among other things,
ethical factors and the safety of human subjects.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
generally healthy volunteers, the drug is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacodynamics.
Phase II usually involves studies in a limited patient population to (i)
determine the efficacy of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specific time period, if
at all, with respect to any of the Company's products subject to such testing.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA or PLA/ELA for
approval of the manufacture, marketing and commercial shipment of the drug or
biologic. The testing and approval process is likely to require substantial time
and effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. The FDA may deny an NDA or PLA/ELA if applicable
regulatory criteria are not satisfied, require additional testing or information
or require postmarketing testing and surveillance to monitor the safety or
efficacy of a product. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for NDA or PLA/ELA approval is the requirement
that the prospective manufacturer's quality control and manufacturing procedures
conform to GMP, which must be followed at all times. In complying with standards
set forth in these regulations, manufacturers must continue to expend time,
monies and effort in the area of production and quality control to ensure full
compliance.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. In Europe, the approval
process for the commencement of clinical trials varies from country to country.
The Company's approach to the European regulatory process involves the
identification of clinical investigators in Europe to conduct clinical studies.
The Company intends to design these studies to meet FDA standards as well as the
standards of such European countries. The foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above.
The ability of GeneMedicine to commercialize its products successfully will
depend in part on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. If the Company succeeds in bringing one or
more products to market, there can be no assurance that these products will be
considered cost effective, that reimbursement will be available, or if
available, that the payor's reimbursement policies will not adversely affect the
Company's ability to sell its products on a profitable basis.
The Company's research and development processes involve the controlled use of
hazardous and radioactive materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposing of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could
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exceed the resources of the Company. Although the Company believes that it is in
compliance in all material respects with applicable environmental control
facilities in the near-term, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future, or that the operations, business or assets of the
Company will not be materially adversely affected by current or future
environmental laws or regulations.
COMPETITION
GeneMedicine is pursuing areas of product development in a field that is new
and rapidly evolving and in which significant technological changes are likely.
Rapid technological development could result in the Company's potential products
or technologies becoming obsolete before the Company recovers a significant
portion of its related research, development and capital expenditures. The
Company will experience competition from pharmaceutical and biotechnology
companies that have other forms of treatment for the diseases targeted by the
Company, as well as from other companies in the field of gene therapy. The
Company is aware of a large number of development stage and established
enterprises, including major pharmaceutical and biotechnology firms, that are
exploring the field of human gene therapy or are actively engaged in research
and development in areas related to gene therapy, including non-viral gene
therapy. The Company also may experience competition from companies that have
acquired or may acquire technology from universities and other research
institutions. As these companies develop their technologies, they may develop
proprietary positions in certain aspects of gene therapy that may materially and
adversely affect GeneMedicine. In addition, the Company may face competition
from other companies for limited opportunities to enter into collaborative
arrangements with pharmaceutical and biotechnology companies and academic
institutions and to obtain licenses to proprietary technology, including genes
and methods of gene use, from third parties.
Many competitors and potential competitors of the Company have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than the Company. Other companies may succeed in developing
products earlier than the Company, in obtaining FDA approvals for such products
more rapidly than the Company, or in developing products that are more effective
than those proposed to be developed by the Company. While the Company will seek
to expand its technological capabilities in order to remain competitive, there
can be no assurance that research and development by others will not render the
Company's technology or products obsolete or non-competitive or result in
treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies.
PRODUCT LIABILITY INSURANCE
Human therapeutic products involve an inherent risk of product liability
claims and associated adverse publicity. The Company currently has obtained
clinical trial liability insurance for its two proposed clinical trials and for
the supply of DNA materials for the current physician-initiated clinical trial
conducted at Vanderbilt. There can be no assurance that it will be able to
maintain product liability insurance on acceptable terms or with adequate
coverage against potential liabilities. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
An inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of the Company's potential products. A product
liability claim brought against the Company or a product withdrawal could have a
material adverse effect upon the Company and its financial condition.
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
Early Stage of Development; Technological Uncertainty
Gene therapy is a new and rapidly evolving technology. While many
approaches to gene therapy are being pursued by pharmaceutical and biotechnology
companies and academic institutions, there are currently no marketed gene
therapy products, and existing clinical data on the safety and efficacy of
potential gene therapy products are limited.
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Preclinical data relating to the Company's specific gene therapy approach are
also limited. Further, the results of preclinical studies do not predict safety
or efficacy in humans, and results from such tests or studies are not
necessarily indicative of the results that will be obtained in human clinical
trials. All of the potential products under development by the Company are in
research, preclinical or early clinical development, and revenues from the sale
of any such products will not be realized for at least the next several years,
if at all. The potential products currently under development by the Company
will require significant additional research and development efforts, including
extensive preclinical and clinical testing and the receipt of regulatory
approval, prior to commercial use. In addition, such products are subject to the
risks of failure inherent in the development of products based on innovative
technologies. There can be no assurance that the Company's research and
development efforts will be successful, that any of the potential products
developed by the Company will prove to be safe and effective in clinical trials,
or that any commercially successful products utilizing the Company's technology
will be developed by the Company or its collaborators. Even if successfully
developed, these potential products may not receive regulatory approval or be
successfully introduced and marketed at prices that would permit the Company to
operate profitably. Due to the early stage of development of the Company's
potential products and the extensive testing and regulatory review process
required before marketing approval can be obtained, the Company cannot predict
with certainty when it will be able to commercialize any of its potential
products, if at all.
History of Operating Losses; Future Capital Needs; Uncertainty of Additional
Funding
The Company expects to incur operating losses over at least the next
several years, and there can be no assurance that the Company will ever achieve
profitability. The Company expects to have quarter-to-quarter fluctuations in
any contract revenues, expenses and losses, some of which could be significant.
The Company has generated no revenues from product sales, nor are any
product revenues expected for at least the next several years. The negative cash
flow from operations is expected to continue for the foreseeable future. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of preclinical studies and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing scale-up, effective commercialization
activities and arrangements, and other factors not within the Company's control.
The Company anticipates that its existing, projected interest income and
committed funding from a corporate alliance, will enable the Company to maintain
its current and planned operations into the second half of 1999. There can be no
assurance, however, that changes in the Company's research and development plans
or other events affecting the Company's operating expenses will not result in
the expenditure of such resources before such time. The Company will need to
raise substantial additional funds to conduct the research and development,
preclinical studies and clinical trials necessary to bring such products to
market.
The Company intends to seek additional funding through public or private
equity or debt financings or new corporate partnerships. There can be no
assurance that additional financing will be available on acceptable terms, or at
all. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research or development programs or to obtain funds
through arrangements with third parties that may require the Company to
relinquish greater or all rights to product candidates at an earlier stage of
development or on less favorable terms than the Company would otherwise seek.
Insufficient funds may also require the Company to relinquish rights to certain
of its technologies that the Company would otherwise develop or commercialize
itself.
Dependence on Collaborative Partners, Licenses and Others
The Company's strategy is to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others for the research,
development, clinical testing, manufacturing, marketing and commercialization of
its products. To date, the Company also has entered into corporate partnerships
for development and commercialization of its potential products with two
pharmaceutical firms, one of which (the Roche Alliance) will end in accordance
with its terms in April 1997. The Company intends to enter into additional
corporate partnering agreements to develop and commercialize products based upon
its gene therapy technology. There can be no assurance, however, that the
Company will be able to establish such additional collaborations on favorable
terms, if at all, or that its current or future partnership arrangements will be
successful. Should any corporate partner fail to develop or
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commercialize successfully any product to which it has rights, or any of the
partner's products to which GeneMedicine has rights, the Company's business may
be adversely affected. In addition, there can be no assurance that any
collaboration will be continued or result in successfully commercialized
products. The Roche Alliance will end in accordance with its terms in April
1997. Failure of a corporate partner to continue funding any particular program
could delay or halt the development or commercialization of any products arising
out of such program. In addition, there can be no assurance that the corporate
partners will not pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
targeted by the Company's programs. The Company also has licenses (or options to
obtain licenses) to technologies developed by other companies and academic
institutions. Pursuant to the terms of certain license agreements, the Company
is obligated to exercise diligence in bringing potential products to market and
to make certain milestone payments that, in some instances, are substantial. The
Company also is obligated to make royalty payments on the sales, if any, of
products resulting from such licensed technology and, in some instances, is
responsible for the costs of filing and prosecuting patent applications. To
date, the Company has licensed key technology from Roche, Baylor College of
Medicine, the University of California, the University of Texas and Vanderbilt
University.
Uncertainty of Protection of Patents and Proprietary Rights; Access to
Proprietary Genes
The patent positions of biotechnology and pharmaceutical companies are
highly uncertain and involve complex legal and factual questions, and the
breadth of claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. In addition, there is a substantial backlog of biotechnology patent
applications at the U.S. Patent and Trademark Office (the "PTO") that may delay
the review and, if issued on the basis of such applications, the issuance of any
patents. The Company's success will depend to a significant degree on its
ability to obtain patents and licenses to patent rights, to maintain trade
secrets and to operate without infringing on the proprietary rights of others,
both in the United States and other countries. To date, the Company has rights
to certain U.S. and foreign issued patents and has filed or participated as a
licensee in the filing of a number of patent applications in the United States
relating to the Company's technology, as well as foreign counterparts of certain
of these applications in many countries. The Company intends to continue to file
applications as appropriate for patents covering both its products and
processes. There can be no assurance that patents will issue from any of these
applications or, that claims allowed under issued patents or patents that may
issue from such applications will be sufficient to protect the Company's
technology. Patent applications in the United States are maintained in secrecy
until a patent issues, and the Company cannot be certain that others have not
filed patent applications for technology covered by the Company or its
licensors' pending applications or that the Company or its licensors' were the
first to file patent applications for such technology. Competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes that block or
compete with those of the Company. The Company is aware of patent applications
filed or patents issued to third parties relating to gene therapy technologies.
The Company's development efforts are at an early stage, however, and the
Company presently is unable to evaluate whether any such patent applications or
patents will have any effect on its products in development. Should any of its
competitors have filed patent applications in the United States that claim
technology also invented by the Company, the Company may have to participate in
interference proceedings declared by the PTO in order to determine priority of
invention and, thus, the right to a patent for the technology in the United
States, all of which could result in substantial cost to the Company to
determine its rights or potential loss of rights. The commercial success of the
Company will depend in part on the Company not infringing patents issued to
competitors and not breaching the licenses that might cover technology used in
the Company's products. It is uncertain whether any third party patents will
require the Company to alter its products or processes, obtain licenses or cease
certain activities. In addition, litigation, which could result in substantial
cost to the Company, also may be necessary to enforce any patents issued to the
Company or to determine the scope and validity of third party proprietary
rights. In addition, there can be no assurance that any patents issued to the
Company or to licensors from whom the Company has licensed rights to technology
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or commercial advantage to the
Company.
A number of the genes that the Company uses in its research and development
programs or may use in its gene therapy products are or may become patented by
third parties. As a result, the Company may be required to obtain licenses under
such patents in order to test, use or market products that contain any such
proprietary genes. If such licenses are required, there can be no assurance that
the Company will be able to obtain any such license on commercially reasonable
terms, if at all. Failure by the Company to obtain a license to any technology
that it may require to
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commercialize its products could have a material adverse effect on the Company.
The Company also relies on trade secrets, know-how, improvements to
technology, confidentiality agreements and collaborative and licensing
opportunities to develop and maintain its competitive position. Although the
Company protects its proprietary technology in part by confidentiality
agreements with its licensors, licensees, employees, consultants and certain
contractors, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
discovered by its competitors. See "Business--Patents and Proprietary
Technology"
Uncertainty of Government Regulatory Requirements; Lengthy Approval Process
Because gene therapy is a new method of treatment that has not been
extensively tested in humans, the regulatory requirements governing gene therapy
products and related clinical procedures are uncertain and are subject to
substantial review by various governmental regulatory authorities. This
uncertainty may result in extensive delay in the regulatory approval process,
adding to the already lengthy review process for human therapeutic products in
general. Regulatory requirements ultimately imposed could adversely affect the
ability of the Company or its collaborative partners to clinically test,
manufacture or market products.
The commercial uses of any of the Company's products will be regulated by
the FDA and comparable foreign regulatory bodies as either biologics or drugs.
Each therapeutic product containing a particular gene will likely be regulated
as either a separate biologic or a drug, depending on its intended use and FDA
policies in effect at such time. In order to commercialize any products, the
Company must sponsor and file an IND for each proposed product and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety, efficacy and potency that are necessary to obtain FDA approval of
any such products. The regulatory process for new therapeutic products,
including the required preclinical studies and clinical testing, is lengthy and
expensive and there can be no assurance that necessary FDA clearances and
approvals will be obtained in a timely manner, if at all. There can be no
assurance as to the length of the clinical trial period or the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish the safety, efficacy and potency of human gene therapy products. The
Company may encounter significant delays or excessive costs in its efforts to
secure necessary approvals, particularly because gene therapy is a novel method
of treatment, and regulatory requirements are evolving and uncertain. Future
U.S. or foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance that
the Company will be able to obtain the necessary clearances for clinical trials
or approvals for the manufacturing or marketing of any of its products under
development. Even if regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed. In addition, a marketed product is subject to continual FDA review.
Later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions. In addition, many academic institutions and
companies conducting research in the gene therapy field are using a variety of
approaches and technologies. Any adverse results obtained by such researchers in
preclinical studies or clinical trials could adversely affect the regulatory
environment for gene therapy products generally, possibly leading to delays in
the approval process for the Company's potential products or preventing approval
altogether.
To market its products outside of the United States, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of human clinical
trials and marketing approval. The approval procedure varies among countries and
can involve additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
approval set forth above, and approval by the FDA does not ensure approval by
the health authorities of any other country. See "Business--Government
Regulation".
Intense Competition; Rapid Technological Change
The gene therapy field is new and rapidly evolving, and it is expected to
continue to undergo significant technological change. Rapid technological
development could result in GeneMedicine's potential products or technologies
becoming obsolete before it recovers its related research, development and
capital expenditures. The Company will experience competition from
pharmaceutical and biotechnology companies that have other forms of
15
<PAGE>
treatment for the diseases targeted by the Company, as well as from other
companies in the field of gene therapy. The Company is aware of a large number
of development stage and established enterprises, including major pharmaceutical
and biotechnology firms, which are exploring the field of human gene therapy or
are actively engaged in research and development in areas related to gene
therapy. GeneMedicine also may experience competition from companies that have
acquired or may acquire technology from universities and other research
institutions. As these companies develop their technologies, they may develop
proprietary positions in certain aspects of gene therapy that may materially and
adversely affect GeneMedicine. In addition, the Company may face competition
from other companies for limited opportunities to enter into collaborative
arrangements with pharmaceutical or biotechnology companies and academic
institutions and to obtain licenses to proprietary technology, including genes
and methods of gene use, from third parties.
