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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to
Commission File Number:0-23930
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TARGETED GENETICS CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1549568
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Olive Way, Suite 100, Seattle, Washington 98101
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(206) 623-7612
--------------
(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 [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 36,403,885
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(Class) (Outstanding at May 1, 2000)
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TARGETED GENETICS CORPORATION
Quarterly Report on Form 10-Q
For the quarter ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets - March 31, 2000 and 3
December 31, 1999
b) Condensed Statements of Operations for the three 4
months ended March 31, 2000 and 1999
c) Condensed Statements of Cash Flows for the three months 5
ended March 31, 2000 and 1999
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</TABLE>
* No information is provided due to inapplicability of the item.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TARGETED GENETICS CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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ASSETS (Unaudited)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,335,839 $ 4,100,798
Securities available for sale 3,045,806 3,052,471
Accounts receivable 1,975,054 1,837,212
Prepaid expenses and other 231,389 269,864
------------- -------------
Total current assets 34,588,088 9,260,345
Property, plant and equipment, net 3,920,842 4,021,466
Other assets 379,829 410,667
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$ 38,888,759 $ 13,692,478
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,851,272 $ 2,278,338
Accrued payroll and other liabilities 815,761 1,181,555
Deferred revenue 385,000 0
Current portion of long-term obligations 1,100,492 1,160,174
------------- -------------
Total current liabilities 4,152,525 4,620,067
Long-term obligations 2,146,833 2,106,897
Shareholders' equity:
Preferred stock, 6,000,000 shares authorized
Series A preferred stock, $.01 par value; 400,000
shares authorized, none outstanding - -
Series B convertible exchangeable preferred stock,
$.001 par value; 12,015 shares authorized, issued
and outstanding at March 31, 2000 and at
December 31, 1999 12,607,041 12,390,513
Common stock $.01 par value, 80,000,000 shares
authorized, 36,393,548 and 34,019,175 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 126,804,664 98,122,922
Accumulated deficit (106,811,070) (103,532,432)
Accumulated other comprehensive loss (11,234) (15,489)
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Total shareholders' equity 32,589,401 6,965,514
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$ 38,888,759 $ 13,692,478
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
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TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
--------------------------
2000 1999
----------- -----------
Revenue:
Collaborative agreements $ 1,762,697 $ 1,204,725
Collaborative agreements with affiliates 412,261 -
----------- -----------
Total revenue 2,174,958 1,204,725
Operating expenses:
Research and development 3,717,756 3,177,960
General and administrative 1,106,951 786,465
----------- -----------
Total operating expenses 4,824,707 3,964,425
----------- -----------
Loss from operations (2,649,749) (2,759,700)
Equity in loss of joint venture (563,994) -
Investment income 215,754 126,774
Interest expense (64,121) (51,320)
----------- -----------
Net loss (3,062,110) (2,684,246)
Accretion of dividend on preferred stock (216,528) -
----------- -----------
Net loss applicable to common stock $(3,278,638) $(2,684,246)
=========== ===========
Basic and diluted net loss per share $(0.09) $(0.09)
=========== ===========
Shares used in computation of basic and
diluted net loss per share 34,823,371 30,655,477
=========== ===========
The accompanying notes are an integral part of this statement.
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TARGETED GENETICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
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<S> <C> <C>
Operating activities:
- ---------------------
Net loss $(3,278,638) $(2,684,246)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of joint venture 563,994 -
Depreciation and amortization 352,875 395,569
Changes in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities (835,102) (607,071)
Increase in deferred revenue 385,000 -
Increase in accounts receivable (137,842) (163,434)
Decrease in other assets 51,913 208,499
Other - (1,838)
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Net cash used in operating activities (2,897,800) (2,852,521)
Investing activities:
- ---------------------
Investment in unconsolidated joint venture (563,994) -
Purchases of property, plant and equipment (362,825) (471,103)
Sales of securities available for sale 10,920 2,338,261
Purchases of securities available for sale - (504,378)
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Net cash provided by (used in) investing activities (915,899) 1,362,780
Financing activities:
- ---------------------
Net proceeds from sale of capital stock 28,681,742 21,333
Proceeds from leasehold improvement and equipment financing 456,182 466,197
Payments under capital leases and installment loans (305,712) (299,282)
Accretion on preferred stock 216,528 -
----------- -----------
Net cash provided by financing activities 29,048,740 188,248
----------- -----------
Net increase (decrease) in cash and cash equivalents 25,235,041 (1,301,493)
Cash and cash equivalents, beginning of period 4,100,798 1,870,841
----------- -----------
Cash and cash equivalents, end of period $29,335,839 $ 569,348
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Equipment financed through capital lease $ 45,599 $ 54,558
Interest paid on capital lease and installment loans 44,543 48,050
</TABLE>
The accompanying notes are an integral part of this statement.
