<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 of (IRS Employer
incorporation or organization) Identification No.)
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)
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
--- ---
As of November 5, 1998, there were outstanding 14,579,376 and 3,750,000 shares
of Common Stock and Series B Preferred Stock, par value $.001, respectively,
of the registrant.
Page 1 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE..................................................................................... 1
TABLE OF CONTENTS.............................................................................. 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1998 and December 31, 1997............................. 3
Statements of Operations for the three and nine months ended September 30, 1998 and
September 30, 1997, and for the period from inception (January 2, 1992)
through September 30, 1998................................................................ 4
Statements of Cash Flows for the nine months ended September 30, 1998 and
September 30, 1997, and for the period from inception (January 2, 1992)
through September 30, 1998................................................................ 5
Notes to Financial Statements............................................................. 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 8
PART II. OTHER INFORMATION.................................................................... 11
SIGNATURES..................................................................................... 12
</TABLE>
Page 2 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................ $ 1,201,190 $ 873,180
Short-term investments........................................... 17,218,089 23,708,845
Prepaid expenses and other....................................... 242,307 175,128
------------ ------------
Total current assets.......................................... 18,661,586 24,757,153
------------ ------------
Equipment, furniture and leasehold improvements, net................... 2,777,353 3,220,987
Deposits and other assets.............................................. 3,707 9,195
------------ ------------
Total Assets........................................................... $ 21,442,646 $ 27,987,335
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities......................... $ 957,654 $ 1,454,986
Deferred grant revenue............................................ - 89,737
Current portion of capital lease obligations...................... 108,079 270,166
------------ ------------
Total current liabilities...................................... 1,065,733 1,814,889
------------ ------------
Long-term Liabilities:
Deferred contract revenue......................................... 3,669,970 2,919,970
Capital lease obligations, net of current portion................. - 54,814
------------ ------------
Total long-term liabilities.................................... 3,669,970 2,974,784
------------ ------------
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;
14,579,376 and 13,911,422 shares issued and outstanding........ 14,579 13,911
Additional paid-in capital........................................ 74,262,669 70,097,651
Deferred compensation............................................. - (56,348)
Deficit accumulated during the development stage.................. (57,574,055) (46,861,302)
------------ ------------
Total stockholders' equity..................................... 16,706,943 23,197,662
------------ ------------
Total Liabilities and Stockholders' Equity............................. $ 21,442,646 $ 27,987,335
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Inception
Three months ended Nine months ended (January 2, 1992)
September 30, September 30, through
--------------------------------- ----------------------------------- September 30,
1998 1997 1998 1997 1998
--------------- -------------- --------------- --------------- ----------------
<S> <C> <C> <C>
Revenues:
Contract revenue................. $ 1,045,000 $ 1,000,000 $ 3,067,500 $ 3,500,000 $ 15,247,500
Research and development
grant revenue.................. - 120,000 219,181 509,000 1,745,578
Interest income.................. 286,369 406,143 967,288 1,272,552 6,665,359
--------------- -------------- --------------- --------------- ----------------
Total revenues................. 1,331,369 1,526,143 4,253,969 5,281,552 23,658,437
Expenses:
Research and development......... 3,788,791 3,299,805 11,510,386 10,068,103 60,998,134
General and administrative....... 1,172,758 1,192,736 3,435,071 3,384,489 19,717,037
Interest expense................. 5,758 13,394 21,265 50,186 517,321
--------------- -------------- --------------- --------------- ----------------
Total expenses................. 4,967,307 4,505,935 14,966,722 13,502,778 81,232,492
--------------- -------------- --------------- --------------- ----------------
Net loss............................ $ (3,635,938) $ (2,979,792) $ (10,712,753) $ (8,221,226) $ (57,574,055)
=============== ============== =============== =============== ================
Loss per share...................... $ (0.25) (0.22) (0.74) (0.60)
=============== ============== =============== ===============
Shares used in computing
loss per share................... 14,578,666 13,800,544 14,469,110 13,656,360
=============== ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4 of 12
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Inception
Nine months ended (January 2, 1992)
September 30, through
------------------------------- September 30,