Many of the Company's competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than the Company. Other companies may
succeed in developing products earlier than the Company, obtaining approvals for
such products from the FDA more rapidly than the Company, or developing products
that are more effective than those proposed to be developed by the Company.
While GeneMedicine will seek to expand its technological capabilities in order
to remain competitive, there can be no assurance that research and development
by others will not render its technology or products obsolete or non-competitive
or result in treatments or cures superior to any therapy developed by the
Company, or that any therapy developed by the Company will be preferred to any
existing or newly developed technologies. In addition, there can be no assurance
that the Company's competitors will not develop more effective or more
affordable products, or achieve product development completion, patent
protection, regulatory approval or product commercialization earlier than the
Company. See "Business--Competition."
Need to Attract and Retain Key Employees and Consultants
GeneMedicine is highly dependent on the principal members of its scientific
and management staff. In addition, the Company relies on consultants and
advisors to assist the Company in formulating its research and development
strategy. Attracting and retaining qualified personnel, consultants and advisors
is critical to the Company's success. In order to pursue its product development
and marketing plans, GeneMedicine will be required to hire additional qualified
scientific personnel to perform research and development, as well as personnel
with expertise in clinical testing, government regulation, manufacturing and
marketing. Expansion in product development also is expected to require the
addition of management personnel and the development of additional expertise by
existing management personnel. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
or at all. See "Business--Human Resources."
Lack of Commercial Manufacturing or Marketing Capability
The Company currently does not have the resources or capability to
manufacture or market any of its proposed products by itself on a commercial
scale. Large scale manufacturing of gene therapy products has not been
demonstrated by any third parties. GeneMedicine may be dependent to a
significant extent on collaborators, licensees or other entities for commercial
scale manufacturing of its products. The Company has a pilot manufacturing
facility, which will require ongoing funding and compliance with extensive
regulations applicable to such a facility. There can be no assurance that the
Company will be able to develop adequate commercial manufacturing capabilities
either on its own or through third parties. In addition, the Company does not
anticipate establishing its own sales and marketing capability in the
foreseeable future, and will be dependent on third parties for those functions.
There can be no assurance that the Company will be able to develop adequate
marketing capabilities either on its own or through third parties. See
"Business--Commercialization and Manufacturing."
Uncertainty of Product Pricing, Reimbursement and Related Matters
The ability of GeneMedicine to commercialize its products successfully may
depend in part on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and if the Company succeeds in bringing one
or more products to market, there can be no assurance that these products will
be considered cost effective, that reimbursement will be available, or if
available,
16
<PAGE>
that the payor's reimbursement policies will not adversely affect the Company's
ability to sell its products on a profitable basis.
Hazardous and Radioactive Materials; Environmental Matters
The Company's research and development processes involve the controlled use
of hazardous and radioactive materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. Although the Company believes that it is in compliance in all
material respects with applicable environmental laws and regulations and
currently does not expect to make material capital expenditures for
environmental control facilities in the near-term, there can be no assurance
that it will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations. See "Business--Government
Regulation."
Volatility of Stock Price; Absence of Dividends
The market price of the shares of Common Stock, like that of the common
stock of many other biotechnology companies, has been and is likely to continue
to be highly volatile. Factors such as developments in the Company's
relationships with collaborative partners, fluctuations in the Company's
operating results, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, progress with clinical
trials, governmental regulation, health care legislation, changes in
reimbursement policies, developments in patent or other proprietary rights,
developments affecting the Company's collaborative partners, public concern as
to the safety and efficacy of products developed by the Company and market
conditions for biotechnology stocks in general may have a significant effect on
the future price of the Common Stock. The Company has never paid any cash
dividends and does not anticipate paying cash dividends in the foreseeable
future.
HUMAN RESOURCES
As of March 20, 1997, GeneMedicine employed 92 individuals full-time, 54 of
whom hold advanced degrees in science and business, including 34 who hold Ph.D.
or M.D. degrees. Of the Company's total work force, 75 employees are engaged or
directly support research and development activities and 17 are engaged in
business development, finance and administrative activities. In addition,
GeneMedicine has contracting arrangements with several scientists at research
institutions for provision of full-time services, as well as part-time
consulting arrangements with other scientists. The success of GeneMedicine will
depend in large part upon its ability to retain its current employees and
consultants and to attract and retain future employees and consultants. A
significant number of the Company's management and scientific staff have had
prior experience with large pharmaceutical, biotechnology or medical products
companies. None of the Company's employees is covered by collective bargaining
agreements and the Company considers its relationships with its employees and
consultants to be good. The Company faces competition for qualified individuals
from numerous pharmaceutical and biotechnology companies, universities and other
research institutions. There can be no assurance that the Company will be able
to attract and retain such individuals on acceptable terms or at all.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eric Tomlinson, D.Sc., Ph.D..... 49 President, Chief Executive Officer and Director
Norman Hardman, Ph.D............ 51 Senior Vice President, Research & Preclinical Development
and Chief Scientific Officer
Josef F. Bossart, Ph.D.......... 45 Vice President and Chief Business Officer
Thomas H. Rossing, M.D.......... 47 Vice President, Clinical Development & Regulatory Affairs
Richard A. Waldron.............. 43 Vice President and Chief Financial Officer and Secretary
Kathryn N. Stankis.............. 38 Vice President, Human Resources
John M. Dodson.................. 35 Director, Administration, Finance & Accounting
</TABLE>
17
<PAGE>
Dr. Tomlinson, one of the Company's founders, has been President, Chief
Executive Officer and a director of the Company since July 1992. Dr. Tomlinson
was President and Chief Executive Officer of Somatix Corporation from February
1990 until 1991, and served as a consultant there from April 1991 until March
1992. From 1984 to 1990, he was worldwide Head of Advanced Drug Delivery
Research for Ciba-Geigy Pharmaceuticals ("Ciba-Geigy"), where he led its
multidisciplinary program in site-specific drug delivery. From 1979 to 1984, Dr.
Tomlinson was Professor of Pharmaceutical Chemistry at Amsterdam University. Dr.
Tomlinson received a Ph.D. and a D.Sc. degree from London University and an
honorary D.Sc. degree magna cum laude from the United Kingdom Council for
National Academic Awards. He was a Fulbright-Hays Scholar and has (co)-authored
more than 210 scientific publications. Dr. Tomlinson was the 1995 Sidney
Riegelman Lecturer at the University of California, San Francisco.
Dr. Hardman will be appointed Senior Vice President, Research & Preclinical
Development and Chief Scientific Officer in April 1997. From 1996 to 1997, Dr.
Hardman was with Novartis Pharmaceuticals UK where he was Head of (UK) Research
and Preclinical Development Operations and a member of the Novartis Pharma UK
Management Committee and of the Novartis Global Pharma R&D Boards. From 1993 to
1996, Dr. Hardman was Head of UK Research and Member of the International
Research Management Committee for the Pharma Division of Ciba Pharmaceuticals
Ltd., a division of Ciba-Geigy. From 1990 to 1993, Dr. Hardman was Head of
Molecular Biology at the Biotechnology Section of Ciba-Geigy. Dr. Hardman
received a Ph.D. degree in Biochemistry from the University of Manchester and a
B.Sc. degree with First Class Honors in Chemistry from the University of London.
Dr. Bossart was appointed Vice President and Chief Business Officer in March
1997. From 1982 to 1997, he held various positions involving marketing,
licensing and general management within the Rhone-Poulenc, and later Rhone-
Poulenc Rorer (RPR), groups. Most recently he was Vice President of Business
and Marketing development for RPR Gencell, the RPR division focused on the
development of gene therapy products. In this position, Dr. Bossart negotiated
numerous agreements and developed licensing strategies in the field of gene
therapy. Dr. Bossart holds a Ph.D. degree from The Ohio State University and a
B.Sc.(Hon.) from Carleton University.
Dr. Rossing has been Vice President, Clinical Development & Regulatory Affairs
since July 1996. From 1993 to 1995, he was Director, Respiratory Clinical
Research at Glaxo and led a group that was responsible for the clinical
development and registration of corticosteroids (Flonase, Flovent) and beta
agonists (Ventolin, Serevent). With the merger of Glaxo and Wellcome in 1995,
he assumed responsibility for International Respiratory Clinical Research for
the new company. From 1991 to 1993 he was Director, Regulatory Affairs with
Merck responsible for global registration of cardiovascular, renal and
neurological products. Dr. Rossing received his B.A. from the University of
Texas at Austin in 1971 and his M.D. from Harvard Medical School in 1976.
Mr. Waldron has been Vice President and Chief Financial Officer since July
1995. From 1990 to 1995, he was a managing director and the head of finance for
technology-based companies at Rauscher Pierce Refsnes, Inc., an investment
banking firm. From 1985 to 1990, he was a senior vice president responsible for
health care investment banking at Cowen & Company. Mr. Waldron received his
M.B.A. degree with honors from Harvard University and his A.B. degree magna cum
laude in Economics from Princeton University.
Ms. Stankis has been Vice President, Human Resources since March 1994 and
served as the Company's Director of Administration and Human Resources from July
1993 to March 1994. From 1988 to July 1993, Ms. Stankis was employed at
Korn/Ferry International, an international executive search firm, most recently
as Principal and Health Care Products Consultant. Prior to 1988, Ms. Stankis
held various marketing and sales positions with Baxter International and MetPath
Laboratories. Ms. Stankis holds an M.B.A. degree from the University of Houston.
Mr. Dodson has been Director of Administration, Finance & Accounting since
September 1994 and prior to that was the Company's Controller from the time he
joined the Company in November 1993. From 1990 until 1993, Mr. Dodson was
employed by Pepsi-Cola South initially as Manager of Planning and Analysis and
most recently as Manager of Finance-CFO for the South Texas region. From 1985
until 1990, he was employed by KPMG Peat Marwick, where his most recent position
was Audit Manager. Mr. Dodson holds a B.B.A. degree in Accounting from The
University of Texas and is a Certified Public Accountant.
18
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases a 38,000 square-foot building in The Woodlands,
Texas. This facility has been built to the Company's specifications to
accommodate the Company's laboratory, support and administrative needs, and
includes a production facility designed to support initial clinical trials.
Monthly rent is approximately $1.90 per square foot. The initial term of the
lease, which began in January 1995, is 10 years, after which time the Company
may renew the lease for an additional period of five years. The Company also has
an option to expand this facility by up to an additional 62,000 square feet
during the first six years of the initial term of the lease.
GeneMedicine believes that this facility and its available expansion will be
adequate to meet the Company's needs for the foreseeable future. Should the
Company need additional space, management believes it will be able to secure
such space on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
In October 1994, the Company became a party to a class action suit in the U.S.
District Court for the Southern District of New York (the "Court") which alleged
violations of certain federal laws primarily arising out of activities of David
Blech and D. Blech & Company, Inc. in connection with the public offerings of
certain securities, including that of the Company. Four class action complaints
were filed by different plaintiffs relating to the same subject matter.
GeneMedicine was named as a defendant in three of these actions. The four
complaints were superseded by an Amended Consolidated Class Action Complaint
(the "Amended Complaint") which was filed on or about March 27, 1995. In June
1995, the Company and the other named defendants, including David Blech, D.
Blech & Company, Inc., the former chairman of the Board of the Company and 10
other biotechnology companies, moved to dismiss the Amended Complaint. On
November 9, 1995, oral argument on the motions to dismiss was heard by the
Court. In June 1996, the Court issued an opinion granting the Company's motion
to dismiss the complaint against it and granting plaintiffs leave to replead
within 20 days. Plaintiffs have since filed a second Amended Consolidated Class
Action Complaint which does not name the Company as a defendant. After
expiration of the 20-day period, certain defendants who were also successful in
dismissing the Amended Complaint moved the Court for a final order of dismissal,
which motion was denied.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was initially offered to the public on July 12,
1994 at an initial public offering price of $7.50 per share. The Common Stock is
traded on the Nasdaq National Market under the symbol "GMED." The following
table sets forth for the periods indicated the high and low sale prices for the
Common Stock as reported by Nasdaq:
HIGH LOW
------ -----
1996
Fourth Quarter................................... $ 5 11/16 $3 1/8
Third Quarter.................................... 5 3/4 3 3/8
Second Quarter................................... 7 3/8 5 3/8
First Quarter.................................... 9 1/4 5 7/8
1995
Fourth Quarter................................... $ 9 1/2 $4 7/8
Third Quarter.................................... 10 3/4 7 1/8
Second Quarter................................... 8 3/4 4 1/2
First Quarter.................................... 5 1/2 2 3/4
On March 20, 1997, the last reported sale price of the Company's Common Stock
on the Nasdaq National Market was $7.00 per share. As of March 20, 1997, there
were approximately 158 stockholders of record of the Company's Common Stock with
13,664,252 shares outstanding. The market price of the shares of Common Stock,
like that of the common stock of many other biotechnology companies, has been
and is likely to continue to be highly volatile. The Company has never declared
or paid any dividends and does not expect to pay any dividends in the
foreseeable future. See "Business--Risk Factors."
