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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file No. 0-23930
TARGETED GENETICS CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
Washington 91-1549568
(State of Incorporation) (IRS Employer Identification No.)
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1100 Olive Way, Suite 100
Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 623-7612
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ________
Indicate the aggregate market value of voting stock held by nonaffiliates
of the Registrant as of March 10, 2000: $487,060,066
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 10, 2000:
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<CAPTION>
Title of Class Number of shares
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<S> <C>
Common Stock, $.01 par value 36,344,346
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DOCUMENTS INCORPORATED BY REFERENCE
(1)Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on May 12, 2000, are incorporated by reference into Part III of
this report.
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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
Some of our statements in this annual report on Form 10-K 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" in
Part II, Item 7 of this annual report. 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.
Overview
Targeted Genetics Corporation develops gene therapy products and
technologies for the treatment of acquired and inherited diseases. We have
assembled a broad base of core technologies that we believe has the potential
to address a significant number of these diseases and we believe that we have
expertise that will enable us to develop products based on these technologies.
We have two lead products under development for the treatment of cystic
fibrosis and cancer. We believe that our success in developing these initial
products would demonstrate the value of our core technologies and their
potential to treat numerous other diseases.
Our business strategy is based on the following five key principles:
Multiple gene delivery systems. We believe that different disease targets
will require different methods of gene delivery. The best gene delivery method
for a particular disease will depend on the type of cell to be modified, the
duration of gene expression desired and the need for in vivo (inside the body)
or ex vivo (outside the body) delivery. Therefore, our strategy has been to
develop multiple gene delivery systems. Our systems are based on three
different vector technologies: adeno-associated viral (AAV), synthetic and
retroviral. We believe these systems will give us the flexibility to develop
gene therapies for a broader range of diseases than we could develop using a
single gene delivery system.
Emphasis on product development infrastructure. We believe that an
abundance of basic research is being conducted in the area of gene therapy,
and that those who are capable of translating that research into products will
derive significant value. A great deal of discovery research has been focused
on gene therapy techniques, but much less effort has been focused on the
creation of the product development infrastructure necessary to move concepts
through preclinical studies and clinical trials into the commercial realm.
Therefore, we have focused the overwhelming majority of our efforts on
establishing product development expertise in the areas of preclinical
biology, process development, manufacturing, quality control, quality
assurance, regulatory affairs and clinical trials. We believe that this
product development focus will increase the probability of our reaching the
market with products before our competitors.
Clinical proof of concept. We believe that by providing strong evidence of
the clinical benefit of our products, we will generate significant value
enhancement for our shareholders. Although most experts believe that gene
therapy will be a powerful approach to treating diseases in the future, many
believe that this is a long-term proposition. We believe that we have two lead
products with significant potential to demonstrate clinical proof of concept
in the near term: tgAAV-CF for cystic fibrosis and tgDCC-E1A for cancer. We
expect both of these products to be in Phase II clinical trials in 2000, with
the possibility of entering pivotal clinical trials in 2001. We believe that
proof of concept in cystic fibrosis and cancer will serve to demonstrate the
value not only of our two lead product candidates but of our AAV and synthetic
gene delivery technologies as well.
Pipeline development. We believe that there is tremendous long-term
potential for the use of our gene delivery systems to treat additional
diseases. The infrastructure we have built to support the development of
tgAAV-CF and tgDCC-E1A should, over time, to support new products based on our
AAV and synthetic gene
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delivery systems. Similarly, the knowledge and expertise we gain in developing
our two initial products should apply to our future products under
development. We believe that we can derive significant future value by
leveraging our infrastructure, knowledge and expertise with additional
pipeline products. Currently, we have ongoing preclinical product development
activities in the areas of hemophilia, rheumatoid arthritis, cardiovascular
disease and HIV vaccines.
Long-term value retention. We believe that our products under development
have significant long-term potential. Therefore, it is important to us that we
retain a substantial financial interest in the sales of commercial products
that result from our work. For products based on our AAV delivery system, we
intend to retain, at a minimum, manufacturing rights to all products that we
develop. We have retained worldwide commercial rights to tgDCC-E1A. We plan to
maintain our tgDCC-E1A rights and to develop the product internally until we
can enter a collaborative transaction that will allow us to achieve
substantial long-term participation in tgDCC-E1A's potential downstream
commercial revenues.
The following table summarizes our product development programs:
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Program/Product Research Preclinical Phase I Phase II Phase III
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AAV Vectors:
Cystic Fibrosis (tgAAV-CF).....
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Hemophilia A...................
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Rheumatoid Arthritis...........
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Cardiovascular Disease.........
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HIV Vaccine....................
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Synthetic Vectors:
Head and Neck Cancer (tgDCC-
E1A)..........................
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Ovarian Cancer (tgDCC-E1A).....
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Metastatic Cancer .............
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In addition to our gene therapy technologies, we have patents and expertise
in cell therapy that may prove to be extremely valuable. Our expertise enables
us to isolate potent disease-specific cytotoxic T lymphocytes (CTLs) from
small samples of patient blood and to efficiently multiply them to large
numbers for reinfusion to the patient. We believe that this technology and
expertise could support development of a series of immunotherapies to treat
infectious diseases and cancer. Key to this technology is our proprietary
Rapid Expansion Method (REM), for which we received our first patent in 1998.
Using REM, we can grow billions of CTLs from individual cloned cells over
several weeks, while preserving the cells' specific disease-fighting
capabilities. We also believe that REM has utility in the areas of genomic
target validation, antigen discovery and vaccine development.
Clinical Product Development Programs
tgAAV-CF
Cystic fibrosis is the most common single-gene deficiency affecting the
Caucasian population, afflicting approximately 24,000 people in the United
States and 60,000 people worldwide. The disease is caused by a defective
cystic fibrosis transmembrane regulator (CFTR) gene, which results in a build-
up of mucus in the lungs, leading to chronic infections, loss of lung function
and early death. Current treatments for cystic fibrosis relieve only symptoms
of the disease, and cannot cure the disease or stop its progression.
Based on our research and development to date, we believe that tgAAV-CF may
be superior to other gene therapy approaches for the treatment of cystic
fibrosis, due to the duration of its effect and lack of toxicity. In
preclinical studies in rabbits, we were able to detect expression of the CFTR
gene in the lung for periods of up to six months with no side effects. These
results were supported in similar studies in rhesus monkeys, in which gene
transfer occurred in up to 50% of targeted airway cells and gene expression
persisted for up to six months.
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Based on these preclinical data, we began our clinical program in late 1995 to
evaluate the safety and feasibility of using tgAAV-CF as a treatment for
cystic fibrosis lung disease. tgAAV-CF has been granted orphan drug status by
the United States Food and Drug Administration (FDA).
Our first clinical trial, which began in late 1995, was a Phase I open-
label, single-dose clinical trial at Johns Hopkins University and the
University of Florida. In this trial, we administered tgAAV-CF to eight
cohorts of adult cystic fibrosis patients at increasing dosage levels. We
administered a liquid form of tgAAV-CF to the right lower lobe of the lung,
using a bronchoscope, and to one nostril of each of 18 patients. The results
of the trial indicated that the product was safe with no apparent side
effects. We recently reopened this trial to treat patients at higher dosages.
Our second clinical trial began in late 1995 at Stanford University. We
designed this trial as a Phase I/II trial, in which tgAAV-CF was administered
to the maxillary sinuses of cystic fibrosis patients with chronic sinusitis.
We completed the Phase I part of this trial, designed as a dose escalation
study, in 1996. A total of ten patients were enrolled and 15 sinuses were
treated, in five cohorts with increasing doses. The results of the trial
indicated that tgAAV-CF was safe and well tolerated with no resulting
inflammatory response or other side effects, even after repeated delivery.
Administration of tgAAV-CF, furthermore, resulted in consistent gene transfer
and persistence of the gene for at least 70 days after treatment. In addition,
the dose level was established for the Phase II part of the trial, in which 23
patients received tgAAV-CF in one sinus and a placebo in the other. The Phase
II part of the trial was completed in mid-1998. The results of the trial
indicated that the drug was safe and well-tolerated in all patients treated,
and that markers of inflammation were reduced in the treated sinuses.
In December 1998, we began a Phase I clinical trial to test the safety of
aerosol delivery of tgAAV-CF to the whole lungs of CF patients. The clinical
trial, for which patient enrollment was completed in early 2000, was conducted
at three sites: Stanford University, the University of Washington and Harvard
University. We treated twelve patients with a single dose of tgAAV-CF in the
study, three each at four increasing dosage levels. We are compiling and
analyzing data from this study and expect to present the results in the first
half of 2000. We plan to begin a Phase II clinical trial, in which patients
will receive multiple doses of tgAAV-CF, in mid-2000.
In November 1998, we entered into a license and collaboration agreement
related to tgAAV-CF with Medeva Pharmaceuticals, Inc., a subsidiary of Medeva
PLC (Medeva). Under this agreement, Medeva received exclusive worldwide
marketing rights to tgAAV-CF in exchange for agreeing to provide significant
funding to Targeted Genetics. The section below entitled "Research and
Development Collaborations" provides a detailed description of this
relationship.
tgDCC-E1A
Cancer is the second leading cause of death in the United States, with over
one million new cases diagnosed each year. Cancer arises when the genetic
pathways that control normal cell growth and division are disrupted. Some of
these pathways are regulated by cellular oncogenes or tumor inhibitor genes.
Cancer can result from the structural alteration and abnormal expression of
cellular oncogenes or from mutation or deletion of tumor inhibitor genes.
Our product candidate for the treatment of cancer uses our proprietary
synthetic delivery system, called DC-Chol, to deliver the E1A gene locally to
cancer cells. We call this product tgDCC-E1A. E1A is a gene from the
adenovirus type 5, a common cold virus. Dr. Mien Chie Hung and his colleagues
at University of Texas M.D. Anderson Cancer Center (M.D. Anderson) have
performed tests that indicate that E1A can function as an inhibitor of the
HER-2/neu oncogene, which is known to be overexpressed in many cancers.