1998 1997 1998
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................$ (10,712,753) $ (8,221,226) $ (57,574,055)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................................... 799,702 727,924 3,577,679
Issuance of convertible debt for noncash consideration............ - - 905,000
Issuance of stock for noncash consideration....................... - - 107,644
Compensation expense related to stock plans....................... 56,348 290,866 1,777,708
Loss on equipment retirements..................................... - - 7,565
Changes in assets and liabilities:
(Increase) in prepaid expenses and other assets................. (61,691) (156,235) (242,886)
Increase (decrease) in accounts payable and accrued liabilities. (497,332) (432,627) 957,654
Increase in deferred revenue and deferred contract revenue...... 660,263 710,000 3,669,971
-------------- -------------- --------------
Net cash provided by (used in) operating activities........... (9,755,463) (7,081,298) (46,813,720)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment, furniture and leasehold improvements......... (356,068) (1,102,548) (6,365,726)
Net sales (purchases) of short-term investments..................... 6,490,756 4,010,769 (17,218,089)
-------------- -------------- --------------
Net cash used in investing activities......................... 6,134,688 2,908,221 (23,583,815)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations........... - - 2,030,823
Repayment of notes payable and capital lease obligations............ (216,901) (289,434) (1,791,744)
Advance on line of credit........................................... - - 750,000
Proceeds from issuance of preferred stock, net...................... - - 22,264,465
Proceeds from issuance of common stock, net......................... 4,165,686 4,575,466 48,345,181
-------------- -------------- --------------
Net cash provided by financing activities..................... 3,948,785 4,286,032 71,598,725
-------------- -------------- --------------
Net increase in cash and cash equivalents............................... 328,010 112,955 1,201,190
Cash and cash equivalents, beginning of period.......................... 873,180 2,145,404 -
-------------- -------------- --------------
Cash and cash equivalents, end of period................................$ 1,201,190 $ 2,258,359 $ 1,201,190
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................$ 21,265 $ 50,186 $ 454,318
Supplemental schedule of noncash financing activity:
Issuance of convertible debt for technology.........................$ - $ - $ 905,000
Conversion of debt to preferred and common stock....................$ - $ - $ 1,786,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
GeneMedicine, Inc. ("GeneMedicine" or 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 ability to establish and maintain collaborative arrangements for
research, development and commercialization of products 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.
The accompanying interim financial statements are unaudited and reflect all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. Results for interim periods are not necessarily indicative
of the results to be expected for the entire year ending December 31, 1998.
These financial statements should be read in conjunction with the Company's
audited financial statements included with the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and its
components. Comprehensive income is the total of net income and all other non-
owner changes in equity. For the period from inception (January 2, 1992) through
September 30, 1998, the only component of comprehensive income for the Company
is net income. Adopting Statement No. 130 had no effect on the Company's
financial position or results of operation.
2. COLLABORATIVE AGREEMENTS
Effective February 1995, the Company and Corange International Ltd.
("Corange"), the parent company of 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, Corange agreed to, among
Page 6 of 12
<PAGE>
other things, invest $20 million in the common equity of the Company at $4
million per year. The first four $4 million equity investments were made in July
1995, February 1996, February 1997 and February 1998 in which 444,444, 418,629,
533,333 and 533,333 common shares were issued at $9.00, $9.56, $7.50 and $7.50
per share, respectively. In August 1998, the agreement was amended to extend the
field of the alliance and the research term of the collaboration. In connection
with this amendment, GeneMedicine agreed to forgo the requirement of the equity
purchase by Corange due on February 1, 1999, and Corange agreed to pay the
Company certain additional research and milestone payments.
3. SUBSEQUENT EVENTS
On October 24, 1998, GeneMedicine entered into a definitive merger
agreement (the "Merger Agreement") with Megabios Corp. ("Megabios") pursuant to
which the Company will become a wholly-owned subsidiary of Megabios in a stock
for stock merger (the "Merger") intended to qualify as a tax-free
reorganization. Under the terms of the Merger Agreement, which was unanimously
approved by the boards of directors of both companies, each share of
GeneMedicine Common Stock outstanding at the time of the Merger will be
exchanged, at a fixed exchange ratio of 0.571, for newly issued shares of Common
Stock of Megabios. This will result in the issuance of approximately 9.1 million
additional Megabios shares. In addition, all outstanding employee stock options
of GeneMedicine will convert into Megabios options at the same exchange ratio.