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TARGETED GENETICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
- ------------------------------
The condensed financial statements included in this quarterly report have been
prepared by Targeted Genetics Corporation without audit, according to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which consist solely of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations as of and for the periods indicated.
The results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the full year.
Note 2. Revenue Recognition
- ----------------------------
In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements ("SAB101"), which provides the SEC's views
on applying generally accepted accounting principles to revenue recognition
issues. In response to SAB 101, we expect that we will change from our method
for recording up-front license fee revenue upon receipt to a more preferable
method of deferring this revenue over the term of the related collaborative
agreements. We currently estimate that the impact of this change will be a
cumulative charge, as of January 1, 2000, of approximately $2.9 million to
reverse previously recognized up-front license fee related to the November 1998
Celltech cystic fibrosis collaboration and defer this revenue prospectively over
the remaining term of the collaboration agreement. We expect the impact in the
remaining quarters of 2000 will be a $417,000 increase in quarterly
collaborative research revenue. We anticipate that we will implement this
change in the second quarter of 2000.
Note 3. Sale of Common Stock
- -----------------------------
On March 1, 2000, we completed the sale of 2,164,285 shares of our common
stock to investors for an aggregate offering price of $30.3 million.
Note 4. Emerald Gene Systems
- -----------------------------
In July 1999, Targeted Genetics Corporation and Elan Corporation, plc ("Elan")
formed Emerald Gene Systems, Ltd. ("Emerald"), a joint venture to develop
enhanced gene delivery
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technology and products utilizing our gene therapy expertise and Elan's drug
delivery expertise. Emerald's unaudited results for the quarter ended March 31,
2000 were as follows:
EMERALD GENE SYSTEMS, LTD.
CONDENSED BALANCE SHEETS
March 31, December 31,
2000 1999
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ASSETS
- ------
Current assets:
Cash and equivelants $ 26,847 $ -
Prepaid expenses 2,415 2,250
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Total current assets 29,262 2,250
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 24,771 $ 6,350
Due to shareholders and related parties 246,939 738,346
------------ ------------
Total current liabilities 271,710 744,696
------------ ------------
Shareholders' equity:
Share capital 12,000 12,000
Contributed surplus 16,192,110 14,988,000
Accumulated deficit (16,446,558) (15,742,446)
------------ ------------
Total shareholders' equity (242,448) (742,446)
------------ ------------
$ 29,262 $ 2,250
============ ============
EMERALD GENE SYSTEMS, LTD.
CONDENSED STATEMENT OF LOSS
Three months ended
March 31,
2000
------------------
Revenue $ 19
Expenses
Research and development 692,728
General and administrative 11,403
------------------
704,131
Net loss $(704,112)
==================
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EMERALD GENE SYSTEMS, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2000
------------------
Operating activities:
- ---------------------
Net loss $ (704,112)
Adjustments to reconcile net loss to net cash
used in operating activities:
Changes in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities (472,986)
Decrease in other assets (165)
-----------
Net cash used in operating activities (1,177,263)
Financing activities:
- ---------------------
Net proceeds from additional equity investment 1,204,110
-----------
Net cash provided by financing activities 1,204,110
-----------
Net increase in cash and cash equivalents 26,847
Cash and cash equivalents, beginning of period -
-----------
Cash and cash equivalents, end of period $ 26,847
===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
- --------------------------
Some of our statements in this quarterly report on Form 10-Q are forward-
looking statements that involve risks and uncertainties. In making these
statements, we rely on a number of assumptions and make predictions about the
future. Our actual results could differ materially from our expectations for a
number of reasons, including the risks described in the section entitled
"Factors Affecting Our Operating Results, Our Business and Our Stock Price"
included below. You should not rely unduly on these forward-looking statements
which apply only as of the date of this report. We undertake no duty to
publicly announce or report revisions to these statements as new information
becomes available that would cause us to change our expectations of the future.