Preclinical mouse studies indicate that tgDCC-E1A inhibits expression of the
HER-2/neu oncogene, inhibits growth and metastasis of cancer cells and
increases significantly the long-term survival of the mice. We have worldwide
rights, under patents filed by Dr. Hung, to the use of the E1A gene as a tumor
inhibitor.
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Other research, conducted by Dr. Steven Frisch and his colleagues at the
Burnham Institute, has indicated that E1A has other anti-tumor effects
unrelated to the inhibition of HER-2/neu expression. In vitro experiments have
shown that E1A, when introduced to a variety of tumor cells, can alter tumor
cells so that they appear to revert to normal cells and lose their malignant
characteristics. Furthermore, in vivo studies in mice involving tumor cells
not overexpressing HER-2/neu indicated that administration of E1A reduced
tumor growth rates. In pre-clinical studies we also found that E1A makes tumor
cells susceptible to being killed by certain chemotherapeutic agents. We have
worldwide rights to patents filed by Dr. Frisch that are complementary to
those filed by Dr. Hung.
Our first Phase I clinical trial of tgDCC-E1A began in 1996 at M.D.
Anderson, Rush Presbyterian Medical Center in Chicago (Rush) and Virginia
Mason Medical Center in Seattle. In this trial, patients with ovarian or
breast cancer received weekly doses of tgDCC-E1A for up to six months. We
conducted the trial as an interpatient escalating dose study delivering doses
of tgDCC-E1A into the peritoneal cavity (intestines) of the ovarian cancer
patients and into the pleural cavity (lungs) of the breast cancer patients. We
designed this trial to assess safety, levels of gene transfer and expression
and tumor response. We treated a total of 18 patients through the trial's
completion in early 1998. The results indicated that clinicians can safely
administer the drug in biologically active amounts and that the E1A gene was
present and active in tumor cells. Additionally, in some patients, we observed
decreased levels of HER-2/neu expression and decreased numbers of tumor cells.
Our second Phase I clinical trial began in early 1997 at M.D. Anderson,
Rush and Wayne State University in Detroit. In this trial, we administered to
patients with inoperable primary head or neck tumors or metastatic breast or
lung tumors up to ten weekly doses of tgDCC-E1A, injected directly into the
tumor. We conducted the trial as an interpatient escalating dose study with
four dose levels and treated a total of 18 patients through the trial's
completion in early 1998. The objectives of the trial were to assess safety,
levels of gene transfer and expression and tumor response. The results
indicated that the drug was safe and that the E1A gene was present and active
in tumor cells. Additionally, in a majority of the patients, tumor growth was
inhibited or treated tumors shrank in size, or both.
Based on the data obtained from the two Phase I clinical trials described
above, we began a Phase II clinical trial of tgDCC-E1A for head and neck
cancer in October 1998. We completed this trial, which we conducted at five
cancer centers, in the fall of 1999, treating a total of 23 patients. We are
compiling and analyzing the data from the study and expect to present the
results in the first half of 2000.
In late 1999, we began the first in a series of clinical trials testing
tgDCC-E1A administered in combination with chemotherapeutic drugs. In this
Phase I clinical trial, we will treat ovarian cancer patients with advanced
stage disease with a combination of tgDCC-E1A, Taxol and Cisplatin, at
increasing dosage levels. We anticipate enrolling up to 21 patients in this
study, which is ongoing at the University of Arizona and M.D. Anderson. We
expect to complete patient enrollment in this clinical trial by the end of
2000. Also in 2000, we plan to begin additional clinical trials of tgDCC-E1A
in combination with chemotherapeutic drugs in head and neck cancer and,
potentially, other cancers.
Preclinical Product Development Programs
Hemophilia A
Hemophilia A is a hereditary disorder caused by the absence or severe
deficiency of Factor VIII, a blood protein essential for proper coagulation.
According to the National Hemophilia Foundation, approximately 14,000 people
in the United States live with hemophilia A. Worldwide, there are
approximately 50,000 hemophilia A patients. Hemophilia A patients face
spontaneous, uncontrolled internal bleeding that can lead to restricted
mobility, pain and, if left untreated, death. These serious, acute bleeding
incidents are generally treated with either recombinant or naturally-derived
Factor VIII protein. If slow chronic bleeding is not treated, however,
progressive, irreparable physical damage can result. In addition, both
recombinant and naturally-derived Factor VIII protein is expensive, and the
naturally-derived protein from human serum may carry blood-borne pathogens,
such as HIV, EBV (Epstein Barr Virus) and hepatitis C.
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We believe that there is strong rationale for the development of a gene
therapy product that could be administered prophylactically to hemophilia A
patients in order to prevent bleeding incidents for the following reasons:
. the disease results from a single gene defect that is well understood
and has been validated by the development of a protein therapy;
. overproduction of Factor VIII has not been shown to be harmful,
therefore eliminating the need for precise regulation of gene
expression;
. researchers believe that production of just 5% of normal levels of
Factor VIII could stop the chronic bleeding incidents in hemophilia A
patients;
. high costs and safety issues prevent protein therapies from being
administered prophylactically, thereby creating an unmet need among
hemophilia patients; and
. the current global market for Factor VIII protein products, which is
estimated at $1.2 billion, not including hospitalization costs,
represents a significant market opportunity.
We also believe that AAV vectors represent the most promising means of
creating an effective gene therapy product for the treatment of hemophilia A.
The characteristics of AAV vectors, including the demonstrated safety profile
and their ability to persist in cells and express genes for extended periods
of time, should provide important advantages compared to competing gene
delivery methods. Additionally, AAV vectors have been shown to express genes
efficiently in liver cells, the site from which Factor VIII protein is
normally produced in the human body. We have invested in significant
infrastructure to support the development of tgAAV-CF, which we believe can be
efficiently adapted also to the development of a Factor VIII AAV vector
product.
In 1999, we entered into an agreement with the University of North Carolina
at Chapel Hill to gain exclusive access to patent applications filed on a
novel approach for using AAV vectors to deliver the Factor VIII gene. In its
native form, the Factor VIII gene is too large to fit into an AAV vector. Dr.
Christopher Walsh of UNC developed a vector that contains a smaller version of
the Factor VIII gene, one that is missing a portion of the gene called the "B-
domain." In the human body, when clotting activity is required, a natural
process removes the B-domain to create an active Factor VIII protein. Dr.
Walsh's vector has been shown to produce active Factor VIII protein in a mouse
model. Furthermore, in the same model, Dr. Walsh has shown that when the gene
is transferred to liver cells, the gene expression persists for at least 12
months and the level of Factor VIII released into the bloodstream reached up
to 27 percent of normal levels. Based on these encouraging data, we are
collaborating with Dr. Walsh to move his AAV-Factor VIII vector into clinical
trials as quickly as possible. We expect to begin a Phase I clinical trial in
2001. We intend to design this clinical trial to establish safety and measure
Factor VIII protein levels that result from the administration of various
dosage levels of the product.
Metastatic Cancer
Based on our clinical testing of tgDCC-E1A, we believe that we have
demonstrated the potential of E1A as a tumor inhibitor. Therefore, we believe
that if we were able to deliver E1A systemically and reach tumor sites
throughout the body, we could significantly expand the utility of E1A as a
cancer treatment. We have developed a new formulation of E1A, called tgLPD-
E1A, that we believe has the potential to target cancer cells when
administered systemically.
tgLPD-E1A is based on a gene delivery vehicle called LPD that was developed
in collaboration with Dr. Leaf Huang of the University of Pittsburgh. The LPD
formulation, which contains lipid, polycation and DNA, results in the
formation of small, stable particles encapsulated in a lipid shell. In 1999,
we conducted tests of tgLPD-E1A in a mouse model of human breast cancer
tumors. In this study, conducted in collaboration with Dr. Mien Chie Hung of
M.D. Anderson, we administered tgLPD-E1A systemically to evaluate its ability
to inhibit tumor growth. The results indicated that the impact of tgLPD-E1A on
tumor growth was comparable to the impact observed with administration of
Taxol. Additionally, in mice that received both Taxol and tgLPD-E1A, the
inhibition of tumor growth was significantly better than with either agent
alone. Based on these encouraging results, we are preparing to begin a Phase I
clinical trial of tgLPD-E1A by 2001.
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Rheumatoid Arthritis
Our interest in developing a gene therapy product for the treatment of
rheumatoid arthritis stems from our origins as a spinout from Immunex
Corporation. As part of that spinout, Immunex granted us a license to certain
Immunex technology for use in the field of genetic therapy. The TNF receptor
(TNFR) gene, which is the basis for Immunex's Enbrel product for the treatment
of rheumatoid arthritis, was included in that license. We believe that the
characteristics of AAV vectors make them well suited for delivery of genes to
joints. We are in the process of conducting preclinical experiments designed
to demonstrate the potential of delivering the TNFR gene to joints using AAV
vectors to provide sustained, localized production of the TNFR protein. We
envision an AAV-TNFR product as an attractive alternative to systemic TNFR
protein therapy in patients susceptible to infection or with disease symptoms
limited to one or several joints.
Cardiovascular Disease
We are collaborating with Collateral Therapeutics, Inc. to assess the
feasibility of an AAV-based product for the delivery of therapeutic genes to
the heart. Collateral has rights to a gene known as AC6, which it believes may
be useful in the treatment of congestive heart failure. Collateral is testing
AAV vectors in animal models to determine the feasibility of delivering AC6
with an AAV vector. If these preclinical tests are successful, we may
collaborate with Collateral to develop an AAV-AC6 gene therapy product.
Acquired Immune Deficiency Syndrome (AIDS)
We are collaborating with the International AIDS Vaccine Initiative and
Children's Hospital in Columbus, Ohio to develop a vaccine to prevent AIDS.
The vaccine will utilize our AAV vectors to deliver HIV genes with the goal of
eliciting a protective immune response against the virus. The collaboration
will extend for a period of up to three years, beginning in March 2000, and
will include development, preclinical and Phase I clinical studies. We have
the right to commercialize in industrialized countries any vaccine product
that may result from this development collaboration. We also have the option
to manufacture the vaccine for non-industrialized nations.