The proposed transaction will be accounted for as a purchase, and is subject to
the approval of the stockholders of both companies and appropriate government
agencies, as well as the satisfaction or waiver of customary closing conditions.
The transaction is expected to close in the first calendar quarter of 1999.
Pursuant to its Amended and Restated Certificate of Incorporation, the
Company has provided Syntex Corporation written notice of the Company's
intention to convert all outstanding shares of its Series B Preferred Stock into
1,071,428 shares of its Common Stock, effective November 10, 1998.
Page 7 of 12
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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 GeneMedicine, Inc.'s development and
technological uncertainty, dependence on collaborative partners and licenses,
the failure of existing or future partnerships to be successful, future capital
needs and uncertainty of additional funding, uncertainty of patent protection,
uncertainty of government regulatory requirements, level of competition and
rapid technological change, as well as those set forth in this section and in
the section entitled "Risk Factors" and elsewhere in the Company's Form 10-K for
the year ended December 31, 1997.
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 to date 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 September 30,
1998, the Company's accumulated deficit was approximately $57.6 million.
RESULTS OF OPERATIONS
Revenues of $1.3 million and $4.3 million were recorded for the three and
nine months ended September 30, 1998, respectively, which consisted primarily of
contract revenue of $1.0 million and $3.1 million, and interest income of $0.3
million and $1.0 million, respectively. These results compare with revenues of
$1.5 million and $5.3 million for the three and nine months ended September 30,
1997, respectively, which consisted primarily of contract revenue of $1.0
million and $3.5 million, and interest income of $0.4 million and $1.3 million,
respectively. Contract revenues in each respective period primarily resulted
from a corporate partnership with certain Boehringer Mannheim subsidiaries
("Boehringer Mannheim") of Corange International Ltd. ("Corange"), which was
acquired by Roche Holding Ltd. in March 1998, to develop non-viral gene
medicines using certain genes to treat human cancer indications. The decrease
in contract revenue for the first nine months of 1998 compared to the same
period in 1997 was due to the recognition in 1997 of a $0.5 million milestone
payment from Boehringer Mannheim for achieving clearance from the U.S. Food and
Drug Administration to commence a Phase I clinical trial using the Company's IL-
2 Gene Medicine, which GeneMedicine is developing for the treatment of head and
neck cancer.
The Company's research and development expenses for the quarter ended
September 30, 1998 were $3.8 million, compared to $3.3 million for the third
quarter of 1997. For the nine months ended September 30, 1998, research and
development expenses increased to $11.5 million from $10.1 million for the same
period in 1997. These increases 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 the Company's research and
development activities has been driven primarily by the progression of research
in the field of genetic
Page 8 of 12
<PAGE>
vaccines and clinical development efforts in the field of cancer. The Company
anticipates that research and development expenditures will increase over the
next several years as it continues to expand its research and product
development efforts.
General and administrative expenses remained relatively unchanged at $1.2
million and $3.4 million for the three and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997.
Losses per share for the three and nine months ended September 30, 1998
were $0.25 and $0.74, respectively, as compared to losses per share of $0.22 and
$0.60 for the same periods in 1997. The increases in the Company's net loss per
share for the three and nine months ended September 30, 1998 were primarily the
result of decreased contract revenue and increased research and development
expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private and public sales of its equity securities, interest income on
invested funds and revenues from corporate alliances. Through September 30,
1998, the Company had received approximately $70.6 million in net proceeds from
sales of its equity securities. At September 30, 1998, the Company had working
capital of $17.6 million and cash, cash equivalents and short-term investments
of $18.4 million. In addition, in October 1998 the Company received a $1.25
million, scheduled contract research payment from Boehringer Mannheim.