In February 1996, the Company issued 418,629 shares of Common Stock, at a
price per share of $9.56, to Boehringer Mannheim pursuant to the Boehringer
Mannheim Alliance. The Company issued such shares in reliance on the exemption
provided by section 4(2) of the Securities Act of 1933, as amended.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The selected financial information set forth below with respect to the
Company's statements of operations for each of the years ended December 31,
1992, 1993, 1994, 1995 and 1996, and the balance sheet data at December 31,
1992, 1993, 1994, 1995 and 1996, are derived from the financial statements of
the Company audited by Arthur Andersen LLP, independent public accountants. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
(in thousands, except share and per share data)
1992(1) 1993 1994 1995 1996
-------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Contract revenue.................................... $ -- $ -- $ -- $ 3,680 $ 4,000
Research and development grant revenue. -- -- 125 -- 722
Interest income..................................... -- 105 713 1,384 1,862
---------- ---------- ---------- ---------- -----------
Total revenues.................................... -- 105 838 5,064 6,584
Expenses:
Research and development............................ 986 2,269 7,042 11,338 13,727
General and administrative.......................... 383 1,497 2,881 3,736 3,406
Interest expense.................................... 20 82 88 140 104
---------- ---------- ---------- ---------- -----------
Total expenses.................................... 1,389 3,848 10,011 15,214 17,237
---------- ---------- ---------- ---------- -----------
Net loss............................................. $ (1,389) $ (3,743) $ (9,173) $ (10,150) $ (10,653)
========== ========== ========== ========== ===========
Net loss per share(2)................................ $(0.25) $(0.55) $(1.19) $(1.10) $(0.84)
Shares used in computing net loss per share (2) 5,562,081 6,585,171 7,732,328 9,195,489 12,753,301
December 31,
-----------------------------------------------------------------
(in thousands)
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments.. $ 266 $ 4,410 $ 22,173 $ 35,197 $ 30,872
Total assets....................................... 274 5,344 25,004 38,760 34,049
Long-term obligations.............................. 905 1,019 410 1,588 2,179
Deficit accumulated during the development stage... (1,389) (5,132) (14,305) (24,455) (35,108)
Total stockholders' equity......................... (1,359) 3,561 23,383 35,667 29,929
</TABLE>
(1) Reflects data for the period from inception (January 2, 1992) through
December 31, 1992.
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here.
Since its inception in January 1992, GeneMedicine has devoted its resources
primarily to fund its research and development programs. The Company has been
unprofitable since inception and has not received any revenues from the sale of
products. No assurance can be given that the Company will be able to generate
sufficient product revenues to attain profitability on a sustained basis or at
all. The Company expects to incur substantial losses for the next several years
as it continues to invest in product research and development, preclinical
studies, clinical trials and regulatory compliance. At December 31, 1996, the
Company's accumulated deficit was approximately $35.1 million.
RESULTS OF OPERATIONS
The Company does not anticipate revenues from product sales in the foreseeable
future. GeneMedicine expects its source of revenues for the next several years
to be interest income and payments under licensing and collaborative research
agreements, to the extent that the Company has such agreements and meets any
requirements for receipt of additional payments under them.
Years ended December 31, 1994, 1995 and 1996
Revenues for the year ended December 31, 1996 were $6.6 million, which
consisted of contract revenue of $4.0 million, interest income of $1.9 million
and research and development grant revenue of $0.7 million. This compares with
revenues of $5.1 million in 1995 and $0.8 million in 1994, which consisted
solely of interest income and $3.7 million of contract revenue in 1995 and two
Phase I Small Business Innovation Research ("SBIR") grants in 1994 for an
aggregate of $125,000. The contract revenues starting in 1995 resulted from a
corporate partnership with Boehringer Mannheim effective February 1995 to
develop certain non-viral gene medicines for application in the field of cancer.
The increases in interest income for the years 1994 through 1996 were primarily
the result of higher average cash balances in 1996 and 1995 compared to prior
years due to the sale of Series B Preferred Stock and a Common Stock warrant to
Roche in April 1994, the Company's initial public offering in July 1994 and the
Company's follow-on public offering in October 1995.
Research and development expenses for the year ended December 31, 1996 were
$13.7 million compared to $11.3 million in 1995 and $7.0 million in 1994. The
increases in research and development expense were generally due to the
expansion of the Company's research and development activities resulting in
staffing increases and the related salary and benefit costs as well as
additional laboratory supplies and other support costs. The expansion of
research and development activities resulted primarily from the commencement of
research in the fields of asthma, arthritis and cancer. The fields of asthma and
arthritis are the focus of a three-year corporate partnership agreement with
Roche which commenced in April 1994 and will end in accordance with its terms in
April 1997. In February 1995, the Company commenced research and development
efforts in the field of cancer, which is the focus of a multi-year corporate
partnership consummated with Boehringer Mannheim in July 1995. The Company
anticipates that expenditures will increase over the next several years as it
expands its research and product development efforts.
General and administrative expenses were approximately $3.4 million in 1996
compared to $3.7 million and $2.9 million in 1995 and 1994, respectively. The
slight decrease in 1996 from 1995 is due primarily to lower legal costs in 1996.
The overall increase from 1994 through 1996 was primarily due to the hiring of
additional personnel to support expanded research and development activities and
increased efforts in corporate development including corporate alliances. The
Company expects that general and administrative expenses will increase in the
future as a result of additional corporate development activities.
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1996, the Company has
generated net operating loss (NOL) carryforwards of approximately $28 million
22
<PAGE>
and approximately $645,000 of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2007. For
financial reporting purposes, a valuation allowance has been established as of
December 31, 1995 and 1996, to offset fully the Company's net deferred tax
assets, including those relating to its carryforwards. The Company 's ability
to utilize these carryforwards to reduce future taxable income may be limited
due to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private sales of its equity securities, its initial and follow-on public
offerings and revenues from corporate alliances. Through December 31, 1996, the
Company had received approximately $61.5 million in net proceeds from sales of
its equity securities. At December 31, 1996, the Company had working capital of
$29.1 million and cash, cash equivalents and short-term investments of $30.9
million. In addition, in February 1997 the Company received $4.0 million from
Corange International Ltd., the corporate parent of Boehringer Mannheim,
representing a Common Stock equity investment.
The Company expects its cash requirements to increase significantly in future
periods. The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products and to market with its partners any products that are developed. In
addition, the Company currently plans to manufacture clinical scale quantities
of its products, which will require the Company to expend substantial additional
capital. The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical testing and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting and enforcing patent claims, competing technological
developments, the cost of manufacturing, and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and committed funding from corporate partners, will be
sufficient to meet the Company's operating expenses and capital requirements
into the second half of 1999. There can be no assurance, however, that changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the expenditure of such
resources before such time. The Company intends to seek additional funding
through public or private financing, research and development arrangements with
potential corporate partners, or from other sources. There can be no assurance
that additional financing will be available on favorable terms, if at all. In
the event that adequate funding is not available, the Company may be required to
delay, reduce or eliminate one or more of its research or development programs
or obtain funds through arrangements with corporate collaborators or others that
may require the Company to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise seek. Insufficient financing may also require the
Company to relinquish rights to certain of its technologies that the Company
would otherwise develop or commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process and with obtaining and enforcing patents. Although
the Company's products may appear promising at an early stage of development,
they may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products commercially
unattractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from the
Financial Statements set forth on pages F-1 through F-17 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item with respect to Directors is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 1997 Annual Meeting of Stockholders to be held on May
13, 1997 ( the "Proxy Statement").
The information required by this item with respect to Executive Officers of
the Company is contained in item 1 of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Financial Statements are set forth on pages F-1 through F-17 hereof. The
index to the Financial Statements is found on page F-1.
2. Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
3. Exhibits
Each management contract or compensatory plan or arrangement required to
be filed are identified. See Exhibit Index in part (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1996.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1* Amended and Restated Certificate of Incorporation of Registrant
3.2* By-laws of Registrant
3.3** Certificate of Designation of Series A Junior Participating
Preferred Stock of Registrant
4.1* Specimen certificate of Common Stock of Registrant
4.2 Preferred Share Purchase Rights Plan dated January 16, 1996.
Previously filed on Form 8-K with the Commission on January 29,
1996 and incorporated herein by reference.
10.1**(1) 1993 Stock Option Plan, as amended
10.2* (1) Forms of Nonstatutory and Incentive Stock Option Agreements
under the 1993 Stock Option Plan
10.3*(1) Employee Stock Purchase Plan
10.4**(1) 1994 Non-Employee Directors' Stock Option Plan
10.5* Form of Indemnity Agreement between the Company and its
directors and executive officers
10.6+* First Amendment and Restatement of License Agreement between
Registrant and Baylor College of Medicine dated March 7, 1994
10.7+* First Amendment and Restatement of License Agreement--Woo
between Registrant and Baylor College of Medicine date March 7,
1994
10.8+* First Amendment and Restatement of License Agreement--Gene
Switch between Registrant and Baylor College of Medicine dated
March 7, 1994
10.9+* Limited Exclusive License Agreement between Registrant and the
Regents of the University of California dated October 26, 1993,
as amended January 21, 1994
10.10+* License Agreement between Registrant and British Technology
Group Limited dated November 8, 1993
10.11+* Patent License Agreement between Registrant and the University
of Texas System dated October 15, 1993
10.12*(1) Employment and Stock Purchase Agreement between Registrant and
Eric Tomlinson dated July 31, 1992
10.13(1) Employment Letter between Registrant and Thomas Rossing, M.D.
dated June 11, 1996
10.14(1) Change of Control Severance Plan
10.15* Lease Agreement between Registrant and The Woodlands Corporation
dated October 29, 1993
25
<PAGE>
EXHIBITS (CONT.)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.16+* Collaborative Alliance Agreement between Registrant and Syntex
(U.S.A.) Inc. dated April 8, 1994
10.17+* License Agreement between Registrant and Syntex (U.S.A.) Inc.
dated April 8, 1994
10.18* Stock and Warrant Purchase Agreement between Registrant and
Syntex Corporation dated April 8, 1994
10.19++ Share Purchase Agreement between GENEMEDICINE, INC. and Corange
International Ltd. dated July 17, 1995. Exhibit 10.21 to the
Company's Form 10-Q for the quarter ended September 30, 1995 is
incorporated herein by reference.
10.20++ Alliance Agreement between GeneMedicine, inc. and Corange
International Ltd. effective February 3, 1995. Exhibit 10.21
to the Company's Form 10-Q for the quarter ended September 30,
1995 is incorporated herein by reference.
10.21(1) Employment Agreement between Registrant and Richard A. Waldron
dated June 30, 1995
11.1 Statement regarding calculation of net income (loss) per share
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney, reference is made to page 24
* Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-77126) or amendments thereto and incorporated herein by
reference.
** Previously filed as an exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995.
+ Confidential treatment has been afforded to certain portions of this Exhibit
pursuant to Order Granting Application Under the Securities Act of 1933 and
Rule 406 Thereunder Respecting Confidential Treatment dated July 12, 1994.
++ Confidential treatment has been afforded to certain portions of this Exhibit
pursuant to Order Granting Application Under the Securities Act of 1934 and
Rule 24b-2 Thereunder Respecting Confidential Treatment dated February 5,
1996.
(1) Executive compensation plans and arrangements of Registrant.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, State of Texas, on March 27, 1997.
GENEMEDICINE, INC.
By: Eric Tomlinson
----------------------------------
Eric Tomlinson, D.Sc., Ph.D.
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signatures appears
below constitutes and appoints Eric Tomlinson his attorney-in-fact, with the
full power of substitution, for him and in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Eric Tomlinson President, Chief Executive Officer
- -------------------------------------------------- and Director (Principal Executive Officer) March 27, 1997
(Eric Tomlinson, D.Sc., Ph.D.)
Richard A. Waldron Vice President and Chief
- -------------------------------------------------- Financial Officer (Principal Financial Officer) March 27, 1997
(Richard A. Waldron)
John M. Dodson Director of Administration, Finance &
- -------------------------------------------------- Accounting (Principal Accounting Officer) March 27, 1997
(John M. Dodson)
Edward L. Cahill Director March 27, 1997
- --------------------------------------------------
(Edward L. Cahill)
Stanley T. Crooke Director March 27, 1997
- --------------------------------------------------
(Stanley T. Crooke, M.D., Ph.D.)
David F.J. Leathers Director March 27, 1997
- --------------------------------------------------
(David F.J. Leathers)
Arthur M. Pappas Director March 27, 1997
- --------------------------------------------------
(Arthur M. Pappas)
W. Leigh Thompson Director March 27, 1997
- --------------------------------------------------
(W. Leigh Thompson, M.D., Ph.D.)
</TABLE>
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................................ F-2
Balance Sheets at December 31, 1995 and 1996........................................................ F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the period
from inception through December 31, 1996........................................................... F-4
Statement of Stockholders' Equity for the period from inception through December 31, 1996........... F-5
Statements of Cash Flows for the years ended December 31,1994, 1995 and 1996 and for the period from
inception through December 31, 1996................................................................ F-7
Notes to Financial Statements....................................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GeneMedicine, inc.