Core Technologies
We have assembled a broad range of core technologies that we believe will
allow us to address a number of different diseases. We believe that the three
different vector technologies on which our systems are based, AAV, synthetic
and retroviral, will give us the flexibility to develop gene therapies for a
broader range of diseases than we could develop using any single gene delivery
system. In the area of cell therapy, we believe that our technology and
expertise in isolating and multiplying CTLs could lead to development of a
series of immunotherapies to treat infectious diseases and cancer.
Gene Therapy
Overview. Gene therapy is an approach to the treatment and prevention of
genetic and acquired diseases that involves inserting genetic information into
target cells to produce specific proteins needed to correct or modulate
disease conditions. Proteins are the fundamental components of all living
cells and are essential to cellular structure, growth and function. Cells
produce proteins from a set of genetic instructions encoded in DNA, which
contains all the information necessary to control cellular biological
processes. DNA is organized into segments called genes, with each gene
containing the information required to express, or produce, a specific
protein.
An alteration in the function of, or absence of, specific genes causes
certain diseases, including inherited diseases such as cystic fibrosis and
certain types of cancer. Gene therapy may be used to treat these diseases by
replacing a missing or defective gene to facilitate the normal protein
production capabilities of cells. In addition, gene therapy may be used to
enable cells to perform additional roles in the body, such as enhancing the
function of the immune system to fight infectious diseases or cancer. Gene
therapy may also be used to inhibit production of undesirable proteins or
viruses within cells that cause disease.
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A key factor in the progress of gene therapy has been the development of
safe and efficient methods of transferring genes into cells. For transfer into
cells, the gene is incorporated into a delivery system called a vector, which
may be derived from either viral or synthetic systems. The most common gene
delivery approach to date relies on viral gene transfer, whereby modified
viruses are used to transfer the desired genetic material into host cells. The
process of gene transfer can be accomplished ex vivo (outside the body),
whereby doctors remove cells from the patient, genetically modify the cells
and then reinfuse them into the patient, or in vivo (inside the body), whereby
vectors are introduced directly into the patient's body.
The use of viruses takes advantage of their natural ability to introduce
genes into host cells and use the host's metabolic machinery to produce
proteins essential for the survival and function of the virus. In gene therapy
applications, viruses are genetically modified to contain the desired genes
and to inhibit the ability of the virus to reproduce. Successful viral gene
transfer for diseases requiring long-term gene expression involves a number of
essential technical requirements, including the ability of the vector to carry
the desired genes, to transfer the genes into a sufficient number of target
cells and to enable the delivered genes to persist in the host cell. A number
of different viral vectors, including AAV and retroviral vectors, are being
used for potential gene therapy applications requiring long-term gene
expression.
Current synthetic vector systems generally consist of DNA incorporating the
desired gene, combined with various compounds aimed at enabling the DNA to be
taken up by the host cell. These in vivo gene delivery approaches include:
. encapsulating genes into lipid carriers such as liposomes, which
facilitate the entry of DNA into cells;
. complexing negatively charged DNA with positively charged cationic
lipids;
. injecting pure plasmid or naked DNA in an aqueous solution; and
. directing DNA to receptors on target cells by combining the gene with
proteins that bind to the receptors.
AAV Vectors. Together with our scientific collaborators, we have developed
significant expertise in the design and use of AAV vectors in gene therapy. We
believe that AAV vectors are particularly well suited for the treatment of a
number of diseases because:
. AAV has never been associated with causing any human disease;
. AAV vectors contain no viral genes that could produce unwanted cellular
immune responses leading to side effects or reduced efficacy;
. AAV vectors can introduce genes into nondividing or slowly dividing
cells;
. AAV vectors can persist in the host cell to provide relatively long-term
gene expression; and
. AAV vectors can be manufactured using methods utilized in the
manufacture of other biopharmaceutical products.
We are building a proprietary position in AAV through our development of or
acquisition of exclusive rights to inventions that:
. provide important enhancements to AAV vectors;
. demonstrate novel approaches to the use of AAV vectors for gene therapy;
and
. establish new and improved methods for large-scale production of AAV
vectors.
In addition to our tgAAV-CF clinical development program, we are conducting
preclinical experiments to assess the potential for delivery of genes to other
target cells using AAV vectors. Currently, we are evaluating the use of AAV
vectors in cells of the cardiovascular system, joints and the liver. As
resources become available to do so, we intend to examine, both internally and
through academic collaborators, the use of AAV vectors in additional cell
types.
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Synthetic Vectors. We have exclusive rights to a significant body of
synthetic gene delivery technology based on cationic lipids. These synthetic
vectors are formulated by mixing negatively charged DNA with positively
charged cationic lipids, which promote uptake of genes by cells. These vectors
appear to be safe and they can be used in vivo as well as ex vivo. We believe
that synthetic vectors have several characteristics that make them
particularly well suited for the treatment of certain diseases, including:
. the ability to target a specific cell type;
. the relative ease of manufacture; and
. the ability to transfer relatively large segments of DNA.
We are working with Dr. Leaf Huang of the University of Pittsburgh to
develop a series of synthetic delivery systems based on his discoveries. Dr.
Huang's original DC-Chol system is used in our potential tgDCC-E1A cancer
product. We have an exclusive license to an issued U.S. patent on DC-Chol for
the treatment of cancer and certain other diseases. Also, we have obtained
from the University of Pittsburgh broad licenses to a series of Dr. Huang's
more recent discoveries in this area. In one of these discoveries, which we
call LPD, DNA is condensed and combined with cationic lipids to generate
particles of defined size that have significantly enhanced gene transfer
efficiency and stability in the bloodstream. We therefore believe that LPD may
be useful for delivery of genes by intravenous administration.
Enhanced Vectors. In July 1999 we began a collaborative effort with Elan
Pharmaceutical Technologies, a division of Elan Corporation plc, to focus on
developing enhanced gene delivery systems. We established a joint venture with
Elan, Emerald Gene Systems, Ltd., to focus on combining our AAV and synthetic
gene delivery technologies with Elan's drug delivery technologies. Elan's
contributed technologies include targeting ligands, permeation enhancers and
polymers. We plan to develop enhanced gene delivery systems that can be
systemically or orally administered and that will target the desired cells
within the body.
Retroviral Vectors. We believe that retroviral vectors may be well suited
for ex vivo genetic modification of rapidly dividing cells, such as T cells
and stem cells. We have a strong position in retroviral gene delivery
technology through our relationship with Dr. A. Dusty Miller, a leader in the
development of packaging cell lines for retroviral vectors. One of Dr.
Miller's inventions in this area is an improved retroviral vector packaging
cell line called PG13, which we have licensed exclusively from the Fred
Hutchinson Center Research Center. Our research has shown that vectors
produced in this cell line have improved efficiency for ex vivo transfer of
genes to human T cells and stem cells.
Cell Therapy
Overview. The immune system is the body's major defense mechanism against
disease. It functions through a complex interplay of components that allow the
body to detect foreign agents and defend against infections and diseases. The
immune system recognizes parts of proteins called antigens that are present on
the surface of diseased cells but are not present on normal cells. The immune
response to an antigen involves the integrated action of various classes of
white blood cells, including lymphocytes. There are two major classes of
lymphocytes, B cells and T cells.
T cells direct cell-mediated immunity by recognizing antigens on diseased
cells. The two main classes of T cells are CD4 cells and CD8 cells. In
general, CD8 cells are CTLs that recognize, contact and kill the diseased
cells. CD4 cells are primarily helper cells that coordinate the function of
other immune cells, including CTLs, by secreting growth factors known as
cytokines. CTLs are disease-specific: they individually recognize and bind
only to a single, specific antigen. Only in the presence of CD4 helper cells,
furthermore, do these specific CTLs proliferate to produce the large
population of antigen-specific CTLs required to elicit an effective immune
response.
In some diseases, the immune system fails to mount or maintain an effective
immune response. For infectious diseases and cancer, it is believed that this
failure may be associated with an inadequate CTL response.
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<PAGE>
For example, HIV infects and kills CD4 cells, which leads to subsequent loss
of CTL function and therefore to destruction of the immune system by the
virus.
Targeted CTLs. We have developed a highly targeted form of cell therapy,
with which we intend to produce a disease-specific immune response through the
infusion of large numbers of antigen-specific CTLs. In our Targeted CTL
program, antigen-specific CTLs are isolated from a small sample of the
patient's blood, multiplied to large numbers ex vivo and then reinfused into
the patient. In essence, these Targeted CTLs are intended to amplify the
natural disease-fighting function of the immune system relating to specific
infected or cancerous cells.
We believe that our Targeted CTL program represents an improvement over
other approaches to immunotherapy because:
. it is based on highly potent, cloned, antigen-specific CTLs;
. virtually all of the reinfused CTLs target the specific diseased cells;
and
. side effects may be reduced due to the uniformity and consistency of the
reinfused cells.
Our focus on Targeted CTLs originated from research conducted by Drs.
Philip Greenberg and Stanley Riddell, collaborators at the Fred Hutchinson
Cancer Research Center. These researchers conducted a Phase I clinical trial
to evaluate the use of cytomegalovirus (CMV) -specific CTLs to provide an
immune response against CMV in bone marrow transplant patients. This trial
represented the first use of cloned, antigen-specific CTLs. None of the 14
patients receiving the CTLs developed CMV viremia or disease. Dr. Riddell is
now conducting a Phase II clinical trial to follow up on the promising results
observed in Phase I. Other work by Drs. Greenberg and Riddell has shown,
moreover, that Targeted CTLs may be useful in treating HIV infection.
In 1998, we completed a preclinical study in which we administered Targeted
CTLs to chimpanzees chronically infected with hepatitis B virus (HBV). The
objective of the study was to establish safety of the therapy and,
potentially, obtain proof of concept that HBV-specific Targeted CTLs could be
promising as a treatment for humans infected with HBV. The preliminary results
of the study, which we presented in August 1998, indicated that the therapy
was safe and that there were trends toward efficacy, evidenced by a temporary
drop in viral burden, increased levels of liver enzymes and improvement in
liver condition. This study has given us additional reason to believe that
Targeted CTLs have potential to treat viral diseases.