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 the ability to maintain existing and establish
additional corporate partnerships, 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 anticipated funding from its corporate alliance
with Boehringer Mannheim, will enable the Company to maintain its current and
planned operations into the first quarter of 2000. 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. If the merger with Megabios
Corp. described in Note 2 to the Notes to Financial Statements included
elsewhere herein is not consummated, the Company intends to seek additional
funding through public or private financing, research and development
arrangements with potential corporate partners, or from other sources to augment
its current cash position. 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
Page 9 of 12
<PAGE>
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, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. 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. There can be no assurance that any collaboration will be continued
or result in successful commercialized products.
The Company is currently developing and executing a plan to insure that its
system and software infrastructure are Year 2000 compliant. Key financial
information and operational systems will be assessed and plans will be developed
to address required systems modifications. Given the relatively small size of
the Company's systems and the Company's predominantly new hardware, software and
operating systems, management does not anticipate any significant delays in
becoming Year 2000 compliant. However, the Company is unable to control whether
its current and future strategic partners and vendors systems are Year 2000
compliant. At this time management does not believe that Year 2000 changes will
have a material impact on the Company's business, financial condition or results
of operations.
Page 10 of 12
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Pursuant to recent changes to the proxy rules, unless a stockholder
who wishes to bring a matter before the stockholders at the Company's 1999
annual meeting of stockholders notifies the Company of such matter prior to
March 21, 1999, management will have discretionary authority to vote all shares
for which it has proxies in opposition to such matter.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit Number Description
-------------- -----------
<S> <C> <C>
10.24 Management Change of Control Incentive Plan dated July 1, 1998
+10.25 Binding Letter Agreement between Registrant and Corange
International Limited dated August 4, 1998
27 Financial Data Schedule
(b) On July 27, 1998 and August 3, 1998 the Registrant filed a current report on Form 8-K and
Form 8-K/A, respectively, to report a change in Registrant's certifying accountant.
- -----------------
+ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted
portions will be filed separately with the Securities and Exchange Commission.
</TABLE>
Page 11 of 12
<PAGE>
GENEMEDICINE, INC.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENEMEDICINE, INC.
Date: 11/06/1998 By: John M. Dodson
---------------------------------------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the Registrant's
Chief Accounting Officer)
Page 12 of 12
<PAGE>
EXHIBIT 10.24
GENEMEDICINE, INC.
MANAGEMENT CHANGE OF CONTROL INCENTIVE PLAN
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
employees of the Company may be given an opportunity to participate in the
proceeds of a Change of Control transaction.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now employees of the Company, to secure and retain the services
of new employees, and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
2. DEFINITIONS.
(a) "ACQUISITION POOL" means an amount of cash and/or securities,
determined pursuant to the Plan, equal to 3% of the Net Proceeds received by the
Company upon a Change of Control.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CHANGE OF CONTROL" means the occurrence of any one or more of the
following events: (i) a merger or consolidation in which the Company is not the
surviving corporation and in which the Company's stockholders 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;
(ii) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's common and preferred 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; (iii) the sale, exchange
or other disposition, in one transaction or a series of related transactions, of
at least a majority of the outstanding shares of the Company's common and
preferred stock (determined on an as-converted basis) in which the Company's
stockholders 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 such
shares are exchanged (taking into account only such stockholders' ownership of
the Company prior to the time such transaction or transactions commenced); (iv)
the Company sells all or substantially all of its assets to a single purchaser
or to a group of associated purchasers; or (v) any other transaction, or series
of related transactions, which, in effect, result in a change of control of the
Company, as evidenced, for example, by a change in a majority of the members of
the Board of Directors or the power to effect such a change, all as determined
by the Board of Directors as constituted before such change.
<PAGE>
(d) "CLOSING" means the closing of a transaction constituting a Change of
Control.
(e) "COMPANY" means GeneMedicine, Inc., a Delaware corporation.
(f) "KEY EMPLOYEE" means any person employed by the Company who is
designated by the Board from time to time as a Key Employee. The individuals
currently designated by the Board as Key Employees are: Eric Tomlinson, Norman
Hardman, Alain Rolland, Joseph Bossart, Richard Waldron, and Kathryn Stankis.