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Results of Operations
- ---------------------
Revenue for the quarter ended March 31, 2000 increased to $2.2 million from
$1.2 million for the first quarter of 1999, as revenue increased from our
Celltech Group plc ("Celltech") cystic fibrosis product development efforts.
Our Emerald drug delivery joint venture with Elan also contributed to the
revenue increase.
Research and development expenses increased to $3.7 million for the quarter
ended March 31, 2000 from $3.2 million for the comparable quarter in 1999. This
increase is attributable to the hiring of additional research scientists to
support our Emerald collaboration, as well as to increased costs associated with
our cystic fibrosis, cancer and hemophilia product development efforts. We
expect to see continued increases in quarterly costs associated with developing
our gene therapy product candidates for cancer and hemophilia and providing
research and development services to Emerald. Our costs will also vary
depending on the level of clinical trial activity occurring in each quarter.
General and administrative expenses for the quarter ended March 31, 2000
increased to $1.1 million from $786,000 for the first quarter of 1999. The
increase reflects higher investment in business development, shareholder
communications costs, legal costs associated with initiating the International
AIDS Vaccine Initiative collaboration and costs of general support to the
Celltech and Emerald collaborations.
Investment income for the first quarter ended March 31, 2000 increased to
$216,000 from $127,000 for the first quarter of 1999. The increase resulted
from the investment of the net proceeds from our March 1, 2000 private placement
of 2.2 million shares of our common stock.
Interest expense for the quarter ending March 31, 2000 increased to $64,000
from $51,000 for 1999 primarily due to higher average principal balances in
2000.
Financial Condition
- -------------------
As of March 31, 2000, we had $32.4 million in cash, cash equivalents and
securities available for sale and $30.4 million in working capital. By
comparison, we had $7.2 million in cash, cash equivalents and securities and
$4.6 million in working capital at December 31, 1999. The increases in cash and
working capital are attributable to our March 1, 2000 private placement of 2.2
million shares of our common stock, which resulted in net proceeds of $28.2
million. These increases were partially offset by operating losses, investments
in capital equipment and principal payments on capital lease obligations. We
currently fund substantially all of our equipment purchases with capital leases.
In conjunction with the Emerald joint venture, Elan agreed to loan us up to
$12 million, in the form of convertible debt bearing 12% interest per annum, to
fund our share of Emerald's research and development costs. As of March 31,
2000, we have not drawn any proceeds under
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the loan agreement. We also have a contractual commitment for a $5.0 million
equity investment by Elan in July 2000, at our option.
Since we began operations, our primary sources of revenue have been from
research funding under collaborative agreements, license fees and income earned
from investments. These sources have covered less than 20% of our expenses
since we started business. Gene therapy products are subject to long
development timelines and the risks of failure inherent in the development of
products based on innovative technologies. Although our technology appears
promising, we do not know whether any commercially viable products will result
from our research and development activities. Since we do not anticipate that
we will have any product-related revenue for at least the next several years, we
expect to generate substantial additional losses in the future.
We currently estimate that, based on our current planned rate of spending,
our existing cash, cash equivalents and securities available for sale, together
with the funding expected to be provided by our existing collaborative partners,
will be sufficient to meet our operating and capital requirements well into
2002. The assumed levels of revenue and expense underlying our estimates may
not be accurate. We may not be successful in establishing any additional
collaborative relationships or in maintaining our existing ones. Whether or not
our assumptions prove to be accurate and regardless of our partnering success,
we expect that we will need to raise substantial additional funds to continue
developing and commercializing our products.
Recent Accounting Changes
- -------------------------
In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements ("SAB101"), which provides the SEC's views
on applying generally accepted accounting principles to revenue recognition
issues. In response to SAB 101, we expect that we will change from our method
for recording up-front license fee revenue to a more preferable method of
deferring this revenue over the term of the related collaborative agreements.
We currently estimate that the impact of this change will be a cumulative
charge, as of January 1, 2000, of approximately $2.9 million to reverse
previously recognized up-front license fee related to the November 1998 Celltech
cystic fibrosis collaboration and defer this revenue prospectively over the
remaining term of the collaboration agreement. We expect the impact in the
remaining quarters of 2000 will be a $417,000 increase in quarterly
collaborative research revenue. We anticipate that we will implement this
change in the second quarter of 2000.
