<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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.
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GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
FORM 10-Q/A
TABLE OF CONTENTS
PAGE NO.
--------
COVER PAGE................................................................ 1
TABLE OF CONTENTS......................................................... 2
PART I. FINANCIAL INFORMATION
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 3
PART II. OTHER INFORMATION............................................... 6
SIGNATURES................................................................ 7
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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, Inc. (the "Company" or
"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
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research and development activities has been driven primarily by the progression
of research in the field of genetic 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
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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, 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.
IMPACT OF YEAR 2000 ON INFORMATION SYSTEMS
Year 2000 exposure is the result of computer programs using two instead of
four digits to represent the year. These computer programs may erroneously
interpret dates beyond the year 1999, which could cause system failures or other
computer errors, leading to disruptions in operations.
Genemedicine is currently developing and executing a plan to insure that
its system and software infrastructure are Year 2000 compliant. GeneMedicine is
in the process of conducting an internal review to identify financial
information and operations systems and applications from which it has exposure
to Year 2000 disruptions in operations. Given the relatively small size of
GeneMedicine's information systems and GeneMedicine's predominantly new
hardware, software and operating systems, management expects to be Year 2000
compliant by the end of the fourth quarter of 1999.
Additionally, GeneMedicine has contacted key vendors and other third-
parties with which GeneMedicine has a significant relationship to determine
their readiness with respect to Year 2000 issues. GeneMedicine has been assured
that such third parties are either Year 2000 compliant or will be compliant by
the end of the fourth quarter of 1999. GeneMedicine is unable to control whether
its current and future strategic partners' and vendors' systems are or will be
Year 2000 compliant.
GeneMedicine has prepared a preliminary estimate of total Year 2000
remediation expenses of $10,000. These anticipated expenses are primarily for
training and education of information systems personnel and upgrades of certain
software.
GeneMedicine has not yet evaluated the consequences of its most reasonably
likely worst case Year 2000 scenario nor has GeneMedicine completed Year 2000
contingency planning to address the question of what GeneMedicine will do if
Year 2000 compliance is not achieved. However at this time, management does not
believe that any systems, applications or third-party relationships will have a
material impact on GeneMedicine's business, financial condition or results of
operations if GeneMedicine is not Year 2000 compliant prior to the end of the
fourth quarter of 1999.
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GENEMEDICINE, INC.
PART II - OTHER INFORMATION
---------------------------
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.
On October 24, 1998 in connection with the Merger Agreement, the Company
and American Stock Transfer & Trust ("AST&T) executed an Amendment to the Rights
Agreement between the Company and AST&T, a copy of which is attached hereto as
Exhibit 4.3.
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
-------------- -----------
<S> <C> <C>
4.3 Amendment to Rights Agreement between Registrant and
American Stock Transfer & Trust Company dated October 24, 1998
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
</TABLE>
(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.
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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: 11/23/1998 By: /s/ John M. Dodson
---------- -----------------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the
Registrant's Chief Accounting Officer)
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EXHIBIT 4.3
AMENDMENT TO RIGHTS AGREEMENT
BETWEEN
GENEMEDICINE, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made this 24th day
of October, 1998, by and between GeneMedicine, Inc., a Delaware corporation (the
"Company"), and American Stock Transfer & Trust Company, as rights agent (the
"Rights Agent").
WHEREAS, the Company is entering into an Agreement and Plan of Merger and
Reorganization (as the same may be amended from time to time, the "Merger
Agreement") among the Company, Megabios Corp., a Delaware corporation
("Megabios"), and Montana Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of Megabios (the "Merger Sub"), pursuant to which Merger
Sub will merge with and into the Company and the Company will survive as a
wholly-owned subsidiary of Megabios, and the former stockholders of the Company
will receive shares of Common Stock of Megabios; and
WHEREAS, the Company and the Rights Agent are parties to a Rights
Agreement, dated as of January 16, 1996, as amended (the "Rights Agreement");
and
WHEREAS, the parties desire to amend the Rights Agreement in connection
with the execution and delivery of the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein set forth, the parties hereby agree as follows:
1. The definition of "Acquiring Person" set forth in Section 1(a) of the
Rights Agreement is hereby amended by adding the following sentence to the end
of that section:
Notwithstanding the foregoing, no Person shall be or become an
Acquiring Person by reason of (i) the execution and delivery of the
Agreement and Plan of Merger and Reorganization, dated as of October
24, 1998, among Megabios Corp., a Delaware corporation, Montana
Acquisition Sub, Inc., a Delaware corporation ("Merger Sub"), and the
Company (the "Merger Agreement") or the execution of any amendment
thereto, (ii) the merger of Merger Sub with and into the Company, or
(iii) the consummation of any other transaction contemplated by the
Merger Agreement.
<PAGE>
2. The definition of "Change of Control" set forth in Section 1(e) of the
Rights Agreement is hereby amended by adding the following sentence to the end
of that section:
Notwithstanding the foregoing, no Change of Control shall be
deemed to have occurred by reason of (i) the execution and delivery or
amendment of the Merger Agreement, (ii) the merger of Merger Sub with
and into the Company, or (iii) the consummation of any other
transaction contemplated by the Merger Agreement.
3. The definition of "Shares Acquisition Date" in Section 1(n) of the
Rights Agreement is hereby amended by adding the following sentence to the end
of that section:
Notwithstanding anything else set forth in this Agreement, a
Shares Acquisition Date shall not be deemed to have occurred by reason
of (i) the public announcement, public disclosure, execution and
delivery or amendment of the Merger Agreement, (ii) the merger of
Merger Sub with and into the Company, or (iii) the consummation of any
other transaction contemplated by the Merger Agreement.
4. Section 3(a) of the Rights Agreement is hereby amended by adding the
following sentence to the end of that section:
Notwithstanding anything else set forth in this Agreement, no
Distribution Date shall be deemed to have occurred by reason of (i)
the execution and delivery or amendment of the Merger Agreement, (ii)
the merger of Merger Sub with and into the Company, or (iii) the
consummation of any other transaction contemplated by the Merger
Agreement.
5. Section 7(a) of the Rights Agreement is hereby amended by deleting the
word "or" on the penultimate line of the section and adding the following clause
at the end of that section:
, or (iv) immediately before the Effective Time, as
defined in the Merger Agreement.
6. Section 13(c) of the Rights Agreement is hereby amended to add the
following parenthetic phrase at the beginning of the second line of that
section: (other than any such transaction contemplated by the Merger Agreement)
7. The Rights Agreement, as amended by this Amendment, shall remain in
full force and effect in accordance with its terms.
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8. This Amendment shall be deemed to be a contract made under the laws of
the State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State. This Amendment may be executed in any
number of counterparts, each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument. If any term, provision, covenant or restriction
of this Amendment is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Amendment shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
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IN WITNESS WHEREOF, the parties herein have caused this Amendment to be
duly executed and attested, all as of the date and year first above written.
<TABLE>
<CAPTION>
GENEMEDICINE, INC.
<S> <C>
By: /s/ Norman Hardman
--------------------------------------
Name: Norman Hardman
Title: President & CEO
Attest: /s/ Richard A. Waldron
--------------------------------------
Name: Richard A. Waldron
Title: Vice President and
Chief Financial Officer
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Wilbert Miles
--------------------------------------
Name: Wilbert Miles
Title: Vice President
Attest: /s/ Susan Silber
--------------------------------------
Name: Susan Silber
Title: Assistant Secretary
</TABLE>
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