Rapid Expansion Method. The Targeted CTL program is made possible by our
proprietary rapid expansion method, or REM, which we use to rapidly grow CTLs
for infusion into the patient. We believe that REM represents a significant
improvement over other methods of growing T cell clones. Using REM, CTL clones
can be multiplied over a thousand-fold in less than two weeks. We can grow
billions of CTLs from individual cloned cells over several weeks, while
preserving the cells' disease-fighting capabilities. We have seen consistent
results from REM both with CD8 and CD4 T cells. Furthermore, we have shown
that REM is effective for growing Targeted CTLs for a number of viral diseases
and cancers, such as HIV, CMV, HBV, malignant melanoma and prostate tumor
peptides. We have filed patent applications relating to the original REM
process and to subsequent process improvements on a worldwide basis. Since
1998 we have received one U.S. patent in this area.
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<PAGE>
Research and Development Collaborations
Celltech Group plc/Medeva PLC
In November 1998, we entered into agreements with Medeva Pharmaceuticals,
Inc. (Medeva), a subsidiary of Medeva PLC to develop and commercialize tgAAV-
CF, our potential gene therapy product for the treatment of cystic fibrosis.
Medeva committed to provide up to three years of funding (up to $5 million per
year) to support tgAAV-CF development and commercialization activities,
including:
. scale-up and validation of manufacturing processes;
. development and validation of analytical methods;
. conduct of Phase I clinical trials; and
. other activities in support of product testing and commercialization.
In addition to development and clinical support, Medeva agreed to pay the
costs of Phase II and subsequent clinical trials of the product. While we may
manage Phase II clinical trials in the United States, Medeva was assigned the
responsibility for conducting all other trials and securing worldwide
registration of tgAAV-CF. Under the terms of the tgAAV-CF agreements, we
granted Medeva an exclusive worldwide license to sell tgAAV-CF, but we
retained responsibility for manufacturing and supplying bulk tgAAV-CF product
to support clinical trials and product commercialization. Medeva agreed to
loan us $2 million to partially fund the construction of a pilot-scale tgAAV-
CF manufacturing facility. Medeva also agreed to loan us, under certain
conditions, up to an additional $10 million toward building a GMP
manufacturing facility for higher-volume production of tgAAV-CF.
In January 2000, Medeva merged with Celltech/Chiroscience to become part of
Celltech Group plc. Celltech has assumed Medeva's rights and responsibilities
under our agreements.
Assuming successful commercialization of the tgAAV-CF product, we could
receive a total of up to $54 million in license fees, development funding,
milestone payments, loans and equity investments connected with the
Medeva/Celltech tgAAV-CF agreements. Under a long-term supply agreement we
would also receive proceeds from sales of tgAAV-CF, assuming successful
commercialization, based upon a pricing formula intended to provide us with a
significant percentage of Celltech's net revenue from product sales. The
research and development funding agreement is effective through October 1,
2001, with options to extend the term if both parties agree. The long-term
supply agreement is effective for the term of the patents covering tgAAV-CF.
Celltech may terminate our tgAAV-CF agreements at will with 180 days notice.
Should Celltech exercise its termination right, all rights related to tgAAV-CF
would return to us.
Emerald Gene Systems, Ltd. and Elan Corporation, plc
In July 1999, we formed a joint venture with Elan International Services,
Ltd., a wholly owned subsidiary of Elan Corporation plc, named Emerald Gene
Systems, Ltd. The joint venture is based in Bermuda and is owned 80.1% by
Targeted Genetics and 19.9% by Elan. Emerald's purpose is to develop enhanced
gene delivery systems based on a combination of our gene delivery technologies
and Elan's drug delivery technologies. Emerald's research and development
program will be Elan's exclusive effort in the field of gene delivery and our
exclusive effort in the combination of our technologies with drug delivery
technologies. Generally, Emerald's research and development will be conducted
under contract by Elan and Targeted Genetics and Emerald will reimburse each
company for the costs of the research and development plus a profit
percentage. Elan and Targeted Genetics will fund the expenses of Emerald in
proportion to their ownership interests.
As part of our agreements related to Emerald, Elan has provided funding to
us as follows:
. a $5 million purchase of our common stock at the signing the agreements;
and
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<PAGE>
. a $12 million purchase of convertible exchangeable preferred stock at
the closing of the agreements, the proceeds of which we used to make our
initial investment in Emerald.
Elan has also agreed to provide additional funding as follows:
. an additional $5 million purchase of our common stock one year from the
date of our agreements; and
. a $12 million line of credit under a convertible note to fund our
ongoing investment in Emerald.
At Elan's option, the convertible exchangeable preferred stock can be
converted into common stock of Targeted Genetics or exchanged for an
additional 30.1% ownership in Emerald, which would result in 50/50 ownership
of Emerald.
Alkermes, Inc.
In June 1999, we entered into a strategic alliance with Alkermes, Inc. in
which we received exclusive rights to an important issued patent and other
pending patent applications related to AAV vector manufacturing. We believe
that the issued patent broadly covers a manufacturing method that is key to
making AAV-based products in a commercially viable, cost-effective manner.
Under the terms of our agreement, we issued to Alkermes 500,000 shares of
common stock and warrants to purchase two million additional shares of common
stock at significant premiums to market price at the time of the transaction.
Alkermes will also receive milestone payments and royalties on products
manufactured using the licensed patents
Relationship with Immunex Corporation
Targeted Genetics was formed in 1989 as a subsidiary of Immunex, a
biopharmaceutical company developing recombinant proteins as therapeutics. In
February 1992, we spun off as a separate company from Immunex and entered into
a technology license agreement with Immunex. In exchange for shares of our
preferred stock, which were converted into 1,920,000 shares of common stock at
the time of our initial public offering, Immunex granted us a worldwide,
exclusive field-of-use license for certain Immunex proprietary technology
specifically applicable to our gene therapy business. This technology relates
to gene identification and cloning, panels of retroviral vectors, packaging
cell technology, recombinant cytokines, DNA constructs, cell lines,
promoter/enhancer elements and immunological assays. In addition, the
agreement required Immunex to disclose to us, until February 1999, information
concerning improvements discovered or developed by Immunex relating to the
transferred technology such as new techniques, biological materials,
inventions, or developments. We have the option to acquire a nonexclusive,
worldwide, fully paid, royalty-free license and, in some cases, an opportunity
to negotiate the conversion of a nonexclusive license into an exclusive
license, to these improvements. Immunex currently owns approximately 7% of our
outstanding common stock.
Patents and Proprietary Rights
Patents and licenses are important to our business. Our policy is to file
patent applications to protect technology, inventions and improvements to
inventions that we consider important to the development of our business. We
also rely on trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position. To
date, we have filed or exclusively licensed 107 patent applications relating
to our product and technology development programs with the United States
Patent and Trademark Office (USPTO), as well as foreign counterparts of some
of these applications in Europe, Japan and certain other countries. Of these
patent applications, 29 patents have been issued or allowed by the USPTO.
In addition to the intellectual property that we own or have exclusively
licensed, we have licensed several issued and pending patents on a
nonexclusive basis. Among these are the two key patents that relate to the use
of AAV vectors for gene therapy licensed from the National Institutes of
Health (NIH) and the University of Florida Research Foundation. In addition,
we have acquired nonexclusive rights to the CFTR gene being delivered in our
tgAAV-CF product.
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<PAGE>
The patent positions of pharmaceutical and biotechnology firms, including
our patent positions, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved,
particularly with regard to human therapeutic uses. The coverage claimed in a
patent application may be significantly reduced before a patent is issued.
Consequently, we do not know whether any patent applications will result in
the issuance of patents or, if any patents are issued, whether the patents
will be subjected to further proceedings limiting their scope, whether they
will provide significant proprietary protection or whether they will be
circumvented or invalidated. Since patent applications in the United States
are maintained in secrecy until patents issue and patent applications in other
countries generally are not published until more than 18 months after they are
filed, and since publication of discoveries in scientific or patent literature
often lags behind actual discoveries, we cannot be sure that we or any
licensor were the first creator of inventions covered by pending patent
applications or that we or the licensor were the first to file patent
applications for these inventions.
We are currently indirectly involved in a patent interference proceeding
declared by the USPTO to determine priority of invention relating to the
nonexclusively licensed CFTR gene delivered in our tgAAV-CF product candidate.
As a nonexclusive licensee of the CFTR gene, we do not expect to directly
participate in the CFTR gene interference proceeding. If the eventual outcome
of the CFTR interference proceeding is unfavorable to our licensor, we may
have to obtain a license from the prevailing party in order to proceed with
development of tgAAV-CF. Costs associated with obtaining a license may be
substantial and could include ongoing royalties in excess of those we
currently pay under our existing CFTR gene license. Any license required in
this circumstance may not be available to us on acceptable terms, if at all.
Although we do not foresee material expenditures related to interference
proceedings, these proceedings could result in substantial financial costs to
us, even if the eventual outcome were favorable to us. Our patents, if issued,
may not be held valid or enforceable by a court and a competitor's technology
or product may not be found to infringe these patents. Litigation, which could
result in substantial cost to us, may be necessary to enforce our patents or
to determine the scope and validity of other parties' proprietary rights. If
the outcome of litigation were adverse, our business could be adversely
affected. We are unable to predict how courts will resolve any future issues
relating to the validity and scope of our patents, should they be challenged.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to our
business. Some of these technologies, applications or patents may conflict
with our technologies or patent applications. This conflict could limit the
scope of any patents that we might be able to obtain or result in denial of
our patent applications. In addition, if patents that cover our activities are
issued to other companies, we may be required to either obtain a license under
those patents or to develop or obtain alternative technology. A license may
not be available on acceptable terms, if at all, and we may not be able to
develop or obtain alternative technology.