Factors Affecting our Operating Results, our Business and our Stock Price
- -------------------------------------------------------------------------
In addition to the other information contained in this annual report, you
should read and consider the following risk factors. If any of these risks
actually occur, our business, financial condition or operating results could be
adversely affected and the trading price of our stock could decline.
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If we are unable to secure financing on terms acceptable to us for future
capital needs, we will be unable to fund continuing operations.
Developing and commercializing our potential products will require
substantial additional financial resources. Because we cannot expect internally
generated cash flow to fund development and commercialization of our products,
we will look to outside sources for funding. These sources could involve one or
more of the following types of transactions:
. technology partnerships;
. technology sales;
. technology licenses;
. issuing debt; or
. equity arrangements.
If we cannot obtain additional financing when needed or on acceptable
terms, we will be unable to fund continuing operations. In addition, if we
raise additional funds by issuing equity securities, our shareholders will
likely experience significant dilution of their ownership interest.
We have a history of losses and may never become profitable, which could result
in a decline in the value of our common stock and a loss of your investment.
We have generated small amounts of revenue and incurred significant net
losses since we began business. As of December 31, 1999, we have incurred
cumulative losses totaling $103.5 million. We expect to continue to incur
substantial additional losses in the future, due primarily to the following
factors:
. all of our products are in a testing phase and have not received
regulatory approval; and
. we will likely spend significant amounts on operating expenses.
We may never generate profits, and if we do become profitable, we may be
unable to sustain or increase profitability on a quarterly or annual basis. As
a result, the trading price of our stock could decline and you could lose all or
part of your investment.
If our clinical trials are unsuccessful or we do not receive regulatory approval
for our products, which are in the early stage of product development, we may be
unable to generate sufficient revenues to maintain our business.
We do not yet have products in the commercial markets. All of our
potential products, including tgAAV-CF, our cystic fibrosis product candidate,
and tgDCC-E1A, our cancer product candidate, are in research and development or
in early-stage clinical trials. We cannot apply for regulatory approval of our
potential products until we have performed additional research and development
and testing. Our clinical trials may not demonstrate the safety and efficacy of
our
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potential products, and we may encounter unacceptable side effects or other
problems in the clinical trials. Should this occur, we may have to delay or
discontinue development of the potential product that causes the problem. After
a successful clinical trial, we cannot market products in the United States
until we receive regulatory approval. If we are unable to gain regulatory
approval of our products after successful clinical trials and then commercialize
and sell those products, we may be unable to introduce and sell a quantity of
products sufficient to maintain our business or secure additional financing to
fund our operations.
Delays or unexpected costs in obtaining approval of our products or complying
with governmental regulatory requirements could decrease our ability to generate
revenue and make funding our operations more difficult.
The regulatory process in the gene and cell therapy industry is costly,
time consuming and subject to unpredictable delays. Accordingly, we cannot
predict with any certainty how long it will take or how much it will cost to
obtain regulatory approvals for clinical trials or for manufacturing or
marketing our potential products. Delays in bringing a potential product to
market or unexpected costs in obtaining regulatory approval could decrease our
ability to generate revenue and make it more difficult to obtain additional
financing necessary to fund our operations. In addition, all manufacturing
operations are subject on an ongoing basis to the current Good Manufacturing
Practices requirement of the Food and Drug Administration. While we currently
anticipate that we will be able to manufacture product that meets this
requirement, we may be unable to attain or maintain compliance with current or
future Good Manufacturing Practices requirements. If we discover previously
unknown problems after we receive regulatory approval of a potential product or
fail to comply with applicable regulatory requirements, we may suffer
restrictions on our ability to market the product, including mandatory
withdrawal of the product from the market. This, or an unexpected increase in
the cost of compliance, could decrease our ability to generate revenue.
Failure to recruit patients could delay or prevent clinical trials of our
potential products, which could cause a delay or inability to introduce products
to market and a resulting decrease in our ability to generate revenue.