(g) "NET PROCEEDS" means the sum of all cash and/or the market value of
any securities received by the Company in connection with a transaction, reduced
(1) by the selling and other expenses incurred in connection with such
transaction; and (2) by the liabilities of the Company, if any, retained by the
Company's stockholders following such transaction (not including any liabilities
created as a result of the establishment of this Plan). Any contingent payments
payable in connection with any transaction, less any related expenses and
liabilities as discussed above, shall be included in the determination of Net
Proceeds. In the event that all or part of the consideration received by the
Company in a transaction is in the form of securities, the Net Proceeds received
by the Company shall be deemed to include the fair market value of such
securities, determined on the same basis on which such securities were valued in
the transaction.
(h) "PLAN" means this GeneMedicine, Inc. Management Change in Control
Incentive Plan.
3. ADMINISTRATION.
(a) The Plan shall be interpreted and administered by the Board, whose
actions shall be final and binding on all persons, including each employee.
(b) The Board, in its sole discretion, shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:
(1) To determine from time to time which employees of the Company
shall be designated as Key Employees entitled to participate in the Plan. This
authority shall also include the ability to determine that one or more employees
previously designated as Key Employees shall no longer be entitled to
participate in the Plan.
(2) To determine whether or not a transaction or related series of
transactions results in a Change of Control.
(3) To establish, change and adjust, in its sole discretion except to
the extent specified in the Plan, the percentage allocation of the cash or
securities in the Acquisition Pool to each of the Key Employees.
(c) The Board may delegate some or all of its powers and responsibilities
under the Plan either to a committee of the Board or to one or more officers of
the Company.
2
<PAGE>
4. ALLOCATION OF ACQUISITION POOL.
(a) The allocation of the Acquisition Pool to individuals designated as
Key Employees as of the date hereof shall be as follows:
(1) Eric Tomlinson 30%
(2) Norman Hardman 21%
(3) Alain Rolland 11%
(4) Joseph Bossart 8%
(5) Richard Waldron 8%
(6) Kathryn Stankis 7%;
(b) Under no circumstances will the Key Employees specified in (a)(1) and
(a)(2) above receive an allocation or distribution pursuant to this Plan in
excess of $700,000; and (ii) no other employee shall receive an allocation or
distribution in excess of two (2) times his or her base salary as in effect as
of the Closing.
(c) Other employees eligible to receive benefits under this Plan shall
receive allocations from 15% of the Acquisition Pool.
5. DISTRIBUTIONS.
(a) If the conditions for distributions set forth in the Plan are
satisfied, each employee shall be entitled to receive, upon the Closing, a
distribution equal to (i) such employee's allocation of the Acquisition Pool
times (ii) the aggregate dollar value of the Acquisition Pool, subject to the
limitations set forth in Section 4 above. Such distributions shall be made in
cash and/or securities as determined by the Board. While generally each
participant will receive his or her distributive share of the Acquisition Pool
in the same form or forms of payment and in the same proportions as that made by
the purchaser(s) upon the Change of Control, the Board shall have the discretion
to restructure the form and timing of payment of such distributions to
accommodate the business objectives of the Company in the Change of Control,
which may include, but not be limited to, (1) consideration of the tax
consequences to the Company, its stockholders, and the Plan's participants, (2)
financial accounting consequences for the Company or the acquiror, and (3)
satisfaction of any applicable securities law requirements.
(b) An individual must be an employee of the Company at the time of the
Closing in order to receive his or her allocation of the Acquisition Pool.
(c) Subject to any adjustments made under Section 5(a) above, if any,
payments to employees under the Plan shall be made within 30 days of the
Closing, except for payments to be made with respect to contingent payments
payable in connection with a Change of Control, which shall be made as soon as
administratively reasonable following the receipt by the Company of such
payments.