As the biotechnology industry expands and more patents are issued the risk
increases that our processes and potential products may give rise to claims
that they infringe the patents of others. These other parties could bring
legal actions against us claiming damages and seeking to stop clinical
testing, manufacturing and marketing of the affected product or use of the
affected process. Litigation may be necessary to enforce patents issued to us,
to protect trade secrets or know-how owned by us or to determine the
enforceability, scope and validity of proprietary rights of others. This type
of litigation regardless of its merit, could result in substantial expense to
us and significantly divert the efforts of our technical and management
personnel. An adverse outcome could adversely affect our business. In addition
to any potential liability for damages, we could be required to obtain a
license to continue to manufacture or market the affected product or use the
affected process. Costs associated with any required license could be
substantial and could include ongoing royalties. Any license required under
any infringed patent may not be available to us on acceptable terms, if at
all.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information. Other parties may independently
develop substantially equivalent proprietary information and techniques or
gain access to our trade secrets or disclose our technology. To protect our
trade secrets, we require our employees, consultants, scientific advisors and
parties to collaborative agreements to execute confidentiality
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<PAGE>
agreements. In the case of employees, the agreements also provide that all
inventions resulting from work performed by them while employed by Targeted
Genetics will be our exclusive property. These agreements, however, may not
provide meaningful protection of our trade secrets or adequate remedies in the
event of unauthorized use or disclosure of this information.
Competition
We are aware of a number of companies and institutions that are developing
or considering the development of potential gene therapy and cell therapy
treatments. These include other gene therapy companies, fully integrated
pharmaceutical companies, universities, research institutions, governmental
agencies and other healthcare providers. In addition, our potential products
will compete with existing pharmaceutical products that are based on
established technologies. Many of our competitors have substantially more
financial and other resources, larger research and development staffs and more
experience and capabilities in researching, developing and testing products in
clinical trials, in obtaining FDA and other regulatory approvals, and in
manufacturing, marketing and distributing products. We also compete with
others to acquire products or technology from research institutions or
universities. In addition, the competitive positions of other companies may be
strengthened through collaborative relationships with large pharmaceutical
companies or academic institutions. Our competitors may develop, obtain patent
protection for, receive FDA and other regulatory approvals for, or
commercialize products more rapidly than we do. If we are successful in
commercializing our products, we will be required to compete with respect to
manufacturing efficiency and marketing capabilities, areas in which we have no
experience. Our competitors may develop new technologies and products that are
available for sale before our potential products or that may be more effective
than our potential products. In addition, our competitors may manufacture and
market their products more successfully than our potential products. These
developments could render our potential products less competitive or obsolete.
Governmental Regulation
All of our potential products will require regulatory approval by U.S. and
foreign governmental agencies before commercialization in the applicable
countries. Human therapeutic products are subject to rigorous preclinical and
clinical testing and other premarket approval procedures administered by the
FDA and similar authorities in foreign countries. The FDA exercises regulatory
authority over the development, testing, formulation, manufacture, labeling,
storage, record keeping, reporting, quality control, advertising, promotion,
export and sale of our potential products. Similar requirements are imposed by
foreign regulators. In some cases, state requirements may also apply.
Gene therapy and cell therapy are relatively new technologies and have not
been extensively tested in humans. The regulatory requirements governing gene
and cell therapy products and related clinical procedures are uncertain and
are subject to change. Obtaining approval from the FDA and other regulatory
authorities for a new therapeutic product is likely to take several years, if
approval is ever obtained, and could involve substantial expenditures.
Moreover, ongoing compliance with applicable requirements may also require the
expenditure of substantial resources. We may encounter difficulties or
unanticipated costs in our efforts to secure necessary governmental approvals,
which could delay or prevent the marketing of our products.
The activities required before a new therapeutic agent may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation and may require animal studies to assess the product's
potential safety and effectiveness. Animal safety studies must be conducted in
accordance with the FDA's Good Laboratory Practice regulations. The results of
these studies must be submitted to the FDA as part of an Investigational New
Drug application, which must be reviewed and cleared by the FDA before
proposed clinical testing can begin. Clinical trials must be conducted in
accordance with the FDA's Good Clinical Practices regulations under protocols
that detail the objectives of the trial, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the application. The FDA's review or approval
of a study protocol does not necessarily mean that a trial successfully
demonstrating safety or efficacy will result. Further, each clinical trial
must be approved by and conducted under
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the auspices of an independent institutional review board at the institution
at which the trial will be conducted. This board will consider, among other
things, ethical factors, the safety of human subjects and the possible
liability of the institution. This review board is also responsible for
continuing oversight of the approved protocols in active trials. A review
board may require changes in a protocol, and the review board may not permit
any given trial to be initiated or completed.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, gene therapy clinical trials
generally involve a small number of patients, who may or may not be afflicted
with a specific disease, to determine the preliminary safety profile. In Phase
II, clinical trials are conducted with larger groups of patients afflicted
with a specific disease in order to establish preliminary effectiveness and
optimal dosages and to obtain additional evidence of safety. In Phase III,
large-scale, multicenter, comparative clinical trials are conducted with
patients afflicted with the target disease in order to provide enough data for
the statistical proof of efficacy and safety required by the FDA and others
for market approval. The FDA receives reports on the progress of each phase of
clinical testing, and it may require the modification, suspension or
termination of clinical trials if patient risk is too high. Because gene
therapy products are a new category of therapeutics, we cannot be certain of
the length of the clinical trial period or the number of patients the FDA will
require to be enrolled in a particular clinical trial in order to establish to
its satisfaction the safety and effectiveness of the products.
After completion of clinical trials of a product candidate, we are required
to obtain FDA approval to market the product in the U.S. The FDA's legal
authority is defined in the Federal Food, Drug and Cosmetics Act. Our products
are regulated by the Center for Biologics Evaluation and Research. While we
expect this regulatory structure to continue, we also expect the FDA's
regulatory approach to evolve as it increases its scientific knowledge and
experience in gene therapy. Current FDA regulations relating to biologic
therapeutics require us to submit a Biologics License Application to the FDA
before the FDA will permit commercial marketing. This application includes
product development activities, results of preclinical studies and clinical
trials, and detailed manufacturing information. Unless the FDA gives expedited
review status, this stage of the review process takes at least one year. The
FDA may refuse to accept a Biologics License Application if it fails to meet
predetermined requirements.
The FDA is an agency focused on public health, reviewing all products for
safety and efficacy. Both standards must be met before the FDA grants product
approval. Should the FDA have concerns with respect to product safety and
efficacy, it may delay product review or request additional data. The FDA may
ultimately decide that our license application does not satisfy its criteria
for approval and might require us to do any or all of the following:
. modify the scope of our desired product claims;
. add warnings or other safety-related information; or
. perform additional testing.
Once approved by the FDA, marketed products are subject to continual FDA
review. Later discovery of previously unknown problems or failure to comply
with applicable regulatory requirements may result in restrictions on
marketing of a product or in its withdrawal from the market, as well as
potential criminal penalties or sanctions.
The FDA requires that manufacturers of a product comply with current Good
Manufacturing Practices requirements, both as a condition of product approval
and on a continuing basis. In complying with these requirements, we must
expend time, money and effort on a continuing basis in production, record
keeping and quality control. Our manufacturing facilities are subject to
periodic inspections by the FDA to ensure compliance. Failure to pass these
inspections could subject us to possible FDA action, such as the suspension of
manufacturing, seizure of product, withdrawal of approval or other regulatory
sanctions. The FDA could also require us to recall a product.
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In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other federal, state and local regulations. Our research
and development activities involve the controlled use of hazardous materials,
chemicals, biological materials and radioactive compounds. Although we believe
that our safety procedures for handling and disposing of these materials
comply with the standards prescribed by state and federal laws and
regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident, we
could be held liable for any resulting damages, and any resulting liability
could exceed our financial resources.
Human Resources
At December 31, 1999, we had 92 full-time-equivalent employees, 72 of which
are directly involved in research and development. Of these employees, 16 have
Ph.D. or M.D. degrees. A significant number of our management and professional
employees have prior experience with other biotechnology or pharmaceutical
companies.
Executive Officers
The following table lists the executive officers of Targeted Genetics, who
will serve in the capacities noted until their successors are duly appointed
and qualified.
<TABLE>
<CAPTION>
Name Age Position
------------------------- --- ----------------------------------------
<C> <C> <S>
H. Stewart Parker........ 44 President, Chief Executive Officer and
Director
Barrie J. Carter, Ph.D. . 55 Executive Vice President and Director of
Research and Development
James A. Johnson......... 43 Senior Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
H. Stewart Parker managed the formation of Targeted Genetics as a wholly
owned subsidiary of Immunex and has served as president, chief executive
officer and director since our inception in 1989. She served in various
capacities at Immunex from August 1981 through December 1991, most recently as
vice president, corporate development. From 1991 to January 1993, Ms. Parker
also served as president and a director of Receptech Corporation, a company
formed by Immunex in 1989 to accelerate the development of soluble cytokine
receptor products. Ms. Parker is a member of the executive committee and the
board of directors of BIO, the primary trade organization for the
biotechnology industry. She received her B.A. and M.B.A. from the University
of Washington.
Barrie J. Carter has served as executive vice president and director of
research and development since August 1992. For the previous 22 years he was
employed by the National Institutes of Health in Bethesda, Maryland, and from
1982 to 1992 was chief of the laboratory of molecular and cellular biology at
the National Institute for Diabetes and Digestive and Kidney Diseases. Dr.
Carter received his B.Sc. (Honors) from the University of Otago, Dunedin, New
Zealand and his Ph.D. in the Biochemistry Department of the University of
Otago Medical School. Before joining the NIH he then spent a period of
postdoctoral training at the Imperial Cancer Research Fund Laboratories in
London, England. His long-term research interests are in the molecular biology
of viruses, development of AAV vectors and gene therapy. Dr. Carter serves on
the editorial boards of Human Gene Therapy, as a section editor of Current
Opinion in Molecular Therapeutics and as an associate editor of Virology.
Since 1995, he has been an affiliate professor of medicine at the University
of Washington Medical School.
James A. Johnson serves as senior vice president, finance and
administration, chief financial officer, treasurer and secretary. He joined
Targeted Genetics in March 1994 as vice president, finance, chief financial
officer, treasurer and secretary and was promoted to his current position in
January 1999. He was employed by Immunex from January 1988 to February 1994,
initially as director of finance, and then as vice president, finance
beginning February 1990. While at Immunex, Mr. Johnson served as treasurer of
Targeted Genetics from our
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inception in 1989. From November 1989 to January 1993, he also served as
treasurer and assistant secretary of
Receptech. He received his B.A. from the University of Washington.