Identifying and qualifying patients to participate in testing our potential
products is critical to our near-term success. The timing of our clinical
trials depends on the speed at which we can recruit patients to participate in
testing our products. Delays in recruiting or enrolling patients to test our
products could result in increased costs, delays in advancing our product
development, delays in proving the usefulness of our technology or termination
of the clinical trials altogether. If we are unable to timely introduce
potential products to market after successful clinical trials, our ability to
generate revenue may decrease and we may be unable to secure additional
financing.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
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Our success depends in part on our ability to protect our proprietary
rights. We own or have licenses to patents on a number of genes, processes,
practices and techniques critical to our present and potential products. If we
fail to obtain and maintain patent protection for our technology, our
competitors may market competing products that threaten our market position.
The failure of our licensors to obtain and maintain patent protection for
technology they license to us could similarly harm our business. Patent
positions in the field of biotechnology are highly uncertain and involve complex
legal, scientific and factual questions. Our patent applications may not result
in issued patents. Even if we secure a patent, the patent may not afford
adequate protection against our competitors.
We also rely on unpatented proprietary technology. Because this technology
does not benefit from the protection of patents, we may be unable to
meaningfully protect this proprietary technology from unauthorized use or
misappropriation by a third party.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights.
As the biotechnology industry expands, the risk increases that other
companies may claim that our processes and potential products infringe on their
patents. Defending these claims would be costly and would likely divert
management's attention and resources away from our operations. If we infringe
on another company's patented processes or technology, we may have to pay
damages or obtain a license in order to continue manufacturing or marketing the
affected product or using the affected process. We may be unable to obtain a
license on acceptable terms.
Our potential tgAAV-CF product uses our proprietary AAV delivery technology
to deliver a normal copy of a CFTR gene to which we have rights under a
nonexclusive license. The United States Patent and Trademark Office has
declared an interference proceeding to determine the priority of invention of
this gene. While we do not expect to directly participate in the CFTR gene
interference proceedings, we have an interest in the outcome. If the eventual
outcome does not favor our licensor, we would have to secure a license to the
CFTR gene from the prevailing party to continue with development of tgAAV-CF.
The costs of licensing the CFTR gene could be substantial and could include
royalties greater than those we currently pay. If we cannot secure this license
on acceptable terms and on a timely basis, we may be unable to develop or
deliver our potential tgAAV-CF product, which could result in decreased ability
to generate revenue and difficulty in obtaining additional financing to fund our
operations.
If we or our business partners are unable to successfully market and distribute
our products, our business will fail.
We have no experience in sales and marketing. To market any products that
may result from our development programs, we will need to develop marketing and
sales capabilities, either on our own or with others. We intend to enter into
collaborations with corporate partners to utilize the mature marketing and
distribution capabilities of our partners. While we believe that these
collaborative partners will be motivated to market and distribute our potential
products, our current and potential future partners may not commit sufficient
resources to commercializing our
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technology on a timely basis. Furthermore, our present or future collaborators
may pursue the development or marketing of competing products. If our business
partners do not successfully market and distribute our products and we are
unable to develop sufficient marketing and distribution capabilities on our own,
our business will fail.
The intense competition and rapid technological change in our market may result
in pricing pressures and failure of our products to achieve market acceptance.
We presently face competition from other companies developing gene and cell
therapy technologies and from companies using more traditional approaches to
treating human diseases. Most of our competitors have substantially more
experience and financial and infrastructure resources than we do in the
following areas:
. Research and development;
. Clinical trials;
. Obtaining FDA and other regulatory approvals;
. Manufacturing; and
. Marketing and distribution.
Consequently, our competitors may be able to commercialize new products
more rapidly than we do, or manufacture and market competitive products more
successfully than we do. This could result in pricing pressures or the failure
of our products to achieve market acceptance.
In addition, gene and cell therapy are new and rapidly evolving fields and
are expected to continue to undergo significant and rapid technological change.
Rapid technological development by our competitors could result in our actual
and proposed technologies, products or processes losing market share or becoming
obsolete.
If we do not attract and retain qualified personnel and scientific
collaborators, we will be unable to successfully and timely develop our
potential products and may be unable to generate sufficient revenue to maintain
our business.
Our future success depends in part on our ability to attract and retain key
employees. We have programs in place to retain personnel, including programs to
create a positive work environment and competitive compensation packages.
Because competition for employees in our field is intense, however, we may be
unable to retain our existing personnel or attract additional qualified
employees. If we experience turnover or difficulties recruiting new employees,
our research and development could be delayed and we could experience
difficulties in generating sufficient revenue to maintain our business.