3
<PAGE>
(d) Anything in the Plan to the contrary notwithstanding, in the event it
shall be determined that any payment or distribution by the Company to or for
the benefit of an employee (whether paid or payable or distributed or
distributable pursuant to the terms of the Plan or otherwise) (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
Section 280G of the Internal Revenue Code (the "Code") and would cause the
employee to be liable for an excise tax pursuant to Section 4999 of the Code,
then the aggregate present value of amounts payable or distributable under this
Plan may be reduced to the Reduced Amount. The "Reduced Amount" shall be an
amount expressed in present value which maximizes the aggregate present value of
benefits without causing any Payment to be nondeductible by the Company because
of Section 280G of the Code or to create an excise tax liability under
Section 4999 of the Code. For purposes of this Paragraph (d), present value
shall be determined in accordance with Section 280G(d)(4) of the Code. The
decisions as to whether or not to reduce the benefits to the Reduced Amount, and
as to the manner of any such reduction, shall be made by the Company in its sole
discretion, and such decisions shall be binding upon the Company and each
employee.
6. AMENDMENT OR TERMINATION OF THE PLAN.
(a) The Board at any time, and from time to time prior to the Closing, may
amend or terminate the Plan.
(b) The Plan shall automatically terminate upon the earlier to occur of
(i) May 17, 2000 or (ii) the Closing and completion of all payments under the
terms of the Plan.
7. NO GUARANTEE OF FUTURE SERVICE.
Selection of an individual to participate in the Plan shall not provide any
guarantee or promise of continued service of the participant with the Company,
and the Company retains the right to terminate the employment of any employee at
any time, with or without cause, for any reason or no reason, except as may be
restricted by law or contract.
8. TAX WITHHOLDING
The Company shall withhold from any distributions under the Plan any amount
required to satisfy the Company's income and employment tax withholding
obligations under Federal and State Law.
9. CHOICE OF LAW
All questions concerning the construction, validation and interpretation of
the Plan will be governed by the law of the State of Texas.
10. HEADINGS
The headings in the Plan are inserted for convenience only and shall not be
deemed to constitute a part hereof nor to affect the meaning thereof.
4
<PAGE>
The Plan is adopted by an authorized officer of the Company effective as of
the 1st day of July, 1998.
GENEMEDICINE, INC.
By:Kathryn Stankis
---------------
Its:Vice President, Human Resources
-------------------------------
5
<PAGE>
-1-
CONFIDENTIAL TREATMENT
REQUESTED UNDER 17 C.F.R.
SECTIONS 200.80(b)(4), 200.83 AND
240.24b-2. * INDICATES OMITTED
MATERIAL THAT IS THE SUBJECT OF
A CONFIDENTIAL TREATMENT
REQUEST THAT IS FILED
SEPARATELY WITH THE
COMMISSION
EXHIBIT 10.25
BINDING LETTER AGREEMENT
This Letter Agreement is made and entered into this August 4, 1998 by and
between Corange International Limited, a Bermudan corporation having its
principal place of business at P.O. Box HM 2026, Hamilton, HM HX, Bermuda
("Corange") and GeneMedicine, Inc., a Delaware corporation having its principal
place of business at 8301 New Trails Drive, The Woodlands, Texas 77381-4248
("GMED") to amend the Alliance Agreement (the "Alliance Agreement") dated
July 17, 1995 as amended and Share Purchase Agreement (the "Share Purchase
Agreement") dated July 17, 1995 by and between Corange and GMED. Capitalized
terms used and not otherwise defined herein shall have the meanings given such
terms in the Alliance Agreement.
The parties hereby set forth in this Binding Letter Agreement the terms for
amending the Alliance Agreement and Share Purchase Agreement. These terms are
as follows:
A) The Research Term of the Alliance Agreement shall be extended for twenty-
four (24) months to February 3, 2002, which is the date of the seventh
anniversary of the Effective Date of the Alliance Agreement.
B) The Research Plan of September 23, 1997 as updated April 2, 1998, which is
now in place, is continued with respect to the three Research Leads for the
genes IL-2 (clinical study phase II), Interferon-(alpha) (clinical study
phase I/II) and IL-12 (clinical study phase I/II).