We have audited the accompanying balance sheets of GeneMedicine, inc. (a
Delaware corporation in the development stage) as of December 31, 1995 and 1996,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1994, 1995 and 1996, and for the period from
inception (January 2, 1992) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GeneMedicine, inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1994, 1995 and 1996, and for the period from
inception (January 2, 1992) through December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
February 11, 1997
F-2
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- ----------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................ $ 15,420,772 $ 2,145,404
Short-term investments................................... 19,776,723 28,726,602
Prepaid expenses and other............................... 420,154 170,453
-------------- --------------
35,617,649 31,042,459
-------------- --------------
Equipment, furniture and leasehold improvements, net....... 3,135,697 2,998,416
Deposits and other assets.................................. 6,845 8,395
-------------- --------------
Total Assets............................................... $ 38,760,191 $ 34,049,270
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities................. $ 1,117,243 $ 1,352,762
Deferred revenue......................................... -- 179,489
Notes payable and current portion of capital lease
obligations............................................ 387,985 408,387
-------------- --------------
Total current liabilities.............................. 1,505,228 1,940,638
-------------- --------------
Long-term Liabilities:
Deferred contract revenue................................ 919,970 1,919,970
Capital lease obligations, net of current portion........ 667,781 259,393
-------------- --------------
Total long-term liabilities............................ 1,587,751 2,179,363
-------------- --------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000
shares authorized; 3,750,000 issued and outstanding.... 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares
authorized; 12,036,415 and 13,077,369 shares issued
and outstanding........................................ 12,036 13,077
Additional paid in capital............................... 60,965,612 65,485,846
Deferred compensation.................................... (859,557) (465,803)
Deficit accumulated during the development stage......... (24,454,629) (35,107,601)
-------------- --------------
Total stockholders' equity............................. 35,667,212 29,929,269
-------------- --------------
Total Liabilities and Stockholders' Equity................. $ 38,760,191 $ 34,049,270
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 2, 1992)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------- DECEMBER 31,
1994 1995 1996 1996
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue................... $ -- $ 3,680,000 $ 4,000,000 $ 7,680,000
Research and development
grant revenue.................... 125,000 -- 722,644 847,644
Interest income.................... 713,396 1,383,546 1,861,818 4,063,679
----------- ------------ ------------ ------------
838,396 5,063,546 6,584,462 12,591,323
Expenses:
Research and development........... 7,042,167 11,337,688 13,727,587 35,362,935
General and administrative......... 2,881,126 3,735,918 3,405,660 11,902,236
Interest expense................... 88,046 139,651 104,187 433,753
----------- ------------ ------------ ------------
Total expenses....................... 10,011,339 15,213,257 17,237,434 47,698,924
----------- ------------ ------------ ------------
Net loss............................. $(9,172,943) $(10,149,711) $(10,652,972) $(35,107,601)
=========== ============ ============ ============
Loss per share....................... $ (1.19) $ (1.10) $ (0.84)
Shares used in computing loss per
share.............................. 7,732,328 9,195,489 12,753,301
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
------------------ -------------------- PAID IN DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE COMPENSATION EQUITY
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, January 2,
1992................................ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of stock for cash, January
and October 1992 ($.04 per share)... -- -- 272,268 273 9,256 -- -- 9,529
Issuance of stock for license
agreement rights, September 1992
($.04 per share).................... -- -- 600,000 600 20,400 -- -- 21,000
Issuance of stock for services
rendered, September and November
1992 ($.04 per share)............... -- -- 6,471 6 221 -- -- 227
Net loss............................. -- -- -- -- -- (1,389,275) -- (1,389,275)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Balance, December 31, 1992........... -- -- 878,739 879 29,877 (1,389,275) -- (1,358,519)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Issuance of stock for cash, January
through May 1993 ($.04 per share)... -- -- 1,334,286 1,334 45,366 -- -- 46,700
Issuance of Series A Preferred Stock,
May 1993, for cash ($2.15 per share),
net of issuance costs of $65,406.... 3,600,462 3,600 -- -- 7,680,988 -- -- 7,684,588
Issuance of Series A Preferred Stock,
May 1993, for conversion of debt
($2.15 per share)................... 409,291 410 -- -- 880,590 -- -- 881,000
Issuance of stock, July 1993,
for cash ($.18 per share)........... -- -- 11,429 11 1,989 -- -- 2,000
Exercise of stock options, December
1993, ($.18 per share).............. -- -- 4,857 5 845 -- -- 850
Deferred compensation................ -- -- -- -- 210,600 -- (210,600) --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 47,220 47,220
Net loss............................. -- -- -- -- -- (3,742,700) -- (3,742,700)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Balance at December 31, 1993......... 4,009,753 4,010 2,229,311 2,229 8,850,255 (5,131,975) (163,380) 3,561,139
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Issuance of Series B Preferred Stock,
April 1994, for cash ($4.00 per
share), net of issuance costs of
$420,123............................ 3,750,000 3,750 -- -- 14,576,127 -- -- 14,579,877
Issuance of stock upon conversion
of debt, April 1994 ($10.56 per
share).............................. -- -- 85,714 86 904,914 -- -- 905,000
Issuance of stock in initial public
offering, July 1994 ($7.50 per
share), net of offering costs of
$1,705,625.......................... -- -- 1,933,333 1,933 12,792,439 -- -- 12,794,372
Conversion of Series A Preferred
Stock into common stock upon the
closing of the initial public
offering, July 1994.................(4,012,610) (4,013) 4,012,610 4,013 -- -- -- --
Exercise of stock options and
warrants, January through December
1994 ($.18-$2.15 per share)......... 2,857 3 74,285 74 26,159 -- -- 26,236
Issuance of stock under employee
stock purchase plan, December 1994
($2.66 per share)................... -- -- 9,426 9 25,129 -- -- 25,138
Deferred compensation................ -- -- -- -- 1,755,400 -- (1,755,400) --
Amortization of deferred
compensation........................ -- -- -- -- -- -- 664,246 664,246
Net loss............................. -- -- -- -- -- (9,172,943) -- (9,172,943)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Balance at December 31, 1994......... 3,750,000 $ 3,750 $ 8,344,679 $ 8,344 $38,930,423 $(14,304,918) $(1,254,534) $23,383,065
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY(CONTINUED)
FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
------------------ -------------------- PAID IN DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE COMPENSATION EQUITY
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 3,750,000 $ 3,750 $ 8,344,679 $ 8,344 $38,930,423 $(14,304,918) $(1,254,534) $23,383,065
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Exercise of stock options, January
through December 1995 ($.18-
$7.50 per share).................... -- -- 157,588 $ 158 $ 257,286 $ -- $ -- $ 257,444
Issuance of stock under employee
stock purchase plan, June and
December 1995 ($2.66-$6.48 per
share............................... -- -- 69,677 70 218,553 -- -- 218,623
Issuance of stock, July 1995, for
cash ($9.00 per share), net of
issuance costs of $411,454.......... -- -- 444,444 444 3,588,102 -- -- 3,588,546
Exercise of warrants, July 1995
($1.73 per share)................... -- -- 20,027 20 34,573 -- -- 34,593
Issuance of stock, October 1995, for
cash ($6.50 per share), net of
offering costs of $1,560,325........ -- -- 3,000,000 3,000 17,936,675 -- -- 17,939,675
Amortization of deferred
compensation........................ -- -- -- -- -- -- 394,977 394,977
Net loss............................. -- -- -- -- -- (10,149,711) -- (10,149,711)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Balance at December 31, 1995......... 3,750,000 3,750 12,036,415 12,036 60,965,612 (24,454,629) (859,557) 35,667,212
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Exercise of stock options, January
through December 1996 ($.18-
$5.88 per share).................... -- -- 250,676 251 212,204 -- -- 212,455
Issuance of stock under employee
stock purchase plan, June and
December 1996 ($2.66-$6.48 per
share).............................. -- -- 108,751 109 311,379 -- -- 311,488
Issuance of stock, February 1996, for
cash ($9.56 per share) net of
issuance costs of $8,818............ -- -- 418,629 418 3,990,764 -- -- 3,991,182
Exercise of warrants, March and May
1996, (Note 6)...................... -- -- 262,898 263 5,887 -- -- 6,150
Amortization of deferred
compensation........................ -- -- -- -- -- -- 393,754 393,754
Net loss............................. -- -- -- -- -- (10,652,972) -- (10,652,972)
--------- ------- ----------- ------- ----------- ------------ ----------- -----------
Balance at December 31, 1996......... 3,750,000 $ 3,750 13,077,369 $13,077 $65,485,846 $(35,107,601) $ (465,803) $29,929,269
========= ======= =========== ======= =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 2, 1992)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------- DECEMBER 31,
1994 1995 1996 1996
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows used in operating
activities:
Net loss........................... $(9,172,943) $(10,149,711) $(10,652,972) $(35,107,601)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization...... 277,762 644,544 808,409 1,815,765
Issuance of convertible debt for
noncash consideration............ -- -- -- 905,000
Issuance of stock for noncash
consideration.................... -- -- -- 21,050
Purchase of short-term investments. (3,997,171) -- -- (3,997,171)
Compensation expense related to
stock plans...................... 664,246 423,502 393,754 1,528,722
Loss on equipment retirements...... 3,980 -- 1,313 5,293
Changes in assets and liabilities:
Decrease (increase) in prepaid
expenses and other assets....... (322,455) 41,290 248,151 (75,721)
Increase in accounts payable and
accrued liabilities............. 402,158 254,623 235,519 1,352,762
Increase in deferred revenue
and deferred contract revenue... -- 919,970 1,179,489 2,099,459
----------- ------------ ------------ ------------
Net cash used in operating
activities..................... (12,144,423) (7,865,782) (7,786,337) (31,452,442)
Cash flows used in investing activities:
Purchase of equipment, furniture
and leasehold improvements........ (1,855,778) (1,417,523) (672,441) (4,822,601)
Purchase of short-term investments. -- (15,779,552) (8,949,879) (24,729,431)
Purchase of certificates of
deposit........................... -- -- -- (100,000)
----------- ------------ ------------ ------------
Net cash used in investing
activities..................... (1,855,778) (17,197,075) (9,622,320) (29,652,032)
----------- ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and
capital lease obligations......... 575,832 723,991 -- 2,030,823
Repayment of notes payable and
capital lease obligations......... (235,555) (426,074) (387,986) (1,232,043)
Advance on line of credit.......... -- -- -- 750,000
Proceeds from issuance of preferred
stock, net........................ 14,579,877 -- -- 22,264,465
Proceeds from issuance of common
stock, net........................ 12,845,746 22,010,356 4,521,275 39,436,633
----------- ------------ ------------ ------------
Net cash provided by financing
activities..................... 27,765,900 22,308,273 4,133,289 63,249,878
----------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 13,765,699 (2,754,584) (13,275,368) 2,145,404
Cash and cash equivalents, beginning
of period.......................... 4,409,657 18,175,356 15,420,772 --
----------- ------------ ------------ ------------
Cash and cash equivalents, end of
period............................. $18,175,356 $ 15,420,772 $ 2,145,404 $ 2,145,404
=========== ============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest.......................... $ 146,685 $ 139,651 $ 104,187 $ 433,053
Supplemental schedule of noncash
financing activity:
Conversion of debt to preferred
and common stock.................. $ 905,000 $ -- $ -- $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS:
GeneMedicine, inc. (the "Company") is a Delaware corporation in the
development stage. The Company is developing non-viral gene therapies that may
provide unique clinical benefits in the treatment of a number of human diseases.
The Company intends to develop its products through alliances with major
pharmaceutical and biotechnology companies.
The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale of
products, nor is there any assurance of future product revenues. In addition,
the Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, the need for additional
financing, the reliance on collaborative arrangements for research and
contractual agreements with corporate partners, and the ability to develop or
access manufacturing, sales and marketing experience. Additional factors
include uncertainties as to patents and proprietary technologies, technological
change and risk of obsolescence, development of products, competition,
government regulations and regulatory approval, and product liability exposure.
As a result of the aforementioned factors and the related uncertainties, there
can be no assurance of the Company's future success.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents and Short-term Investments
The Company considers all investments with an original maturity of less than
three months when purchased to be cash equivalents. Short-term investments have
maturities greater than three months at the date of purchase. At December 31,
1995 and 1996 cash equivalents and short-term investments consisted primarily of
U.S. Government obligations and commercial paper of the highest grade. All cash
equivalents and short-term investments have been classified as held-to-maturity
at December 31, 1995 and 1996. Investments in debt securities classified as
held-to-maturity at December 31, 1996, have various maturity dates which do not
exceed one year. These securities are carried at amortized cost which
approximates fair value.
Prepaid Expenses and Other
Prepaid expenses and other are mainly comprised of restricted certificates of
deposit, a loan to an officer and prepayments for contracted research, building
rent, and insurance.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are carried at cost and are
depreciated on a straight-line basis over the estimated useful economic lives of
the assets involved. The estimated useful lives employed in computing
depreciation are 5 years for equipment, 7 years for furniture and 10 years for
leasehold improvements. When property is retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in income. Maintenance and repairs that do
not extend the life of assets are charged to expense when incurred.
F-8
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Research and Development
Research and development costs are expensed when incurred. These costs
include personnel costs, materials consumed, depreciation on equipment and the
cost of facilities used for research and development. Payments related to the
acquisition and patenting of technology rights, for which development work is in
process, are expensed and considered a component of research and development
costs. Contract revenue and research and development grant revenue include
payments from corporate partners and a government agency for research and
development performed by the Company and are recognized ratably as the Company
satisfies its obligation under the related agreements. Payments received in
excess of amounts earned are classified as deferred contract revenue.
Loss Per Share
Loss per share has been computed by dividing the net loss by the weighted
average number of shares of Common Stock outstanding. All Common Stock
equivalents were anti-dilutive. In accordance with Staff Accounting Bulletin
Number 83 of the Securities and Exchange Commission, the Common Stock
equivalents that were issued during the twelve months preceding the initial
public offering at prices below the initial public offering price have been
included in the Company's loss per share computation up to the initial public
offering date and treated as if they had been issued at the Company's inception,
even though they were anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Realization of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted SFAS No. 121 on January 1, 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not materially impact the results of
operations.
F-9
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------- ------------
<S> <C> <C>
Laboratory equipment........................................................ $ 2,783,127 $ 3,292,122
Office equipment............................................................ 296,682 368,091
Furniture................................................................... 339,666 350,803
Leasehold improvements...................................................... 720,947 799,318
----------- -----------
4,140,422 4,810,334
Less accumulated depreciation and amortization.............................. (1,004,725) (1,811,918)
----------- -----------
$ 3,135,697 $ 2,998,416
=========== ===========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Research contracts.......................................................... $ 86,289 $ 334,556
Professional fees........................................................... 428,735 200,920
Compensation and benefits................................................... 416,872 162,677
Other accounts payable and accrued liabilities.............................. 185,347 654,609
----------- -----------
$ 1,117,243 $ 1,352,762
=========== ===========
</TABLE>
5. DEBT AND CAPITAL LEASE OBLIGATIONS:
In March 1994, the Company entered into an equipment leasing arrangement with
a financing company. Equipment has been financed over forty-two and forty-eight
month periods at implicit interest rates of 8.4 percent and 11.2 percent,
respectively. Equipment purchases financed through this agreement are recorded
as capital leases in the accompanying financial statements.
Future principal payments under capital lease obligations as of December 31,
1996 are as follows:
1997................................ $408,387
1998................................ 204,579
1999................................ 54,814
--------
$667,780
========
In February and August 1993, the Company executed two $250,000 promissory
notes with a commercial bank. The notes accrued interest at the prime lending
rate of the bank plus 1 percent. In February 1996 and September 1996, the notes
were paid in full.
On September 16, 1992, the Company issued convertible debt of $905,000 to
Baylor, a stockholder of the Company, in exchange for an exclusive worldwide
license of certain technology. The debt was a five-year term note which accrued
interest at 5 percent per annum. In April 1994, the Company converted the note
into 85,714 shares of its Common Stock.
F-10
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The Company also paid accrued interest of $70,639 in connection with conversion
of this debt.
6. STOCKHOLDERS' EQUITY:
In January 1996, the Board of Directors of GeneMedicine adopted a Preferred
Share Purchase Rights Plan in which preferred share purchase rights ("Rights")
were distributed for each share of common stock held as of the close of business
on February 1, 1996. The rights will expire on February 1, 2006. Each Right
will entitle stockholders to buy one one-hundredth of a share of a new series of
Series A Junior Preferred Stock at an exercise price of $60.00 per one one-
hundredth of a Preferred Share. Upon the occurrence of certain events, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, shares of the Company's Common Stock having a market value of two times
the exercise price of the Right.