Our success also depends on the continued availability of outside
scientific collaborators to perform research and develop processes to advance
and augment our internal research efforts. Competition for collaborators in
gene and cell therapy is intense. If we are unsuccessful in recruiting or
maintaining our relationships with scientific collaborators, we could experience
delays in our research and development or loss of access to important enabling
technology.
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Our limited manufacturing capability may limit our ability to successfully
introduce our potential products.
We currently do not have the capacity to manufacture large-scale clinical
or commercial quantities of our potential products. To do so, we will need to
expand our current facilities and staff or supplement them through the use of
contract providers. We may be unable to obtain or develop the necessary
manufacturing capabilities. If we cannot, we will be unable to introduce
sufficient product to sustain our business.
Our use of hazardous materials to develop our products exposes us to liability
risks and the risk of regulatory limitation of our use of these materials,
either of which could reduce our ability to generate revenue and make it more
difficult to fund our operations.
Our research and development activities involve the controlled use of
hazardous materials. Although we believe that our safety procedures for
handling and disposing of these materials comply with applicable laws and
regulations, we cannot eliminate the risk of accidental contamination or injury
from hazardous materials. If a hazardous material accident occurred, we would
be liable for any resulting damages. This liability could exceed our financial
resources. Additionally, hazardous materials are subject to regulatory
oversight. Accidents unrelated to our operations could cause federal, state or
local regulatory agencies to restrict our access to hazardous materials needed
in our research and development efforts. If our access to these materials is
limited, we could experience delays in our research and development programs.
Paying damages or experiencing delays caused by restricted access could reduce
our ability to generate revenues and make it more difficult to fund our
operations.
The costs of product liability claims and product recalls could exceed the
amount of our insurance, which could significantly harm our results of
operations or our reputation and result in a decline in the value of our stock.
Our business activities expose us to the risk of liability claims or
product recalls and any adverse publicity that might result from a liability
claim against us. We currently have only limited amounts of product liability
insurance, and the amounts of claims against us may exceed our insurance
coverage. Product liability insurance is expensive and may not continue to be
available on acceptable terms. A product liability claim not covered by
insurance or in excess of our insurance or a product recall could significantly
harm our financial results or our reputation. Either of these could result in a
decrease in our stock price, and you could lose all or part of your investment.
Market fluctuations or volatility could cause the market price of our common
stock to decline.
In recent years the stock market in general and the market for
biotechnology-related companies in particular have experienced extreme price and
volume fluctuations, often unrelated to the operating performance of the
affected companies. Our common stock has experienced,
15
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and is likely to continue to experience, these fluctuations in price, regardless
of our performance. These fluctuations could the market price of our common
stock to decline.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
This item discusses our exposure to market risk related to changes in
interest rates and to our credit risk. We limit our exposure to interest rate
and credit risk by establishing and strictly monitoring clear policies and
guidelines for our fixed income portfolios. Additionally, our equity price risk
is limited to the risk inherent in our ownership of 80.1% of Emerald. See Part
II, Item 7A "Qualitative and Quantitative Disclosure About Market Risk" in our
Annual Report filed on Form 10-K for a more detailed description of these risks.
Interest Rate Sensitivity
- -------------------------
Short-Term Investments
As of March 31, 2000, our short-term investments totalled $3.0 million
(about 9%) of our $32.4 million cash, cash equivalents and short-term investment
balance. These short-term investments consist of highly liquid investments with
current maturities of between 2 and 5 months. Because we expect to hold these
investments until maturity, we do not expect the realized value of these
investments to be affected to any significant degree by the effect of a sudden
change in market interest rates. None of our short-term investments are held
for trading purposes. We do not own derivative financial instruments.
Long-Term Obligations
As of March 31, 2000, we had outstanding long-term obligations, primarily
related to capital equipment leases, leasehold improvements and our loan
agreement with Celltech of $3.7 million, at fixed interest rates of up to
14.55%. Because the interest rates on our long-term obligations are fixed,
changes in interest rates would not have a material impact on our financial
position. Increases in interest rates could, however, increase the interest
expense associated with any future borrowings. We do not hedge against interest
rate increases.
Credit Risk
- -----------
As of March 31, 2000, we had a concentration of accounts receivable with
one of our collaborators.
16
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
On March 1, 2000, the company issued 2,164,285 shares of common stock to
investors at an aggregate offering price of $30.3 million. This transaction did
not involve a public offering and therefore was exempt from registration under
section 4(2) and Regulation D of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Reference is made to the Index to Exhibits included herein.