ITEM 2. PROPERTIES
We currently occupy approximately 41,000 square feet of laboratory and
office space in two adjoining buildings in Seattle, Washington. The lease on
our primary facility, for approximately 36,000 square feet, extends to April
1, 2004 and has two five-year extension options. The average annual rent
payment for our main facility is approximately $550,000 during the current
five-year lease term. The lease on our adjoining office space, for
approximately 5,000 square feet, expires on March 31, 2004 and has two
additional five-year extension options. The average annual rent payment for
our adjoining office space is approximately $95,000 during the current term of
the lease. In order to continue to grow our AAV vector manufacturing
capability, we expect that we will need to expand our manufacturing operations
to a separate facility. In 1999, we began the process of identifying
alternatives for this expansion. Otherwise, we believe that our current
facilities, together with approximately 2,000 square feet of expansion space
remaining in our primary facility and additional expansion space available in
the adjoining office complex, will be adequate to meet our projected needs for
the next several years. Within that time frame, however, we could be required
to locate alternative facilities, depending on the extent of our company's
growth and development.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 1999.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Our common stock trades on The Nasdaq National Market under the symbol
TGEN. At March 1, 2000, we had approximately 200 shareholders of record and
approximately 15,300 total beneficial holders of our common stock. We have
never paid cash dividends and do not anticipate paying them in the foreseeable
future. In addition, we are restricted as to the amount of dividends we can
pay under our loan agreement with Medeva PLC. The following table lists, for
each calendar quarter indicated, the high and low bid quotations for our
common stock as quoted on the Nasdaq National Market. These quotes reflect
inter-dealer prices, without retail mark-up or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
------ -----
1999
----
<S> <C> <C>
4th Quarter................................ $4.88 $1.25
3rd Quarter................................ 2.75 1.50
2nd Quarter................................ 1.81 1.44
1st Quarter................................ 3.06 1.31
<CAPTION>
1998
----
<S> <C> <C>
4th Quarter................................ $2.31 $1.31
3rd Quarter................................ 1.75 0.88
2nd Quarter................................ 4.25 1.31
1st Quarter................................ 3.13 0.97
</TABLE>
On June 6, 1999, we issued 500,000 unregistered shares of common stock to
Alkermes, Inc. at an aggregate offering price of $812,500, along with warrants
to purchase an additional 2,000,000 shares of common stock. The warrants are
divided into two tranches: a warrant to purchase 1,000,000 shares of common
stock at a price of $2.50 expiring June 9, 2007 and a warrant to purchase
1,000,000 shares of common stock at a price of $4.16 expiring June 9, 2009. On
July 22, 1999, we issued 2,148,899 unregistered shares of common stock to Elan
at an aggregate offering price of $5 million. On August 9, 1999 we issued
677,392 unregistered shares of common stock to Medeva at an aggregate offering
price of $1.5 million. Each of these transactions did not involve a public
offering and therefore was exempt from registration under Section 4(2) of the
Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1999(1) 1998 1997 1996 1995
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Revenue................. $ 6,847,993 $ 7,510,252 $ 1,327,585 $ 1,330,458 $ 174,625
Expenses................ 21,084,502 16,372,987 15,828,094 27,894,811 10,462,429
Loss from operations.... (14,236,509) (8,862,735) (14,500,509) (26,564,353) (10,287,804)
Net loss applicable to
common stock........... (27,030,648) (8,687,049) (14,187,774) (26,038,042) (9,922,284)
Basic and diluted net
loss per share......... (0.84) (0.33) (0.70) (1.59) (0.94)
Shares used in computing
basic and diluted net
loss per share......... 32,173,756 26,637,823 20,196,325 16,407,928 10,532,950
Financial Condition
Cash, cash equivalents
and securities
available for sale..... $ 7,153,269 $11,956,796 $ 5,037,821 $ 19,051,070 $ 14,442,562
Total assets............ 13,692,478 16,204,083 9,767,084 25,139,052 19,960,460
Long-term obligations,
including current
portion................ 3,267,071 2,072,044 2,547,324 3,378,420 3,286,508
Shareholders' equity.... 6,965,514 11,981,759 5,591,587 19,507,788 15,772,836
</TABLE>
- --------
(1) Expenses increased in 1999 due to the Alkermes license fee write off
described in further detail in Item 7 of "Management's Discussion and
Analysis," in the subsection entitled "Operating Expenses". Net loss
increased in 1999 due to our 80.1% share of Emerald's losses, as described
in Item 7 in the subsection entitled "Other Income and Expense," and due
to the Alkermes license fee.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We were incorporated in March 1989 as a wholly owned subsidiary of Immunex
Corporation and began operations as an independent company in 1992. Our goal,
both then and now, is to research and develop gene and cell therapy products
to treat acquired and inherited diseases. We now have two lead products in
clinical trials, tgAAV-CF for treating cystic fibrosis and tgDCC-E1A for
treating cancer, and several additional product candidates in preclinical
development. Since our founding, we have focused our efforts on technology and
product development, which we have funded primarily through the sale of equity
securities. In addition, we have endeavored to enter into product
collaborations with other companies as a means to obtain outside funding for
our programs and to broaden the application of our technology platform. We
have completed three collaborations to date that provide ongoing funding of
our research and development programs:
. a tgAAV-CF product development collaboration established, with Medeva
PLC in November 1998;
. a gene delivery technology development joint venture with Elan
Corporation plc, Emerald Gene Systems, Ltd. (Emerald), established in
July 1999; and
. an AAV-based AIDS vaccine development program with the International
Aids Vaccine Initiative (IAVI), established in February 2000.
Although our technology appears promising, we do not know whether any
commercially viable products will result from our research and development
efforts. We do not anticipate that we will have any commercial product
revenues for at least the next several years. Through December 31, 1999, our
accumulated losses total approximately $103.5 million. We expect to generate
substantial additional losses in the future, due primarily to the costs of our
preclinical and clinical development programs, developing our manufacturing
capabilities and preparing our products under development for
commercialization. We may never become a profitable company.
20
<PAGE>
Results of Operations
Revenue
Our revenue results have fluctuated from year to year and will likely
continue to be volatile as we establish collaborations, complete
collaborations, enter into licensing agreements and recognize varying amounts
of revenue from our research and development activity. We had revenue of $6.8
million for the year ended December 31, 1999. Of this amount, $6.4 million was
generated from our tgAAV-CF collaboration agreements with Medeva. We earned
the remainder from a collaborative agreement with our affiliate, Emerald Gene
Systems, for research and development services in the fourth quarter of the
year. Although our 1998 revenue of $7.5 million was greater than our 1999
revenue, we believe that this does not reflect a meaningful trend because
revenue for 1998 included $6.0 million in fees earned up-front when we
established the Medeva collaboration. Revenue for 1998 also included
approximately $1.2 million earned from Medeva for product development efforts
in the fourth quarter of the year.
We had revenue of $1.3 million for the year ended December 31, 1997. This
amount included a $1.0 million product milestone payment related to our tgDCC-
E1A cancer product, which we received under a European development
collaboration that has since been terminated. Other revenue in 1997 consisted
of grant funding earned from research grants awarded by the National
Institutes of Health.
We expect our collaborative agreement revenue to increase in 2000. We
expect to realize significant revenue from our Medeva tgAAV-CF collaboration,
including research and development funding, revenue from the supply of tgAAV-
CF product for clinical trials and, potentially, payments upon the achievement
of important product development milestones. We also expect to receive
increased research and development funding from Emerald. In addition, our IAVI
collaboration should provide a new source of research and development funding.
Operating Expenses
Research and Development
Research and development expenses increased to $14.3 million for 1999 from
$13.3 million for 1998. The increase for 1999 compared to 1998 reflects
increased expenses related to the tgAAV-CF collaboration and, to a lesser
extent, costs incurred to support the Emerald joint venture. These increases
were partially offset by decreases in tgDCC-E1A development expenses. In 1998,
we had higher expenses related to the development of manufacturing methods for
tgDCC-E1A and paid a $1.0 million milestone payment in common stock at the
start of Phase II clinical trials. Additionally, 1998 results included
severance expenses we incurred when we downsized our operations early that
year.
Research and development expenses for 1998 remained approximately the same
as research and development expenses for 1997. The tgDCC-E1A manufacturing and
milestone expenses and severance expenses we incurred in 1998 generally offset
higher personnel and patent costs in 1997. We expect research and development
expenses to increase for year 2000 due to increases in staffing in the second
half of 1999 and early 2000 to support the Medeva and Emerald projects and
projected increases in external expenses necessary to support tgDCC-E1A
product development in 2000.
Technology License Fee
We incurred a noncash expense of $3.2 million in 1999 to acquire a
technology license from Alkermes, Inc. We acquired this license by issuing to
Alkermes 500,000 shares of our common stock and warrants to purchase up to
2,000,000 additional shares. We received from Alkermes an exclusive sub-
license to a patent related to the manufacture of AAV vectors, which we use in
our tgAAV-CF cystic fibrosis program, among others. We valued these securities
at $3.2 million, based on the market value of the common stock exchanged and
using the Black- Scholes model to determine the value of the warrants. We
expensed the entire value assigned to the license. While the technology we
acquired under the exclusive license has promise, we expensed the value of the
securities because this technology is in the early stages of development and
its technological feasibility has not been established. We had no technology
license fee expenses in 1998 or 1997.
21
<PAGE>
General and Administrative
General and administrative expenses increased to $3.6 million for 1999 from
$3.0 million for 1998. This increase was primarily attributable to increases
in personnel costs, increased business development activity and investor
communications costs related to the formation of the Emerald joint venture.
General and administrative expenses increased to $3.0 million for 1998 from
$2.8 million for 1997. The increase was attributable to legal fees incurred
related to the Medeva transaction and increased investor and public relations
costs. These increases were partially offset by decreases in operating
expenses achieved through our February 1998 reduction in staff.
Other Income and Expense
Equity in Loss of Joint Venture
We recognized a $12.6 million loss in 1999 from our 80.1% equity share in
the loss of the Emerald joint venture. Emerald's losses for the year ended
December 31, 1999 included a $15.0 million noncash charge for an exclusive
license to Elan's drug delivery technology and $742,000 in losses attributable
to Emerald's research and development activities, which began in the fourth
quarter of the year. We expect to record additional equity in losses of
Emerald in 2000 and for the foreseeable future.