Common Stock
In July 1994, the Company completed an initial public offering of 1,933,333
shares of Common Stock at $7.50 per share, with the Company receiving net
proceeds of approximately $13,500,000, before payment of offering expenses.
In October 1995, the Company completed a follow-on public offering of
3,000,000 shares of Common Stock at $6.50 per share, with the Company receiving
net proceeds of $18,225,000, before payment of offering expenses.
Series A Convertible Preferred Stock
On May 17, 1993, the Company issued 3,948,894 shares of Series A Preferred
Stock (the "Series A Preferred"), at a price of $2.1525 per share, for aggregate
consideration of approximately $8,435,000, net of offering costs of
approximately $65,000. The consideration received consisted of cash proceeds of
approximately $7,685,000 and conversion of advances of $750,000. No dividends
were declared or paid to holders of Series A Convertible Stock. Upon completion
of the Company's initial public offering, in July 1994, all Series A Convertible
Stock was converted, on a one for one basis, into 4,012,610 shares of Common
Stock.
Series B Convertible Preferred Stock
Upon execution of the Syntex Collaborative Agreement (refer to Note 9), Syntex
Corporation, the parent company of Syntex (U.S.A.) Inc., purchased 3,750,000
shares of the Company's Preferred Series B Stock (the "Series B Preferred") and
a warrant to purchase 1,071,428 shares of the Company's Common Stock (the
"Common Warrant") for an aggregate purchase price of $15 million. The Series B
Preferred will convert into 1,071,428 shares of Common Stock at the Company's
option (i) upon the Company's Common Stock trading at an average price of $14.00
per share or more for 30 consecutive days, (ii) upon completion of a public
offering with minimum aggregate proceeds of $10 million and minimum price of
$14.00 per share or (iii) after April 8, 1998. Syntex Corporation may elect to
convert the Series B Preferred into Common Stock at any time. The holders of the
Series B Preferred are entitled to receive a liquidation preference of $4.00 per
share, after which remaining assets would be distributed ratably to the holders
of Common Stock. The Common Warrant is exercisable for five years at $21.00 per
share for an aggregate purchase price of $22.5 million. The warrants have been
recorded at zero in the accompanying financial statements as the value was de
minimus upon issuance. The Company has the right to accelerate the expiration of
the Common Warrant upon (i) the Company's Common Stock trading at an average
price of $28.00 or more per share for 30 consecutive days or (ii) the Company
and Syntex reaching the end of the research term under the collaborative
agreement and not entering into a joint venture.
F-11
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Warrants
In connection with the Company's initial public offering in July 1994, the
Company issued a warrant to the underwriter and stockholder to purchase 133,333
shares of Common Stock at an exercise price of $13.50 per share. The warrant
became exercisable for four years beginning July 12, 1995, and has been recorded
at zero in the accompanying financial statements as the value was de minimus
upon issuance.
In connection with the issuance of the Series A Preferred, the Company issued
warrants to acquire 413,705 shares at $2.1525 per share. These warrants have
been recorded at zero in the accompanying financial statements as the value was
de minimus upon issuance. The warrants were exercisable over an 18-month period
beginning May 17, 1993, however, in November 1994, in return for the pro rata
expiration of a cashless exercise provision of the warrants, the exercise
provision was extended to November 17, 1995. In July 1995, 21,428 warrants were
exercised of which 16,071 shares were issued for cash and 5,357 warrants were
exercised under a cashless provision, netting to an issuance of 3,956 shares.
On July 11, 1995, in return for an agreement to not sell or otherwise dispose of
any shares of the Company's Common Stock held by the remaining warrant holders,
the exercise provision was extended to May 17, 1996 and the pro rata expiration
of the cashless exercise provision was rescinded. In March and May 1996, the
remaining 392,277 warrants were exercised under a cashless provision, netting to
an issuance of 260,041 shares.
In connection with the advances from D. Blech & Company Incorporated ("D.
Blech"), the Company issued D. Blech and a related party warrants to purchase
28,571 shares of the Company's Common Stock at $.035 per share, exercisable over
a five year period beginning January 1993. The warrants have been recorded at
zero in the accompanying financial statements as the value was de minimus upon
issuance.
In connection with loans from two directors of BCM Technologies, Inc., the
Company issued warrants to purchase 5,714 shares of Series A Preferred Stock at
$2.1525 per share. The warrants have been recorded at zero in the accompanying
financial statements as the value was de minimus upon issuance. One warrant for
2,857 shares was exercised in 1994 and the remaining warrant for 2,857 shares
was exercised in May 1996.
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
The Company adopted a 401(k) plan in 1994. Under the plan, employees can
contribute up to 15 percent of their compensation subject to limitations as
defined by the Internal Revenue Service. The Company has the option to match an
employee's contribution as determined each year by the Company. An employee
would vests in the Company's matching contribution based on years of service.
No matching contribution has been made through December 31, 1996.
In March 1994, the Board of Directors adopted the 1994 Non-Employee Directors'
Stock Option Plan ("Directors' Plan") and reserved 250,000 shares of common
stock for issuance thereunder. The plan permits each director of the Company who
is not otherwise employed by the Company who (i) was a director on July 12, 1994
or (ii) is first elected as a director after the date of adoption of the
Directors' Plan, automatically will be granted an option to purchase 10,000 and
30,000 shares of common stock, respectively. All options under this plan vest in
four equal annual installments commencing on the date of grant.
In April 1993, the Board of Directors approved the 1993 Stock Option Plan,
which provides for the grant of up to 1,795,714 incentive and nonstatutory
options to acquire the Company's common stock. In April 1995, the stockholders
amended the plan to increase the stock allowed for issuance to 2,545,714. The
option prices for the incentive and nonstatutory options shall be not less than
100 percent and 85 percent, respectively, of the fair market value of the stock
as determined by the Company's Board of Directors.
F-12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES FINANCIAL STATEMENTS-(CONTINUED)
In March 1994, the Board of Directors adopted the Employee Stock Purchase Plan
and reserved 857,142 shares of Common Stock for issuance thereunder. The plan
permits full-time employees to purchase Common Stock through payroll deductions
(which cannot exceed 15 percent of each employee's compensation) at the lower of
85 percent of fair market value at the beginning of each offering period, as
defined, or the end of each six-month purchase period. In 1995 and 1996, 69,677
and 108,751 shares, respectively, were purchased by employees under this plan at
$2.66 to $6.48 per share.
The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25 and the related Interpretations. Accordingly,
deferred compensation is recorded for stock options based on the excess of the
deemed value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is
amortized over the vesting period of each option. For certain stock options
granted prior to its initial public offering, the Company recorded deferred
compensation. Such deferred compensation totals approximately $2 million, of
which $664,246, $394,977 and $393,754 was recognized as expense during the years
ended December 31, 1994, 1995 and 1996, respectively, and the remainder will be
amortized to expense over the remaining vesting periods of the options As the
exercise price of all options issued during 1995 and 1996 was equal to or
greater than the market price of the Company's stock on the date of grant, no
further deferred compensation was recorded. No compensation cost has been
recognized under the Company's stock purchase plan.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" which, if fully adopted, requires the Company to record stock
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected not to record related compensation
expense in accordance with this statement. Had compensation expense for its
stock option and stock purchase plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been increased to
the following pro forma amounts:
1995 1996
------ ------
Net loss: As reported $10,149,711 $10,652,972
Pro forma $11,028,844 $12,449,641
Loss per share: As reported $1.10 $0.84
Pro forma $1.20 $0.98
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-13
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
1993 STOCK OPTION PLAN DIRECTORS PLAN
------------------------------ --------------------------
WEIGHTED-AVG. WEIGHTED-AVG.
EXERCISE EXERCISE
OPTIONS PRICE ($) OPTIONS PRICE ($)
-------------- -------------- --------- ---------------
<S> <C> <C> <C> <C>
Balance at April 30, 1993 -- --
Granted......................... 650,000 0.18 -- --
Exercised....................... (4,857) 0.18 -- --
---------
Balance at December 31, 1993...... 645,143 0.18 -- --
--------- -------
Granted......................... 702,998 3.07 50,000 7.50
Exercised....................... (74,285) 0.27 -- --
Canceled........................ (43,244) 0.94 -- --
--------- -------
Balance at December 31, 1994...... 1,230,612 1.76 50,000 7.50
--------- -------
Granted......................... 477,250 6.54 140,000 4.91
Exercised....................... (155,088) 1.54 (2,500) 7.50
Canceled........................ (74,978) 3.66 (37,500) 7.07
--------- -------
Balance at December 31, 1995...... 1,477,796 3.23 150,000 5.19
--------- -------
Granted......................... 784,349 4.92 20,000 6.25
Exercised....................... (250,676) 0.85 -- --
Canceled........................ (278,204) 5.80 (30,000) 3.63
--------- -------
Balance at December 31, 1996...... 1,733,265 3.94 140,000 5.68
========= =======
Exercisable at December 31, 1994.. 379,732 1.05 -- --
Exercisable at December 31, 1995.. 645,065 2.15 5,000 7.50
Exercisable at December 31, 1996.. 774,465 2.94 35,000 5.86
</TABLE>
At December 31, 1996, 327,543 and 107,500 options were available for future
grant under the 1993 Stock Option Plan and Directors Plan, respectively. The
exercise price of options outstanding under the 1993 Stock Option Plan and
Directors' Plan at December 31, 1996 range from $0.18 to $9.88 and $3.63 to
$7.50, respectively. The weighted average contractual life of options
outstanding at December 31, 1996 was nine years for both, the 1993 Stock Option
Plan and Directors Plan.
The weighted average fair value of options granted in 1995 and 1996 was $4.78
and $3.45, respectively, under the 1993 Stock Option Plan. The weighted average
fair value of options granted in 1995 and 1996 was $3.70 and $4.30,
respectively, under the Directors' Plan. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1995 and 1996,
respectively: risk-free interest rates of 6.5 percent for both years; no
expected dividend yields for both years; expected lives of 6 years for both
years and expected volatility of 82 and 72 percent.
The weighted average fair value of purchase rights granted in 1995 and 1996
was $1.33 and $1.37, respectively, under the Employee Stock Purchase Plan. The
fair value of employee purchase rights was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions for 1995
and 1996, respectively: risk-free interest rates of 5.8 and 5.6 percent; no
expected dividend yields for both years; expected lives of 6 years for both
years and expected volatility of 77 and 72 percent.
F-14
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
8. FEDERAL INCOME TAXES:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of liabilities and assets
using exacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization
based on a more-likely-than-not criteria in determining if a valuation should be
provided.
As of December 31, 1996, the Company has generated net operating loss ("NOL")
carryforwards of approximately $28 million and research and development credits
of approximately $645,000 available to reduce future income taxes. These
carryforwards begin to expire in 2007. A change in ownership, as defined by
federal income tax regulations, could significantly limit the Company's ability
to utilize its carryforwards. The Company's ability to utilize it current and
future NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because Federal tax limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for federal income tax purposes. As
the Company has had cumulative losses and there is no assurance of future
taxable income, a valuation allowance has been established to fully offset the
deferred tax asset at December 31, 1996 and 1995. The valuation allowance
increased $3,834,402 and $3,436,026 for the years ended December 31, 1996 and
1995, respectively, primarily due to the Company's losses. The components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.............................. $6,273,085 $ 9,714,245
Capitalized start-up costs.................................... 522,456 363,735
Research and development tax credits.......................... 470,320 645,000
Technology license............................................ 175,100 298,168
Tax basis of equipment, furniture and leasehold improvements.. 64,740 97,498
Contract revenue.............................................. 312,790 652,790
Accrued liabilities not currently deductible.................. 146,033 27,490
---------- -----------
Total deferred taxes...................................... 7,964,524 11,798,926
Less valuation allowance...................................... (7,964,524) (11,798,926)
---------- -----------
Net deferred tax assets................................... $ -- $ --
========== ===========
</TABLE>
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS:
Effective February 1995, the Company and Corange International Ltd., the
parent company of the Boehringer Mannheim Group ("Boehringer Mannheim") entered
into a multi-year alliance agreement to develop gene therapy products to treat
selected cancer indications. Under the terms of the agreement, Boehringer
Mannheim has agreed to fund $25 million for research and development at the
Company, with payments to the Company of $5 million per year for five years.
Research and development funding of $4.6 and $5 million were received in 1995
and 1996, respectively. Because the Company may be obligated, upon certain
circumstances, to conduct research and development in an amount not to exceed $5
million at the end of the five-year agreement, the Company has recognized
contract revenue at 80 percent of research funding. In addition, Boehringer
Mannheim has agreed to invest $20 million in the common equity of the Company at
$4 million per year. The first three $4 million equity investments were made in
July 1995, February 1996, and February 1997 in which 444,444, 418,629 and
533,333 common shares were issued at $9.00, $9.56 and $7.50 per
F-15
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
share, respectively. The price per share for common equity investments by
Boehringer Mannheim for the years 1996 through 1999 is based upon the 15
consecutive trading days immediately preceding February 1 for each year, with
the purchase in 1996 at a 20 percent premium. In no case shall the purchase
price be less than $7.50 per share. All payments to the Company beginning in
1997 are subject to the achievement of certain milestones. The Company also
granted Boehringer Mannheim a three-year option to expand the collaboration to
include additional cancer indications.
In April 1994, the Company entered into a collaborative agreement with Syntex
(U.S.A.) Inc., now a subsidiary of Roche Holding Ltd. ("Roche") to develop gene
medicines for certain inflammatory and immunological disorders. The
collaborative agreement provides that the Company will be responsible for the
research during the initial three-year term. The Company and Roche may extend
the initial term for a fourth year, in which case each party would be obligated
to commit an additional $2 million to fund collaborative research. At the end of
the initial research term or through designation by the RMC, the agreement
provides an option for the Company and Roche to enter into a joint venture
agreement to further pursue the development and commercialization of such gene
medicines, which would require an additional initial commitment by each party of
at least $10 million. Upon execution of the collaborative agreement, Roche
purchased 3,750,000 shares of the Company's Preferred Series B Stock and a
warrant to purchase 1,071,428 shares of the Company's Common Stock. Refer to
Note 6.