(b) We did not file any current reports on Form 8-K during the quarter ended
March 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGETED GENETICS CORPORATION
-----------------------------
(Registrant)
Date: May 12, 2000 /s/ H. STEWART PARKER
-------------------- ----------------------------------------
H. Stewart Parker, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2000 /s/ JAMES A. JOHNSON
-------------------- ----------------------------------------
James A. Johnson, Senior Vice President,
Finance and Administration,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
17
<PAGE>
Targeted Genetics Corporation
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Note
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (D)
3.2 Amended and Restated Bylaws (Exhibit 3.2) (D)
3.3 Articles of Amendment of the Company, filed with the State of Washington on July (K)
21, 1999 (Exhibit 1.8)
4.1 Rights Agreement, dated as of October 17, 1996, between the Company and (C)
ChaseMellon Shareholder Services (Exhibit 2.1)
4.2 Registration Rights Agreement, dated as of July 21, 1999, by and among the Company (K)
and Elan International Services, Ltd. (Exhibit 1.2)
4.3 First Amendment of Rights Agreement, dated July 21, 1999, between the Company and (K)
ChaseMellon Shareholder Services (Exhibit 1.9)
4.4 Warrant Agreements to purchase 2,000,000 shares of common stock of the Company, (J)
issued to Alkermes, Inc. on June 9, 1999. (Exhibit 10.38)
10.1 Form of Indemnification Agreement between the registrant and its officers and (L)
directors
10.2 Form of Senior Management Employment Agreement between the registrant and its (D)
executive officers (Exhibit 10.2)
10.3 Gene Transfer Technology License Agreement, dated as of February 18, 1992, (L)
between Immunex Corporation and the Company*
10.4 PHS Patent License Agreement Non-Exclusive, dated as of July 13, 1993, between (L)
National Institutes of Health Centers for Disease Control and the Company*
10.5 Patent License Agreement, dated as of December 25, 1993, between The University (L)
of Florida Research Foundation, Inc. and the Company*
10.6 Research and Exclusive License Agreement, dated as of January 1, 1994, between (E)
the Company and the Fred Hutchinson Cancer Research Center* (Exhibit 10.9)
10.7 PHS Patent License Agreement- Exclusive, dated as of March 10, 1994, between (E)
National Institutes of Health Centers for Disease Control and the Company*
(Exhibit 10.10)
10.8 License Agreement, dated as of March 28, 1994, between the Company and the (E)
University of Michigan* (Exhibit 10.13)
10.9 Patent and Technology License Agreement, effective as of March 1, 1994, between (A)
the Board of Regents of the University of Texas M.D. Anderson Cancer Center and
RGene Therapeutics, Inc.* (Exhibit 10.29)
10.10 First Amended and Restated License Agreement, effective as of October 12, 1995, (A)
between The University of Tennessee Research Corporation and RGene Therapeutics,
Inc.* (Exhibit 10.30)
10.11 Amendment to First Amended and Restated License Agreement, dated as of June 19, (B)
1996, between The University of Tennessee Research Corporation and RGene
Therapeutics, Inc.* (Exhibit 10.1)
10.12 Second Amendment to First Amended and Restated License Agreement, dated as of (G)
April 17, 1998, between The University of Tennessee Research Corporation and
RGene Therapeutics, Inc.*
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
10.13 Revised License Agreement, effective as of October 1, 1996, between the (D)
University of Pittsburgh of the Commonwealth System of Higher Education and the
Company* (Exhibit 10.21)
10.14 License Agreement, dated as of March 15, 1997, between the Burnham Institute and (E)
the Company* (Exhibit 10.23)
10.15 Exclusive Sublicensing Agreement, dated June 9, 1999, between the Company and (J)
Alkermes, Inc. (Exhibit 10.36)
10.16 Common Stock Purchase Agreement, dated June 9, 1999, between the Company and (K)
Alkermes, Inc. (Exhibit 10.37)
10.17 License Agreement, dated as of August 31, 1999, between the Company and the (L)
University of North Carolina Research Center**
10.18 Master Agreement, dated as of November 23, 1998, between the Company and Medeva (H)
Pharmaceuticals, Inc.* (Exhibit 1.1)
10.19 License and Collaboration Agreement, dated as of November 23, 1998, between the (H)
Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2)
10.20 Supply Agreement, dated as of November 23, 1998, between the Company and Medeva (H)