Investment Income
Income from marketable securities decreased to $426,000 for 1999 from
$440,000 for 1998 and $651,000 for 1997. The decreases in 1999 and 1998
resulted from lower average balances of cash available for investment.
Interest Expense
Interest expense has decreased over the last three years to $235,000 for
1999 from $265,000 for 1998 and $338,000 for 1997, because of declining
principal balances on our capital leases and installment loans. This expense
related to obligations under capital leases and installment loans we use to
finance purchases of laboratory and computer equipment, furniture and
leasehold improvements. We do not expect decreases in interest expense to
continue, since we plan to continue to finance our asset purchases under
leases or loans. We borrowed $1.0 million under a loan agreement with Medeva
in late 1999, and we may elect to borrow additional amounts from Medeva or
Elan in the future under existing loan commitments.
Year 2000 Issue
As of December 31, 1999 we completed our Year 2000 readiness evaluation and
compliance efforts. Since December 31, 1999 we have not encountered any Year
2000 compliance problems. Nonetheless, some problems related to year 2000
risks may not appear until several months after January 1, 2000. Year 2000
issues could include problems with third-party products or services that we
use or with which our information systems exchange data. Any problems that are
not identified and corrected successfully and completely could adversely
affect our business. We expect that the cost to fix any year 2000 problems
that may be identified, however, will involve internal labor-hours and will
not be material. The costs of our Year 2000 readiness efforts to date are less
than $100,000.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This new statement, which is effective beginning in
2001, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Statement No. 133 requires companies to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting under
the standard. The impact of Statement No. 133 on Targeted Genetics' financial
position and results of operations is not expected to be material.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin 101"Revenue Recognition in Financial Statements" which
provides the SEC's views on applying generally accepted accounting principles
to revenue recognition issues. The Company is currently evaluating its revenue
recognition policies and has not yet determined the financial statement impact
of this bulletin.
22
<PAGE>
Liquidity and Capital Resources
Since our inception, we have financed our capital requirements through the
issuance of equity securities, revenue from collaborations and grants and
proceeds from leases and loans. As of December 31, 1999, we had cash, cash
equivalents and securities available for sale totaling $7.2 million, compared
to $12.0 million as of December 31, 1998. The decrease is attributable to our
use of cash to fund our operating losses and capital expenditures. Capital
expenditures of $1.9 million for 1999 reflected construction of and equipment
for a 100-liter scale AAV vector manufacturing facility within our corporate
headquarters. Our cash outflows were partially offset by cash inflows when we:
. issued 2,148,899 shares of our common stock to Elan in connection with
the Emerald joint venture, providing total proceeds of $5.0 million;
. issued 677,392 shares of our common stock to Medeva in connection with
our tgAAV-CF collaboration, providing total proceeds of $1.5 million;
and
. received loan proceeds of $1.0 million from Medeva in October 1999, to
partially finance the cost of establishing tgAAV-CF manufacturing
facilities for the supply of bulk product to be used in Phase III
clinical trials and for initial commercial launch.
Although we expect our expenses to continue to increase in 2000, we expect
revenue from Medeva, Emerald and IAVI to increase as well, substantially
offsetting expense increases. We also have contractual commitments for the
following cash resources:
. a $5.0 million equity investment by Elan;
. funds available under a $12.0 million convertible loan from Elan; and
. an additional $1.0 million of proceeds under our loan agreement with
Medeva.
In March 2000, we entered into a definitive agreement to sell 2,164,285
shares of newly issued common stock in a private placement. This transaction
added approximately $28 million to our cash position.
Our business strategy includes entering into additional collaborative
relationships with corporate partners to generate license fees, milestone
payments, research and development funding and, potentially, equity
investments, all of which would be used to fund our ongoing operations. We may
not be successful in establishing any additional collaborative relationships
or in maintaining our existing ones. Over the long term, regardless of our
partnering success, we expect that we will need to raise substantial
additional funds to continue developing and commercializing our products.
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.
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.
23
<PAGE>
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
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 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.
24
<PAGE>
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.
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
25
<PAGE>
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 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.
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.
26
<PAGE>
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 performances of the
affected companies. Our common stock has experienced, and is likely to
continue to experience, these fluctuations in price, regardless of our
performance. These fluctuations could cause the market price of our common
stock to decline.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
This item discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates.
Interest Rate Sensitivity
Short-Term Investments
As of December 31, 1999, we had short-term investments of $3.1 million.
These short-term investments consisted of highly liquid investments with
original maturities at the date of purchase of between 18 months and two
years, with an average maturity of less than one year. These investments are
subject to interest rate risk and will decrease in value if market interest
rates increase.
We performed a sensitivity analysis on our investment portfolio as of
December 31, 1999. This analysis was based on a modeling technique that
measures the hypothetical market value change that would result from an
increase in market interest rates of 100 or 200 basis points over a six-month
and twelve-month time horizon. The market value changes resulting from a 100
or 200 basis-point increase in short-term treasury security yields were not
material because all of our investments held as of December 31, 1999 mature in
2000.
Because we expect to hold most of 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.
Declines in interest rates over time, however, would reduce our interest
income.
27
<PAGE>
Long Term Obligations
As of December 31, 1999, we had outstanding long term obligations,
primarily related to capital equipment leases, leasehold improvements and our
loan agreement with Medeva of $3.3 million, at fixed interest rates of up to
14.62%. Because the interest rates on our long term obligations are fixed, a
hypothetical 10 percent decrease 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.
Market and Credit Risk
We do not use derivative financial instruments in our investment portfolio
to manage interest rate risk. We do, however, limit our exposure to interest
rate and credit risk by establishing and strictly monitoring clear policies
and guidelines for our fixed income portfolios. At the present time we limit
to one year the maximum average maturity period of securities in our
investment portfolio. Our guidelines also establish credit quality standards,
limits on exposure to duration and credit risk criteria. We do not expect our
exposure to market and credit risk to be material. As of December 31, 1999, we
had a concentration of accounts receivable with one of our collaborators.
Equity Price Risk
Our equity price risk is limited to the risk inherent in our ownership of
80.1% of Emerald, our joint venture with Elan, and an immaterial equity
interest we have in another biotechnology company. Accordingly, we do not
hedge against equity price changes.
Foreign Currency Exchange Rate Risk
We realize all of our revenue in dollars and receive substantially all of
our cash from Medeva's U. S.-based operations and Emerald's Bermuda-based
operations. Therefore, we do not believe that we have any significant direct
foreign currency exchange rate risk and we do not hedge against foreign
currency exchange rate changes.
28
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Targeted Genetics Corporation
We have audited the accompanying balance sheets of Targeted Genetics
Corporation as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Targeted Genetics
Corporation at December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
Seattle, Washington
March 1, 2000
29
<PAGE>
TARGETED GENETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents....................... $ 4,100,798 $ 1,870,841
Securities available for sale................... 3,052,471 10,085,955
Accounts receivable............................. 1,391,394 102,359
Receivable from joint venture................... 445,818 --
Prepaid expenses and other...................... 269,864 387,408
------------- ------------
Total current assets.......................... 9,260,345 12,446,563
Property, plant and equipment, net................ 4,021,466 3,299,253
Other assets...................................... 410,667 458,267
------------- ------------
$ 13,692,478 $ 16,204,083
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................ $ 2,278,338 $ 1,664,074
Payable to joint venture........................ 594,699 --
Accrued payroll and other liabilities........... 586,856 486,206
Current portion of long-term obligations........ 1,160,174 1,171,836
------------- ------------
Total current liabilities..................... 4,620,067 3,322,116
Long-term obligations............................. 2,106,897 900,208
Shareholders' equity:
Preferred stock, 6,000,000 shares authorized
Series A preferred stock, $.01 par value,
400,000 shares authorized, none issued and
outstanding at December 31, 1999 and 1998..... -- --
Series B preferred stock, $.001 par value,
12,015 shares authorized, issued and
outstanding at December 31, 1999, none
authorized at December 31, 1998............... 12,390,513 --
Common stock, $.01 par value, 80,000,000 shares
authorized, 34,019,175 and 30,652,375 shares
issued and outstanding at December 31, 1999 and
1998, respectively............................. 98,122,922 88,455,138
Accumulated deficit............................. (103,532,432) (76,501,784)
Accumulated other comprehensive income.......... (15,489) 28,405
------------- ------------
Total shareholders' equity.................... 6,965,514 11,981,759
------------- ------------
$ 13,692,478 $ 16,204,083
============= ============
</TABLE>
See accompanying notes to the financial statements.
30
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Revenue:
Collaborative agreements............ $ 6,402,175 $ 7,192,048 $ 888,335
Collaborative agreements with
affiliates......................... 445,818 -- --
Other............................... -- 318,204 439,250
------------ ----------- ------------
Total revenue..................... 6,847,993 7,510,252 1,327,585
------------ ----------- ------------
Operating expenses:
Research and development............ 14,291,066 13,327,152 13,043,288
Technology license fee.............. 3,200,000 -- --
General and administrative.......... 3,593,436 3,045,835 2,784,806
------------ ----------- ------------
Total operating expenses.......... 21,084,502 16,372,987 15,828,094
------------ ----------- ------------
Loss from operations.................. (14,236,509) (8,862,735) (14,500,509)
Equity in loss of joint venture....... (12,609,699) -- --
Investment income..................... 425,726 440,478 650,892
Interest expense...................... (234,653) (264,792) (338,157)
------------ ----------- ------------
Net loss ............................. (26,655,135) (8,687,049) (14,187,774)
Accretion of dividend on preferred
stock................................ (375,513) -- --
------------ ----------- ------------
Net loss applicable to common stock... $(27,030,648) $(8,687,049) $(14,187,774)
============ =========== ============
Basic and diluted net loss per share.. $ (0.84) $ (0.33) $ (0.70)
============ =========== ============
Shares used in computation of basic
and diluted net loss per share....... 32,173,756 26,637,823 20,196,325
============ =========== ============
</TABLE>
See accompanying notes to the financial statements.