In 1992, the Company entered into license agreements with Baylor whereby the
Company has exclusive noncancelable worldwide licenses to use certain
technology. In exchange for the grant of this exclusive license, the Company
issued 600,000 shares of its common stock to Baylor. Pursuant to the license
agreement, the Company will pay Baylor, for the longer of 10 years or the life
of the patent, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of the such technologies.
Effective May 7, 1993, the Company obtained a worldwide, exclusive license for
the gene-switch technology initially developed by Baylor in exchange for 14,286
shares of common stock and future royalty payments on net sales by the Company
of any products incorporating the licensed technologies.
The Company has entered into several sponsored research agreements with a
number of research institutes. During 1994, 1995 and 1996, the Company paid
$1,013,900, $1,340,000 and $1,442,100, respectively, pursuant to these
agreements and has committed to pay an additional $670,750 in 1997 under these
research agreements.
In addition, the Company has entered into other licensing agreements with
various universities and research organizations. Under the terms of these
agreements, the Company has received exclusive and nonexclusive licenses to
technology or technology claimed, in certain patents or patent applications. The
Company is required to make payments of nonrefundable license fees and royalties
on future sales of products employing the technology. In 1994, 1995 and 1996,
the Company paid license fees of $115,000, $250,000 and 362,000, respectively,
under these agreements, which have been recorded as a research and development
expense. To retain these licenses in future years the Company has committed to
pay approximately $143,000 through 1997.
10. CONSULTING AND RELATED AGREEMENTS:
In 1995, in connection with the execution of the Boehringer Mannheim alliance
agreement, the Company paid a fee of $350,000 to a former chairman and
stockholder of the Company pursuant to a finders agreement.
In April 1994, in connection with the collaborative agreement with Syntex
(U.S.A.) Inc., the Company's Board of Directors approved a payment of $375,000
in consideration of the assistance provided by D. Blech. Affiliates of D. Blech
F-16
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
are principal stockholders of the Company.
The Company has entered into consulting agreements with its founding
scientists and certain individuals. Pursuant to these agreements, the Company
paid $343,000, $494,000 and $447,000 in 1994, 1995 and 1996, respectively. The
fees are recorded as research and development expense as incurred. In 1996, the
Company paid a director of the Company $20,300 under a consulting agreement.
11. COMMITMENTS:
The Company has entered into employment agreements with its chief executive
and other key employees which have initial expiration dates ranging from 1996 to
1999. The agreements are thereafter automatically renewed for successive twelve-
month terms, unless terminated by the Company or employee. Such agreements
provide that, in the case of termination without cause, the employees are
entitled to payments ranging from 25 percent to 85 percent of their annual
salaries. The aggregate amount charged to expense during 1994, 1995 and 1996
pursuant to these agreements totaled $651,000, $848,000 and $872,000,
respectively.
On October 29, 1993, the Company entered into an agreement to lease building
facilities from a real estate company. This operating lease commenced in January
1995 and continues for a lease term of 10 years. The obligations under this
lease along with other operating leases are as follows:
1997............................ $ 874,000
1998............................ 874,000
1999............................ 866,000
2000............................ 901,000
2001............................ 901,000
2002 and thereafter............. 2,703,000
F-17
<PAGE>
Exhibit 10.13
June 11, 1996
Thomas Rossing, M.D.
9719 Rougemont Rd.
Bahama, NC 27503
Dear Tom:
We thoroughly enjoyed meeting with you during the last several weeks to discuss
the possibility of your joining GeneMedicine, inc. (the "Company"). We are
quite impressed with your knowledge and experience and believe that your ability
to drive the clinical and regulatory development of our products will ensure
that GeneMedicine, inc. remains the leader in non-viral gene therapy.
Therefore, I am very pleased to write to you, on behalf of GeneMedicine, inc.,
with an employment offer for the position of Vice President, Clinical
Development and Regulatory Affairs. The terms of the offer of your employment
with the Company are as follows:
1. In this position, you will report directly to the President and Chief
Executive Officer of the Company. You will be responsible for leading the
Company's clinical research and development, ensuring the close interaction
between the Clinical Development and Regulatory Affairs, the Discovery &
Development and the Corporate Development functions. You will be
responsible for all clinical research and development and regulatory
activities. The effective date of your employment will be July 8, 1996.
2. You will be paid an initial salary of $235,000 per annum. As with other
employees of the Company, your salary will be reviewed annually by the
President and the Board of Directors of the Company.
3. The Company will offer you a sign-on bonus of: $50,000 to be paid to you on
the first pay period following your first day of employment, $25,000 to be
paid to you after one year of employment and $25,000 after the second year
of employment with the Company. You will be paid these bonuses as long as
you are an employee of the Company at the time the payment is due and are
not under notice to leave.
4. Upon your acceptance of employment, you will be eligible to receive an
option to purchase 100,000 shares of the Company's Common Stock, subject to
approval by the Company's Board of Directors. Twenty percent (20%) of
these options will vest on the first day of your employment. The remaining
options will vest equally over the subsequent forty-eight months. The
Board will consider the option grant, the exercise price and the other
terms of such option at its first meeting following your start date. Under
the Company's Stock Option Plan, the exercise price of any option shall
equal the fair market value of the Company's Common Stock on the date of
the grant. You will also be eligible, each year at your anniversary date
as long as you are an employee, to earn additional performance-based stock
options based upon the achievement of agreed personal and functional
objectives.
5. The Company agrees to pay you a $200,000 severance benefit on the effective
date of the termination if within two years of your effective date of
employment the Company terminates your employment, without cause as is
defined in the enclosed definition of cause. You will also be eligible to
receive the benefits stated in the enclosed Outline of Employee Rentention
Severance and Benefit Plan.
<PAGE>
Thomas Rossing, M.D.
Page Two
6. The Company will reimburse you for relocation expenses, specifically those
incurred moving your personal and domestic possessions as is specified in
the enclosed relocation policy.
7. As an employee, you will be eligible to participate in the Company's
Employee Stock Purchase, 401(k) and employee benefits plans. The benefit
plan includes group medical, dental, life and long-term disability
insurances. The Company will pay for 85% of the premium for you and your
family. You will be required to pay for the remainder through semi-
monthly, payroll deduction. You will also be covered by directors' and
officers' insurance and will be eligible for vacation per the Company's
policy.
8. As an employee of the Company, you will be expected to sign a proprietary
information and inventions agreement copies of which are attached for your
review and signature.
As a condition of employment you will be required to show proof of citizenship,
permanent residency in the United States or authorization to work in the United
States.
If the above terms and conditions are acceptable to you, please acknowledge
acceptance of the offer by signing and returning to me both the enclosed copy of
this letter and a copy of the enclosed proprietary information and inventions
agreements by June 14, 1996.
Sincerely,
ERIC TOMLINSON, D.SC., PH.D.
Eric Tomlinson, D.Sc., Ph.D.
President and Chief Executive Officer
Accepted by: /s/ Thomas Rossing, M.D.
---------------------------
Thomas Rossing, M.D.
Enclosures: Proprietary Information and Inventions Agreement
Covenant Not to Compete
Relocation Policy
Outline of Employee Severance and Benefit Plan and definitions
W-4
<PAGE>
EXHIBIT 10.14
GENEMEDICINE, INC.
CHANGE OF CONTROL SEVERANCE PLAN
SECTION 1. INTRODUCTION.
THE GENEMEDICINE, INC. CHANGE OF CONTROL SEVERANCE PLAN (the "PLAN") was
approved by the Board of Directors of GENEMEDICINE, INC. (the "COMPANY")
effective May 17, 1996. The purpose of the Plan is to encourage eligible
employees of the Company to continue as employees of the Company in the event of
a Change of Control (as defined herein) and to provide for the payment of
severance benefits to such employees in the event their employment with the
Company is terminated, as provided herein, within a specified period following a
Change of Control. No benefits shall be paid under this Plan prior to the
effective date of a Change of Control of the Company. Except as otherwise
stated herein, this Plan shall supersede any severance benefit plan, policy or
practice previously maintained by the Company. This Plan document also is the
Summary Plan Description for the Plan.
SECTION 2. ELIGIBILITY FOR BENEFITS.
(A) GENERAL RULES. Subject to the requirements set forth in this Section,
the Company will grant severance benefits under the Plan to Eligible Employees.
(I) "ELIGIBLE EMPLOYEES" are all full-time, regular employees of the
Company other than those excluded under this Section 2. An Eligible Employee
shall be eligible for benefits under this Plan if within twelve (12) months
following the effective date of a Change of Control the Eligible Employee's
employment with the Company is either (i) voluntarily terminated for Good Reason
or (ii) involuntarily terminated for a reason other than Cause. An Eligible
Employee who is involuntarily terminated for Cause shall not be eligible for
benefits under this Plan. Part-time employees and temporary employees are not
eligible for benefits under this Plan. For this purpose part-time employees are
those employees who work less than twenty (20) hours per week. Temporary
employees are those employees who are expected to work for the Company for fewer
than six (6) months.
(II) In order to be eligible to receive benefits under the Plan, an
Eligible Employee must execute a general waiver and release on the form provided
by the Company.
(III) Any Change of Control that triggers the payment of benefits
under this Plan must occur during the term of this Plan as specified in Section
6(b); provided that in any event eligibility for benefits shall continue for
twelve (12) months following the effective date of a Change of Control which
occurs during such period.
(B) EXCEPTIONS. An employee who otherwise is an Eligible Employee will not
receive benefits under the Plan in any of the following circumstances:
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(I) The Eligible Employee has executed an individually negotiated
employment contract or agreement with the Company relating to severance benefits
that is in effect on his or her Termination Date. Such Eligible Employee's
severance benefit, if any, shall be governed by the terms of such individually
negotiated employment contract or agreement.
(II) The Eligible Employee is involuntarily terminated following the
effective date of a Change of Control for any reason other than a reason
specified in Section 2(a)(i).
(III) The Eligible Employee voluntarily terminates employment with the
Company within the twelve (12) months following the effective date of a Change
of Control for a reason other than Good Reason or for no reason. Voluntary
terminations include, but are not limited to, resignation, retirement, or
failure to return from a leave of absence on the scheduled date.
SECTION 3. AMOUNT OF BENEFIT.
Severance benefits payable under the Plan are as follows:
(A) Eligible Employees will receive the benefits described in the Benefit
Schedule attached hereto.
(B) Notwithstanding any other provision of the Plan to the contrary, the
total severance payments to any Eligible Employee under this Plan shall not
exceed two times the Eligible Employee's annual compensation earned during the
calendar year immediately preceding the Eligible Employee's termination of
employment (calculated on an annualized basis).
(C) Notwithstanding any other provision of the Plan to the contrary, any
benefits payable to an Eligible Employee under this Plan shall be in lieu of any
severance benefits payable by the Company to such individual under any other
arrangement covering the individual, unless expressly otherwise agreed to by the
Company in writing.
SECTION 4. TIME OF PAYMENT AND FORM OF BENEFIT; INDEBTEDNESS.
(A) Benefits under this Plan shall be paid in a lump sum. The Company
reserves the right to determine the timing of such payments, provided, however,
that no payment shall be made under this Plan prior to the last day of any
waiting period or revocation period as required by applicable law in order for
the general waiver and release required by Section 2(a)(iii) of this Plan to be
effective, and provided further that all payments under this Plan will be
completed within forty-five (45) days of an Eligible Employee's Termination
Date.
(B) If an Eligible Employee is indebted to the Company at his or her
Termination Date, the Company reserves the right to offset any severance
payments under the Plan by the amount of such indebtedness. In no event shall
payment of any Plan benefit be made prior to the Eligible Employee's Termination
Date.
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SECTION 5. CONTINUATION OF EMPLOYMENT BENEFITS.
(A) COBRA CONTINUATION.
(I) Each Eligible Employee who is enrolled in a health, vision or
dental plan sponsored by the Company may be eligible to continue coverage under
such health, vision or dental plan (or to convert to an individual policy) under
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") at the time
of the Eligible Employee's termination of employment. The Company will notify
the individual of any such right to continue health coverage at the time of
termination.
(II) The Company will pay the Eligible Employee's COBRA premiums
during the Severance Period. The Company will pay the COBRA premiums for the
Eligible Employee's dependents during the Severance Period if, and only to the
extent that, such dependents were enrolled in a health, vision or dental plan
sponsored by the Company prior to the Eligible Employee's Termination Date and
such dependents' premiums under such plans were paid by the Company prior to the
Eligible Employee's Termination Date. No provision of this Plan will affect the
continuation coverage rules under COBRA, except that the Company's payment of
any applicable premiums during the Severance Period will be credited as payment
by the Eligible Employee for purposes of the Eligible Employee's payment
required under COBRA. Therefore, the period during which an Eligible Employee
must elect to continue the Company's group medical, vision or dental coverage at
his or her own expense under COBRA, the length of time during which COBRA
coverage will be made available to the Eligible Employee, and all other rights
and obligations of the Eligible Employee under COBRA (except the obligation to
pay premiums that the Company pays during the Severance Period) will be applied
in the same manner that such rules would apply in the absence of this Plan. At
the conclusion of the Severance Period the Eligible Employee will be responsible
for the entire payment of premiums required under COBRA for the duration of the
COBRA period, if any.
(III) For purposes of this Section 5(a), the Severance Period for an
Eligible Employee shall mean the number of months of Pay, rounded to the nearest
whole month, used for calculating the Eligible Employee's cash severance
benefits, as specified in the Schedule attached hereto.
(B) OTHER EMPLOYEE BENEFITS. All non-health benefits (such as life
insurance and disability coverage) terminate as of the employee's Termination
Date (except to the extent that any conversion privilege is available
thereunder).
SECTION 6. RIGHT TO INTERPRET PLAN; AMEND AND TERMINATE; OTHER ARRANGEMENTS;
BINDING NATURE OF PLAN.
(A) EXCLUSIVE DISCRETION. The Plan Administrator shall have the exclusive
discretion and authority to establish rules, forms, and procedures for the
administration of the Plan, and to construe and interpret the Plan and to decide
any and all questions of fact, interpretation,
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definition, computation or administration arising in connection with the
operation of the Plan, including, but not limited to, the eligibility to
participate in the Plan and the amount of benefits paid under the Plan. The
rules, interpretations, computations and other actions of the Plan Administrator
shall be binding and conclusive on all persons.