Pharmaceuticals, Inc.* (Exhibit 1.3)
10.21 Common Stock Purchase Agreement, dated as of November 23, 1998, between the (H)
Company, Medeva Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.4)
10.22 Credit Agreement, dated as of November 23, 1998, between the Company, Medeva (H)
Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.5)
10.23 Securities Purchase Agreement, dated as of July 21, 1999, between the Company, (K)
Elan Corporation and Elan International Services, Ltd., a wholly owned subsidiary
of Elan Corporation (Exhibit 1.1)
10.24 Funding Agreement, dated as of July 21, 1999, among the Company, Elan (K)
International Services, Ltd., and Elan Corporation, plc (Exhibit 1.3)
10.25 Subscription, Joint Development and Operating Agreement, dated as of July 21, (K)
1999, among Elan Corporation, plc, Elan International Services, Ltd., the Company
and Targeted Genetics Newco, Ltd.* (Exhibit 1.4)
10.26 Convertible Promissory Note, dated July 21, 1999, issued by the Company to Elan (K)
International Services, Ltd. (Exhibit 1.5)
10.27 License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and (K)
the Company* (Exhibit 1.6)
10.28 License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and (K)
Elan Pharmaceutical Technologies, a division of Elan Corporation, plc* (Exhibit
1.7)
10.29 Olive Way Building Lease, dated as of November 20, 1993, as amended between the (L)
Company and Ironwood Apartments, Inc. (successor in interest to Metropolitan
Federal Savings and Loan Association)
10.30 Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC (D)
and the Company (Exhibit 10.26)
10.31 1992 Restated Stock Option Plan (Exhibit 99.1) (F)
10.32 Stock Option Plan for Nonemployee Directors (Exhibit 10.34) (E)
10.33 1999 Stock Option Plan (Exhibit 99.1) (I)
27.1 Financial Data Schedule
</TABLE>
___________
*Portions of these exhibits have been omitted based on a grant of
confidential treatment from the Securities and Exchange Commission. The
omitted portions of these exhibits have been filed separately with the
SEC.
19
<PAGE>
**Portions of these exhibits have been omitted based on a request of
confidential treatment filed with the Securities and Exchange Commission.
The omitted portions of these exhibits have been filed separately with the
SEC.
(A) Incorporated by reference to the designated exhibit included with the
Company's Registration Statement on Form S-1 (No. 333-03592) filed on
April 16, 1996, as amended.
(B) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996, filed on August 12, 1996.
(D) Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed October 22, 1996.
(D) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
filed on March 12, 1997.
(E) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
filed on March 31, 1998
(F) Incorporated by reference to the designated exhibit included with the
Company's Registration Statement on Form S-8 (No. 333-58907), filed on
July 10, 1998.
(G) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
filed on March 10, 1999.
(H) Incorporated by reference to the designated exhibit included with the
Company's Current Report on Form 8-K, filed January 6, 1999.
(I) Incorporated by reference to the designated exhibit included with the
Company's Registration Statement on Form S-8 (No. 333-78523), filed on May
14, 1999.
(J) Incorporated by reference to the designated exhibit included with the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1999, filed on August 5, 1999.
(K) Incorporated by reference to the designated exhibit included with the
Company's Current Report on Form 8-K, filed August 4, 1999.
(L) Incorporated by reference to the designated exhibit included with the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
filed on March 23, 2000.
20
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 29,335,839
<SECURITIES> 3,045,806
<RECEIVABLES> 1,975,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,588,088
<PP&E> 11,324,190
<DEPRECIATION> (7,403,348)
<TOTAL-ASSETS> 33,888,759
<CURRENT-LIABILITIES> 4,152,525
<BONDS> 0
0
12,607,041
<COMMON> 126,804,664
<OTHER-SE> (106,822,304)
<TOTAL-LIABILITY-AND-EQUITY> 38,888,759
<SALES> 2,174,958
<TOTAL-REVENUES> 2,174,958
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<INTEREST-EXPENSE> (64,121)
<INCOME-PRETAX> (3,062,110)
<INCOME-TAX> (3,062,110)
<INCOME-CONTINUING> (3,062,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,278,638)
<EPS-BASIC> (.09)
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