C) No rights are or have been granted to GMED under the Alliance Agreement, or
any other agreement entered into prior to the date of this Letter Agreement
by GMED with Corange or an affiliate of Corange including members of the
Roche group of companies to any proprietary technology owned or controlled
by Corange or an affiliate of Corange relating to genes IL-2,
Interferon-(alpha) or IL-12 (all of said proprietary technology herein
referred to as Corange Proprietary Technology). Sect. 14.1 b of the
Alliance Agreement remains applicable. GMED's rights to the DOTMA
technology under the License Agreement between Syntex (U.S.A.) Inc. and
GeneMedicine, Inc. dated April 8, 1994 remain unchanged.
- ----------------------
*** confidential treatment requested
<PAGE>
-2-
D) GMED shall be entitled to develop and commercialize products in the Field
alone or with other partners under GMED's own proprietary technology, or
proprietary technology developed during the Research Term, if Corange or an
affiliate of Corange does not *** or if *** or if GMED fails to ***. In the
latter case, it is agreed that the Alliance shall terminate and GMED and
Corange shall each have the right to develop and commercialize Products in
the Field pursuant to Sect. 7.3 of the Alliance Agreement. Even in these
cases, no rights are implied or granted to GMED under this provision to
Corange Proprietary Technology.
E) Corange and GMED agree that the research funding continues as contemplated
in the Alliance Agreement. Out of this research funding GMED will pay in
particular all costs of phase II clinical development including any cost
for biological materials for conducting clinical studies. The phase II
clinical development will consist of (i) performance of a phase II clinical
trial using the Research Lead for IL-2 (one trial), (ii) performance of a
phase I/II clinical trial using the Research Lead for Interferon-(alpha)
(one trial) and (iii) performance of a phase I/II clinical trial with the
Research Lead IL-12 (one trial) and (iv) associated preclinical development
necessary to support such clinical trials.
Corange and GMED agree that the milestone payment under Sect. 6.2 of the
Alliance Agreement will be payable upon *** during the term of the Alliance
Agreement of each of the milestone events described in Section 6.2 for ***.
F) The definition of "Field" in the Alliance Agreement is amended to read as
follows: "Field" means any non-viral Gene Therapy method using IL-2,
Interferon-(alpha) or IL-12 or any combination thereof for the treatment of
all cancer indications in humans.
G) GMED shall forego the requirement of the equity purchase by Corange due on
February 1, 1999 pursuant to Section 1.2 (b) of the Share Purchase
Agreement. In addition to funding under Section 6.1 of the Alliance
Agreement GMED shall receive from Corange an amount of *** payable during
the Research Term, at the latest on *** in consideration for extending the
Field.
Corange shall pay GMED a one time milestone in an amount of *** upon ***.
Except for the occurrence of payment of this milestone of *** the milestone
payments under Sect. 6.2 of the Alliance Agreement shall remain unchanged.
H) Corange and GMED agree that failure to achieve an Interim Research
Milestone due to the use of inappropriate or unsuitable models,
inappropriate product concepts or inappropriate gene selections will result
only in modification of the Research Plan, if the RMC has approved the
Research Plan under which such work is performed.
- ---------------------
*** confidential treatment requested
<PAGE>
-3-
This Letter Agreement takes precedence over all previous agreements by and
between the parties with respect to the subject matter of the Alliance Agreement
and Share Purchase Agreement. In case of any inconsistencies between the terms
of this Letter Agreement and the terms of either or both of the Alliance
Agreement and Share Purchase Agreement this Letter Agreement shall supercede and
predominate. Except as amended and modified herein, the Alliance Agreement and
the Share Purchase Agreement shall remain in full force and effect in accordance
with respective terms.
IN WITNESS THEREOF, the parties have executed this Binding Letter Agreement as
of the date first set forth above.
CORANGE INTERNATIONAL LIMITED GENEMEDICINE, INC.
/s/ JOHN R. TALBOT /s/ NORMAN HARDMAN
- ------------------------ ---------------------
By: John R. Talbot By: Norman Hardman
Title: President Title: President and COO
/s/ C GEORGE BURCH
- --------------------------------
By: C George Burch
Title: Director
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