(B) TERM OF PLAN; AMENDMENT OR TERMINATION; BINDING NATURE OF PLAN.
(I) This Plan shall be effective for a period of four (4) years from
May 17, 1996, which is the date the Board of Directors approved this Plan;
provided, however, that the Company may, in its discretion, extend the term of
this Plan.
(II) The Company reserves the right to amend or discontinue this Plan
or the benefits provided hereunder at any time; provided, however, that no such
amendment or termination shall affect the right to any unpaid benefit of any
Eligible Employee whose Termination Date has occurred prior to amendment or
termination of the Plan; and further provided, that for the period of twelve
(12) months following a Change of Control, the Plan shall not be amended and no
Eligible Employee shall be reclassified in any manner that would adversely
affect the interests of the Eligible Employees without the written consent of
the Eligible Employee or Eligible Employees so affected. Subject to the
foregoing, this Plan establishes and vests in each Eligible Employee a
contractual right to the benefits to which such Eligible Employee is entitled
hereunder, enforceable by the Eligible Employee against the Company.
(III) Any action amending or terminating the Plan shall be in writing
and executed by the Chief Executive Officer or Vice President Human Resources
and Administration of the Company.
(C) OTHER SEVERANCE ARRANGEMENTS. The Company reserves the right to make
other arrangements regarding severance benefits in special circumstances.
(D) BINDING EFFECT ON SUCCESSOR TO COMPANY. This Plan shall be binding
upon any successor or assignee, whether direct or indirect, by purchase, merger,
consolidation or otherwise, to all or substantially all the business or assets
of the Company, or upon any successor to the Company as the result of a Change
of Control, and any such successor or assignee shall be required to perform the
Company's obligations under the Plan, in the same manner and to the same extent
that the Company would be required to perform if no such succession or
assignment or Change of Control had taken place. In such event, the term
"Company," as used in the Plan, shall mean the Company as hereinafter defined
and any successor or assignee as described above which by reason hereof becomes
bound by the terms and provisions of this Plan.
SECTION 7. DEFINITIONS.
Capitalized terms used in this Plan, unless defined elsewhere in this Plan,
shall have the following meanings:
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(A) CAUSE means (i) conviction of, a guilty plea with respect to, or a plea
of nolo contendere to a charge that the Eligible Employee has committed a felony
under the laws of the United States or of any state or a crime involving moral
turpitude, including, but not limited to, fraud, theft, embezzlement or any
crime that results in or is intended to result in personal enrichment at the
expense of the Company; (ii) material breach of any agreement entered into
between the Eligible Employee and the Company that impairs the Company's
interest therein; (iii) willful misconduct or gross neglect by the Eligible
Employee of the Eligible Employee's duties; or (iv) engagement in any activity
that constitutes a material conflict of interest with the Company.
(B) CHANGE OF CONTROL means the occurrence of one or more of the following
events: (i) a dissolution or liquidation of the Company; (ii) a merger or
consolidation in which the Company is not the surviving corporation in which the
Company's shareholders immediately prior to the transaction do not hold
beneficial ownership of at least fifty percent (50%) of the outstanding voting
shares of the new or continuing corporation; (iii) a reverse merger in which the
Company is the surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise; (iv) at least a majority of the outstanding corporate shares of the
Company are sold, exchanged or otherwise disposed of, in one transaction or
series of related transactions and the Company's shareholders immediately prior
to such transaction or transactions do not hold beneficial ownership of at least
fifty percent (50%) of the outstanding voting shares of the Company or of the
ownership interests of the entity for which shares of the Company were exchanged
(taking into account only such shareholders' ownership of the Company prior to
the time such transaction or transactions commenced); or (v) the Company sells
all or substantially all of its assets to a single purchaser or to a group of
associated purchasers.
(C) COMPANY means GeneMedicine, inc., a Delaware corporation, and any
successor as provided in Section 6(d) hereof.
(D) ELIGIBLE EMPLOYEE means a full-time, regular employee of the Company
who is not excluded from participating in the Plan.
(E) GOOD REASON means (i) reduction of the Eligible Employee's rate of
compensation (base salary and bonus) as in effect immediately prior to the
effective date of a Change of Control; (ii) except as permitted under any
employment contract with the Eligible Employee, change in the Eligible
Employee's responsibilities, authority, titles or offices resulting in
diminution of position, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith which is remedied by the Company
promptly after notice thereof is given by the Eligible Employee; (iii) request
that the Eligible Employee relocate to a worksite that is more than twenty-five
(25) miles from his prior worksite, unless the Participant accepts such
relocation opportunity, or to be absent from such regular place of employment on
travel status or otherwise to a greater degree than was customary during the six
(6) month period immediately preceding the effective date of a Change of
Control; (iv) except as permitted under any employment contract with the
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Eligible Employee, material reduction in duties; (v) failure or refusal of the
successor company to assume the Company's obligations under this Plan as
required by Section 6(d); or (vi) material breach by the Company or any
successor to the Company of any of the material provisions of this Plan.
(F) PAY means the Eligible Employee's base pay (exclusive of shift
differentials, overtime and other forms of supplemental compensation) at the
rate in effect during the last regularly scheduled payroll period immediately
preceding the Eligible Employee's Termination Date and inclusive of the Eligible
Employee's annualized bonuses, as herein described, and commissions. In order
to be included as Pay, bonuses must be paid under a bonus plan adopted by the
Company. Notwithstanding the foregoing, one-time bonuses paid by the Company
that are not paid under a bonus plan adopted by the Company shall be excluded
from Pay for purposes of this Plan. Examples of such one-time bonuses are sign-
on bonuses or special recognition bonuses. Bonus and/or commissions shall be
annualized by determining the total bonus and/or commissions earned by the
Eligible Employee during the twelve (12) month period immediately preceding the
Eligible Employee's Termination Date (or if appropriate, the last twelve (12)
month evaluation period) and dividing such amount by 24, which is the number of
payroll periods occurring during such twelve (12) month period.
(G) PLAN means this GeneMedicine, inc. Change of Control Severance Plan.
(H) TERMINATION DATE means the last date on which the Eligible Employee is
in active pay status with the Company. A holiday cannot constitute a
Termination Date unless the Eligible Employee actively provided services for the
Company on such holiday.
SECTION 8. NO IMPLIED EMPLOYMENT CONTRACT.
The Plan shall not be deemed (i) to give any employee or other person any
right to be retained in the employ of the Company or (ii) to interfere with the
right of the Company to discharge any employee or other person at any time and
for any reason, which right is hereby reserved.
SECTION 9. LEGAL CONSTRUCTION.
This Plan is intended to be governed by and shall be construed in
accordance with the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and, to the extent not preempted by ERISA, the laws of the State of
Texas.
SECTION 10. CLAIMS, INQUIRIES AND APPEALS.
(A) APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for benefits,
inquiries about the Plan or inquiries about present or future rights under the
Plan must be submitted to the Plan Administrator in writing. The Plan
Administrator is:
6
<PAGE>
GeneMedicine, inc.
8301 New Trails Drive
The Woodlands, TX 77381-4248
(B) DENIAL OF CLAIMS. In the event that any application for benefits is
denied in whole or in part, the Plan Administrator must notify the applicant, in
writing, of the denial of the application, and of the applicant's right to
review the denial. The written notice of denial will be set forth in a manner
designed to be understood by the employee, and will include specific reasons for
the denial, specific references to the Plan provision upon which the denial is
based, a description of any information or material that the Plan Administrator
needs to complete the review and an explanation of the Plan's review procedure.
This written notice will be given to the employee within 90 days after the
Plan Administrator receives the application, unless special circumstances
require an extension of time, in which case, the Plan Administrator has up to an
additional 90 days for processing the application. If an extension of time for
processing is required, written notice of the extension will be furnished to the
applicant before the end of the initial 90-day period.
This notice of extension will describe the special circumstances
necessitating the additional time and the date by which the Plan Administrator
is to render its decision on the application. If written notice of denial of
the application for benefits is not furnished within the specified time, the
application shall be deemed to be denied. The applicant will then be permitted
to appeal the denial in accordance with the Review Procedure described below.
(C) REQUEST FOR A REVIEW. Any person (or that person's authorized
representative) for whom an application for benefits is denied (or deemed
denied), in whole or in part, may appeal the denial by submitting a request for
a review to the Plan Administrator within 60 days after the application is
denied (or deemed denied). The Plan Administrator will give the applicant (or
his or her representative) an opportunity to review pertinent documents in
preparing a request for a review. A request for a review shall be in writing
and shall be addressed to:
GeneMedicine, inc.
ATTN: Plan Administrator for the
Change of Control Severance Plan
8301 New Trails Drive
The Woodlands, TX 77381-4248
A request for review must set forth all of the grounds on which it is based, all
facts in support of the request and any other matters that the applicant feels
are pertinent. The Plan Administrator may require the applicant to submit
additional facts, documents or other material as it may find necessary or
appropriate in making its review.
(D) DECISION ON REVIEW. The Plan Administrator will act on each request
for review within 60 days after receipt of the request, unless special
circumstances require an extension of
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time (not to exceed an additional 60 days), for processing the request for a
review. If an extension for review is required, written notice of the extension
will be furnished to the applicant within the initial 60-day period. The Plan
Administrator will give prompt, written notice of its decision to the applicant.
In the event that the Plan Administrator confirms the denial of the application
for benefits in whole or in part, the notice will outline, in a manner
calculated to be understood by the applicant, the specific Plan provisions upon
which the decision is based. If written notice of the Plan Administrator's
decision is not given to the applicant within the time prescribed in this
Subsection (d), the application will be deemed denied on review.
(E) RULES AND PROCEDURES. The Plan Administrator will establish rules and
procedures, consistent with the Plan and with ERISA, as necessary and
appropriate in carrying out its responsibilities in reviewing benefit claims.
The Plan Administrator may require an applicant who wishes to submit additional
information in connection with an appeal from the denial (or deemed denial) of
benefits to do so at the applicant's own expense.
(F) EXHAUSTION OF REMEDIES. No legal action for benefits under the Plan
may be brought until the claimant (i) has submitted a written application for
benefits in accordance with the procedures described by Section 10(a) above,
(ii) has been notified by the Plan Administrator that the application is denied
(or the application is deemed denied due to the Plan Administrator's failure to
act on it within the established time period), (iii) has filed a written request
for a review of the application in accordance with the appeal procedure
described in Section 10(c) above and (iv) has been notified in writing that the
Plan Administrator has denied the appeal (or the appeal is deemed to be denied
due to the Plan Administrator's failure to take any action on the claim within
the time prescribed by Section 10(d) above).
SECTION 11. BASIS OF PAYMENTS TO AND FROM PLAN.
All benefits under the Plan shall be paid by the Company. The Plan shall
be unfunded, and benefits hereunder shall be paid only from the general assets
of the Company.
SECTION 12. OTHER PLAN INFORMATION.
(A) EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer Identification
Number assigned to the Company (which is the "Plan Sponsor" as that term is used
in ERISA) by the Internal Revenue Service is 76-0355802. The Plan Number
assigned to the Plan by the Plan Sponsor pursuant to the instructions of the
Internal Revenue Service is 501.
(B) ENDING DATE FOR PLAN'S FISCAL YEAR. The date of the end of the fiscal
year for the purpose of maintaining the Plan's records is December 31.
(C) AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service of
legal process with respect to the Plan is Vice President of Human Resources and
Administration, GeneMedicine, inc., 8301 New Trails Drive, The Woodlands, TX
77381-4248. The service of legal process may also be made on the Plan by
serving the Plan Administrator.
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(D) PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" and the "Plan
Administrator" of the Plan is GeneMedicine, inc., 8301 New Trails Drive, The
Woodlands, TX 77381-4248. The Plan Sponsor's and Plan Administrator's telephone
number is (713) 364-1150. The Plan Administrator is the named fiduciary charged
with the responsibility for administering the Plan.
SECTION 13. STATEMENT OF ERISA RIGHTS.
Participants in this Plan (which is a welfare benefit plan sponsored by
GeneMedicine, inc.) are entitled to certain rights and protections under ERISA.
If you are an Eligible Employee, you are considered a participant in the Plan
and, under ERISA, you are entitled to:
(A) Examine, without charge, at the Plan Administrator's office and at
other specified locations, such as work sites, all Plan documents and copies of
all documents filed by the Plan with the U.S. Department of Labor, such as
detailed annual reports;
(B) Obtain copies of all Plan documents and Plan information upon written
request to the Plan Administrator. The Administrator may make a reasonable
charge for the copies;
(C) Receive a summary of the Plan's annual financial report, in the case of
a plan which is required to file an annual financial report with the Department
of Labor. (Generally, all pension plans and welfare plans with 100 or more
participants must file these annual reports.)
In addition to creating rights for Plan participants, ERISA imposes duties
upon the people responsible for the operation of the employee benefit plan. The
people who operate the Plan, called "fiduciaries" of the Plan, have a duty to do
so prudently and in the interest of you and other Plan participants and
beneficiaries.
No one, including your employer or any other person, may fire you or
otherwise discriminate against you in any way to prevent you from obtaining a
Plan benefit or exercising your rights under ERISA. If your claim for a Plan
benefit is denied in whole or in part, you must receive a written explanation of
the reason for the denial. You have the right to have the Plan review and
reconsider your claim.
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive them within
30 days, you may file suit in a federal court. In such a case, the court may
require the Plan Administrator to provide the materials and pay you up to $100 a
day until you receive the materials, unless the materials were not sent because
of reasons beyond the control of the Plan Administrator. If you have a claim
for benefits that is denied or ignored, in whole or in part, you may file suit
in a state or federal court. If it should happen that the Plan fiduciaries
misuse the Plan's money, or if you are discriminated against for asserting your
rights, you may seek assistance from the U.S. Department of Labor, or you may
file suit in a federal court. The court will decide who should pay court costs
and legal fees. If you are successful, the court may order the person you have
sued to pay these costs and
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fees. If you lose, the court may order you to pay these costs and fees, for
example, if it finds your claim is frivolous.
If you have any questions about the Plan, you should contact the Plan
Administrator. If you have any questions about your rights under ERISA, you
should contact the nearest area office of the U.S. Labor - Management Services
Administration, Department of Labor.
SECTION 14. EXECUTION.
To record the adoption of the Plan as set forth herein, effective as of May
17, 1996, GeneMedicine, inc. has caused its duly authorized officer to execute
the same this 11th day of December, 1996.
GENEMEDICINE, INC.
By:
---------------------------
Title:
------------------------
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BENEFITS SCHEDULE
FOR THE
GENEMEDICINE INC.
CHANGE OF CONTROL SEVERANCE PLAN
EXECUTIVE OFFICERS AND VICE PRESIDENTS
THE COMPANY SHALL DETERMINE IN ITS SOLE AND ABSOLUTE DISCRETION IN WHICH
CATEGORY AN ELIGIBLE EMPLOYEE SHALL BE PLACED FOR PURPOSES OF RECEIVING
SEVERANCE BENEFITS UNDER THIS PLAN. THE COMPANY'S DETERMINATION SHALL BE FINAL
AND SHALL BE BINDING AND CONCLUSIVE ON ALL PERSONS. THE COMPANY RETAINS THE
RIGHT TO RECLASSIFY AN ELIGIBLE EMPLOYEE PRIOR TO THE TIME OF THE OCCURRENCE OF
A CHANGE OF CONTROL, AND THEREAFTER TO THE EXTENT PERMITTED BY THE PLAN.
1. The cash severance benefit payable under this Plan for Executive Officers
shall be a lump sum payment equal to twelve (12) months of Pay.
2. An Eligible Employee who becomes eligible to receive benefits under this
Plan shall become vested in the Eligible Employee's nonvested stock options, if
any, that were previously granted to the Eligible Employee under the Company's
discretionary stock compensation plans, including, without limitation, the
GeneMedicine, inc. 1993 Stock Option Plan, in accordance with the following
schedule based upon the number of years the Eligible Employee has been employed
by the Company:
YEARS EMPLOYED PERCENTAGE TO BE VESTED IN NONVESTED OPTIONS
0 to less than 2 50%
2 to less than 4 75%
4 plus 100%
3. For purposes of calculating years of employment with the Company for stock
option vesting, periods during which the Eligible Employee was not working but
was paid under the Company's paid time off policy ("Paid Time Off") will be
counted in calculating years of employment. Periods during which the Eligible
Employee was not working and was not paid under Paid Time Off, such as leave
without pay, leaves of absence or sabbaticals, will not be counted in
calculating years of employment.
DEFINITIONS:
For purposes of this Benefits Schedules, the following definitions shall apply:
<PAGE>
EXECUTIVE OFFICERS shall mean those Eligible Employees who are appointed
annually as officers by the Board of Directors of the Company and who are
serving as officers of the Company as of the effective date of a Change in
Control.
VICE PRESIDENTS shall mean those Eligible Employees whose employment title is or
includes the term "Vice President" as reflected on the personnel records of the
Company as of the effective date of a Change in Control.
<PAGE>
BENEFITS SCHEDULE
FOR THE
GENEMEDICINE, INC.
CHANGE OF CONTROL SEVERANCE PLAN
DIRECTORS AND KEY EMPLOYEES
THE COMPANY SHALL DETERMINE IN ITS SOLE AND ABSOLUTE DISCRETION IN WHICH
CATEGORY AN ELIGIBLE EMPLOYEE SHALL BE PLACED FOR PURPOSES OF RECEIVING
SEVERANCE BENEFITS UNDER THIS PLAN. THE COMPANY'S DETERMINATION SHALL BE FINAL
AND SHALL BE BINDING AND CONCLUSIVE ON ALL PERSONS. THE COMPANY RETAINS THE
RIGHT TO RECLASSIFY AN ELIGIBLE EMPLOYEE PRIOR TO THE TIME OF THE OCCURRENCE OF
A CHANGE OF CONTROL, AND THEREAFTER TO THE EXTENT PERMITTED BY THE PLAN.
1. The cash severance benefit payable under this Plan for Scientific Directors
and Key Employees (as determined by the Company) shall be a lump sum payment
equal to six (6) months of Pay.
2. An Eligible Employee who becomes eligible to receive benefits under this
Plan shall become vested in the Eligible Employee's nonvested stock options, if
any, that were previously granted to the Eligible Employee under the Company's
discretionary stock compensation plans, including, without limitation, the
GeneMedicine, inc. 1993 Stock Option Plan, in accordance with the following
schedule based upon the number of years the Eligible Employee has been employed
by the Company:
YEARS EMPLOYED PERCENTAGE TO BE VESTED IN NONVESTED OPTIONS
0 to less than 2 50%
2 to less than 4 75%
4 plus 100%
3. For purposes of calculating years of employment with the Company for stock
option vesting, periods during which the Eligible Employee was not working but
was paid under the Company's paid time off policy ("Paid Time Off") will be
counted in calculating years of employment. Periods during which the Eligible
Employee was not working and was not paid under Paid Time Off, such as leave
without pay, leaves of absence or sabbaticals, will not be counted in
calculating years of employment.
DEFINITIONS:
For purposes of this Benefits Schedule, the following definitions shall apply:
<PAGE>
DIRECTORS shall mean those Eligible Employees whose employment title is or
includes the term "Director" as reflected on the personnel records of the
Company as of the effective date of a Change in Control. The term "Director" as
used herein shall not refer to or include the members of the Board of Directors
of the Company.
KEY EMPLOYEE shall mean any Eligible Employee who is designated by the Company,
in the Company's sole and absolute discretion, to be a Key Employee as of the
effective date of a Change in Control.
<PAGE>
BENEFITS SCHEDULE
FOR THE
GENEMEDICINE, INC.
CHANGE OF CONTROL SEVERANCE PLAN
1. The cash severance benefit payable under this Plan for Employees shall be a
lump sum payment equal to one (1) month of Pay for each year the Employee was
employed by the Company, provided however that the cash severance benefit shall
not exceed six (6) months of Pay. Partial years of employment will receive pro-
rated benefits. For example, an Employee who has been employed by the Company
for three (3) years and five (5) months will receive three and five-twelfths (3
5/12) months of Pay.
2. An Eligible Employee who becomes eligible to receive benefits under this
Plan shall become vested in the Eligible Employee's nonvested stock options, if
any, that were previously granted to the Eligible Employee under the Company's
discretionary stock compensation plans, including, without limitation, the
GeneMedicine, inc. 1993 Stock Option Plan, in accordance with the following
schedule based upon the number of years the Eligible Employee has been employed
by the Company:
YEARS EMPLOYED PERCENTAGE TO BE VESTED IN NONVESTED OPTIONS
0 to less than 2 50%
2 to less than 4 75%
4 plus 100%
3. For purposes of calculating years of employment with the Company for
benefit calculation and stock option vesting, periods during which the Eligible
Employee was not working but was paid under the Company's paid time off policy
("Paid Time Off") will be counted in calculating years of employment. Periods
during which the Eligible Employee was not working and was not paid under Paid
Time Off, such as leave without pay, leaves of absence or sabbaticals, will not
be counted in calculating years of employment.
<PAGE>
EXHIBIT 11.1
GENEMEDICINE, INC.
Calculation of Weighted Average Shares Outstanding
Period for the Twelve Months Ended Dec 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
0 1-Jan-96 12,036,415 12,036,415 x 3 = 36,109,245
950 4-Jan-96 12,037,365 12,037,365 x 5 = 60,186,825
1,558 9-Jan-96 12,038,923 12,038,923 x 9 = 108,350,307
4,763 18-Jan-96 12,043,686 12,043,686 x 4 = 48,174,744
423 22-Jan-96 12,044,109 12,044,109 x 9 = 108,396,981
238 31-Jan-96 12,044,347 12,044,347 x 1 = 12,044,347
418,629 1-Feb-96 12,462,976 12,462,976 x 0 = 0
300 1-Feb-96 12,463,276 12,463,276 x 0 = 0
350 1-Feb-96 12,463,626 12,463,626 x 0 = 0
47 1-Feb-96 12,463,673 12,463,673 x 5 = 62,318,365
300 6-Feb-96 12,463,973 12,463,973 x 0 = 0
1,850 6-Feb-96 12,465,823 12,465,823 x 0 = 0
300 6-Feb-96 12,466,123 12,466,123 x 1 = 12,466,123
400 7-Feb-96 12,466,523 12,466,523 x 1 = 12,466,523
310 8-Feb-96 12,466,833 12,466,833 x 4 = 49,867,332
94 12-Feb-96 12,466,927 12,466,927 x 0 = 0
714 12-Feb-96 12,467,641 12,467,641 x 3 = 37,402,923
47 15-Feb-96 12,467,688 12,467,688 x 8 = 99,741,504
952 23-Feb-96 12,468,640 12,468,640 x 10 = 124,686,400
250 4-Mar-96 12,468,890 12,468,890 x 7 = 87,282,230
62,287 11-Mar-96 12,531,177 12,531,177 x 4 = 50,124,708
47 15-Mar-96 12,531,224 12,531,224 x 5 = 62,656,120
423 20-Mar-96 12,531,647 12,531,647 x 13 = 162,911,411
15,000 2-Apr-96 12,546,647 12,546,647 x 1 = 12,546,647
364 3-Apr-96 12,547,011 12,547,011 x 0 = 0
94 3-Apr-96 12,547,105 12,547,105 x 1 = 12,547,105
238 4-Apr-96 12,547,343 12,547,343 x 8 = 100,378,744
500 12-Apr-96 12,547,843 12,547,843 x 3 = 37,643,529
47 15-Apr-96 12,547,890 12,547,890 x 0 = 0
185 15-Apr-96 12,548,075 12,548,075 x 4 = 50,192,300
2,857 19-Apr-96 12,550,932 12,550,932 x 4 = 50,203,728
282 23-Apr-96 12,551,214 12,551,214 x 1 = 12,551,214
650 24-Apr-96 12,551,864 12,551,864 x 2 = 25,103,728
10,000 26-Apr-96 12,561,864 12,561,864 x 0 = 0
20,104 26-Apr-96 12,581,968 12,581,968 x 3 = 37,745,904
282 29-Apr-96 12,582,250 12,582,250 x 0 = 0
26,301 29-Apr-96 12,608,551 12,608,551 x 0 = 0
171,453 29-Apr-96 12,780,004 12,780,004 x 11 = 140,580,044
2,900 10-May-96 12,782,904 12,782,904 x 3 = 38,348,712
300 13-May-96 12,783,204 12,783,204 x 7 = 89,482,428
212 20-May-96 12,783,416 12,783,416 x 3 = 38,350,248
300 23-May-96 12,783,716 12,783,716 x 5 = 63,918,580
500 28-May-96 12,784,216 12,784,216 x 1 = 12,784,216
600 29-May-96 12,784,816 12,784,816 x 1 = 12,784,816
2,122 30-May-96 12,786,938 12,786,938 x 4 = 51,147,752
238 3-Jun-96 12,787,176 12,787,176 x 11 = 140,658,936
35,420 14-Jun-96 12,822,596 12,822,596 x 3 = 38,467,788
1,428 17-Jun-96 12,824,024 12,824,024 x 11 = 141,064,264
57,705 28-Jun-96 12,881,729 12,881,729 x 3 = 38,645,187
1,309 1-Jul-96 12,883,038 12,883,038 x 0 = 0
517 1-Jul-96 12,883,555 12,883,555 x 2 = 25,767,110
174 3-Jul-96 12,883,729 12,883,729 x 0 = 0
1,553 3-Jul-96 12,885,282 12,885,282 x 13 = 167,508,666
4,522 16-Jul-96 12,889,804 12,889,804 x 7 = 90,228,628
94 23-Jul-96 12,889,898 12,889,898 x 8 = 103,119,184
71,428 31-Jul-96 12,961,326 12,961,326 x 6 = 77,767,956
238 6-Aug-96 12,961,564 12,961,564 x 20 = 259,231,280
300 26-Aug-96 12,961,864 12,961,864 x 1 = 12,961,864
425 27-Aug-96 12,962,289 12,962,289 x 3 = 38,886,867
4,156 30-Aug-96 12,966,445 12,966,445 x 3 = 38,899,335
1,898 2-Sep-96 12,968,343 12,968,343 x 8 = 103,746,744
6,692 10-Sep-96 12,975,035 12,975,035 x 0 = 0
14,879 10-Sep-96 12,989,914 12,989,914 x 7 = 90,929,398
400 17-Sep-96 12,990,314 12,990,314 x 13 = 168,874,082
188 30-Sep-96 12,990,502 12,990,502 x 2 = 25,981,004
238 2-Oct-96 12,990,740 12,990,740 x 5 = 64,953,700
4,578 7-Oct-96 12,995,318 12,995,318 x 8 = 103,962,544
282 15-Oct-96 12,995,600 12,995,600 x 1 = 12,995,600
10,264 16-Oct-96 13,005,864 13,005,864 x 0 = 0
2,856 16-Oct-96 13,008,720 13,008,720 x 12 = 156,104,640
1,428 28-Oct-96 13,010,148 13,010,148 x 44 = 572,446,512
564 11-Dec-96 13,010,712 13,010,712 x 1 = 13,010,712
238 12-Dec-96 13,010,950 13,010,950 x 0 = 0
141 12-Dec-96 13,011,091 13,011,091 x 1 = 13,011,091
1,190 13-Dec-96 13,012,281 13,012,281 x 11 = 143,135,091
1,494 24-Dec-96 13,013,775 13,013,775 x 3 = 39,041,325
348 27-Dec-96 13,014,123 13,014,123 x 3 = 39,042,369
3,200 30-Dec-96 13,017,323 13,017,323 x 1 = 13,017,323
51,046 31-Dec-96 13,068,369 13,068,369 x 0 = 0
9,000 31-Dec-96 13,077,369 13,077,369 x 0 = 0
365 days 4,654,954,983 / 365 12,753,301
==============
Loss Per share
---- ---------
10,652,972 $0.84
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8 dated September 6, 1994.
The Woodlands, Texas
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,145,404
<SECURITIES> 28,726,602
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,042,459
<PP&E> 4,810,334
<DEPRECIATION> (1,811,918)
<TOTAL-ASSETS> 34,049,270
<CURRENT-LIABILITIES> 1,940,638
<BONDS> 0
0
3,750
<COMMON> 13,077
<OTHER-SE> 29,912,442
<TOTAL-LIABILITY-AND-EQUITY> 34,049,270
<SALES> 0
<TOTAL-REVENUES> 6,584,462
<CGS> 0
<TOTAL-COSTS> 17,133,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,187
<INCOME-PRETAX> (10,652,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,652,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,652,972)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.84)
</TABLE>