31
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Total
Stock Preferred Stock Common Stock Accumulated Comprehensive Shareholders'
Shares Stock Amount Shares Amount Deficit Income Equity
--------- ------------ ---------- ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... -- -- 20,136,468 $ 73,115,362 $ (53,626,961) $ 19,387 $ 19,507,788
Net loss--1997......... -- -- -- -- (14,187,774) -- (14,187,774)
Unrealized losses on
securities available
for sale.............. -- -- -- -- -- (14,206) (14,206)
------------
Comprehensive loss..... (14,201,980)
Exercise of stock
options............... -- -- 15,380 8,414 -- -- 8,414
Exercise of warrants... -- -- 59,266 277,365 -- -- 277,365
------ ------------ ---------- ------------ -------------- --------- ------------
Balance at December 31,
1997................... -- -- 20,211,114 73,401,141 (67,814,735) 5,181 5,591,587
Net loss--1998......... -- -- -- -- (8,687,049) -- (8,687,049)
Unrealized gains on
securities available
for sale.............. -- -- -- -- -- 23,224 23,224
------------
Comprehensive loss..... (8,663,825)
Sale of common stock
and warrants, net of
issuance costs of
$158,046.............. -- -- 8,666,667 12,841,954 -- -- 12,841,954
Sale of common stock to
Medeva, net of
issuance costs of
$153,100.............. -- -- 750,000 1,129,400 -- -- 1,129,400
Issuance of shares as
milestone payment..... -- -- 875,134 1,000,000 -- -- 1,000,000
Exercise of stock
options............... -- -- 149,460 82,643 -- -- 82,643
------ ------------ ---------- ------------ -------------- --------- ------------
Balance at December 31,
1998................... -- -- 30,652,375 88,455,138 (76,501,784) 28,405 11,981,759
Net loss--1999......... -- -- -- -- (27,030,648) -- (27,030,648)
Unrealized losses on
securities available
for sale.............. -- -- -- -- -- (43,894) (43,894)
------------
Comprehensive loss..... (27,042,542)
Issuance of Series B
Convertible
Exchangeable Preferred
stock................. 12,015 12,015,000 -- -- -- -- 12,015,000
Accretion on preferred
stock................. -- 375,513 -- -- -- -- 375,513
Sale of common stock to
Medeva, net of
issuance costs of
$13,548............... -- -- 677,392 1,486,452 -- -- 1,486,452
Sale of common stock to
Elan, net of issuance
costs of $57,347...... -- -- 2,148,899 4,942,653 -- -- 4,942,653
Issuance of common
stock and warrants to
Alkermes, net of
issuance costs of
$17,500............... -- -- 500,000 3,182,500 -- -- 3,182,500
Exercise of stock
options............... -- -- 40,509 56,179 -- -- 56,179
------ ------------ ---------- ------------ -------------- --------- ------------
Balance at December 31,
1999................... 12,015 $ 12,390,513 34,019,175 $ 98,122,922 $ (103,532,432) $ (15,489) $ 6,965,514
====== ============ ========== ============ ============== ========= ============
</TABLE>
See accompanying notes to the financial statements.
32
<PAGE>
TARGETED GENETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................... $ (27,030,648) $ (8,687,049) $ (14,187,774)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Equity in loss of joint
venture....................... 12,609,699 -- --
Expenses paid with common
stock......................... 3,200,000 1,000,000 --
Depreciation and amortization.. 1,614,019 1,635,797 1,641,151
Increase in accounts
receivable.................... (1,289,035) (59,198) (3,528)
Increase in accounts receivable
from joint venture............ (445,818) -- --
Increase (decrease) in current
liabilities................... 586,193 485,259 (190,996)
Decrease (increase) in prepaid
expenses and other............ 62,347 (143,769) 42,317
Decrease (increase) in accrued
interest on securities
available for sale............ 79,608 (65,746) 162,497
------------- ------------ -------------
Net cash used in operating
activities.................. (10,613,635) (5,834,706) (12,536,333)
------------- ------------ -------------
INVESTING ACTIVITIES:
Purchases of property, plant and
equipment....................... (1,856,199) (238,623) (704,896)
Purchases of securities available
for sale........................ (483,014) (17,664,960) (814,251)
Maturities and sales of
securities available for sale... 7,392,996 11,693,951 12,130,074
Increase in other assets......... -- (15,000) (50,000)
------------- ------------ -------------
Net cash provided by (used
in) investing activities.... 5,053,783 (6,224,632) 10,560,927
------------- ------------ -------------
FINANCING ACTIVITIES:
Net proceeds from sale of capital
stock........................... 6,467,784 14,053,997 285,779
Proceeds from equipment financing
transactions.................... 1,294,389 176,289 468,363
Loan proceeds from collaborative
partner......................... 1,000,000 -- --
Payments under capital leases and
loans........................... (1,347,877) (1,311,952) (1,299,459)
Accretion on preferred stock..... 375,513 -- --
------------- ------------ -------------
Net cash provided by (used
in) financing activities.... 7,789,809 12,918,334 (545,317)
------------- ------------ -------------
Net increase (decrease) in cash and
cash equivalents.................. 2,229,957 858,996 (2,520,723)
Cash and cash equivalents,
beginning of year................. 1,870,841 1,011,845 3,532,568
------------- ------------ -------------
Cash and cash equivalents, end of
year.............................. $ 4,100,798 $ 1,870,841 $ 1,011,845
============= ============ =============
Cash paid during the year for
interest.......................... $ 202,883 $ 264,702 $ 338,157
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING
ACTIVITIES:
Preferred stock issuance in
exchange for interest in joint
venture......................... 12,015,000 -- --
Equipment financed through
renewal of capital lease........ -- 594,983 --
</TABLE>
See accompanying notes to the financial statements
33
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations
Targeted Genetics Corporation ("Targeted Genetics" or the "Company") is
developing gene therapy products for the treatment of certain acquired and
inherited diseases. Targeted Genetics was incorporated in the state of
Washington in March 1989. The Company's operations constitute one business
segment.
2. Summary of Significant Accounting Policies
Cash Equivalents
Targeted Genetics considers as cash equivalents all short-term investments
with a purchased maturity of three months or less that are readily convertible
into cash and have insignificant interest rate risk. Cash equivalents, valued
at cost that approximates market, consist principally of money market accounts
and short-term government obligations. All other investments are reported as
securities available for sale.
Securities Available for Sale
Securities available for sale consist primarily of corporate debt
securities and U.S. government notes, all of which mature within one year.
Targeted Genetics currently classifies its entire investment portfolio as
securities available for sale. Such securities are stated at market value,
with the unrealized gains and losses included as a component of shareholders'
equity. The cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity, which are
included in investment income. Realized gains and losses and declines in value
judged to be other than temporary on securities available for sale are also
included in investment income. The cost of securities sold is calculated using
the specific identification method.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash, and cash
equivalents, investments, accounts receivable and accounts payable reasonably
approximate fair value because of the short-term nature of these items. The
Company believes the carrying amounts of the note payable and capital leases
obligations approximate fair value because the interest rates on these
instruments change with, or approximate, market interest rates.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of furniture
and equipment is provided using the straight-line method over the assets'
estimated useful lives, which range from three to seven years. Furniture and
equipment under capitalized leases are amortized over the life of the lease.
Leasehold improvements are amortized over the life of the improvements or the
term of the lease, whichever is shorter. Amortization of assets recorded under
capital leases is included with depreciation expense.
Stock Compensation
As permitted by the provisions of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation, the Company has
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
employee stock option grants and apply the disclosure-only provisions to
account for its stock option plans. The Company does not recognize any
compensation expense related to the plans since all options are granted at
fair market value on the date of grant. Options granted to consultants are
accounted for using the Black-Scholes method prescribed by Statement 123 and
are subject to periodic revaluation over their vesting terms.
34
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue under Collaborative Agreements
Revenue under collaborative agreements is recognized according to the terms
of the collaborative agreements. Nonrefundable product license fees that are
not dependent on future performance are recognized as revenue when received.
Up-front signing or licensing fees that are dependent on future performance
are recognized ratably over the period in which the related work is performed.
Milestone revenue is recognized upon the achievement of the related milestone
and when collection is probable. Revenue earned from the performance of
research and development is recognized over the period in which the related
work is performed. Advance payments received in excess of amounts earned are
classified as deferred revenue.
Net Loss Per Share
Basic net loss per share is computed based upon the weighted average number
of common shares outstanding during the period. The Company's diluted net loss
per share is the same as its basic net loss per share because all stock
options, warrants and other potentially dilutive securities are antidilutive
and are therefore excluded from the calculation of diluted net loss per share.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This new statement, which is effective beginning in
2001, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Statement No. 133 requires companies to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting under
the standard. The impact of Statement No. 133 on Targeted Genetics' financial
position and results of operations is not expected to be material.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin 101 Revenue Recognition in Financial Statements which
provides the SEC's views on applying generally accepted accounting principles
to revenue recognition issues. The Company is currently evaluating its revenue
recognition policies and has not yet determined the financial statement impact
of this bulletin.
3. Significant Concentrations
The Company's collaborative agreement with Medeva PLC, provided 87%, 88%
and 0% of revenue in fiscal years ending December 31, 1999, 1998 and 1997,
respectively. See note 8. At December 31, 1999 and 1998, amounts receivable
from Medeva represented 76% and 100%, respectively, of the Company's accounts
receivable balance. The Company does not require collateral or security
related to receivables and has historically had no losses on uncollectible
accounts. Accordingly, no allowance for bad debts has been recorded.
35
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Securities Available for Sale
All securities available for sale at December 31, 1999 mature within one
year. Securities available for sale consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Treasury securities
and obligations of U.S.
government agencies...... $ 3,067,960 $ -- $ (15,489) $ 3,052,471
============ ======== ========= ============
December 31, 1998:
U.S. Treasury securities
and obligations of U.S.
government agencies...... $ 6,184,441 $ 6,106 $ -- $ 6,190,547
U.S. corporate securities. 3,873,109 22,370 (71) 3,895,408
------------ -------- --------- ------------
$ 10,057,550 $ 28,476 $ (71) $ 10,085,955
============ ======== ========= ============
</TABLE>
Unrealized gains and losses on securities available for sale consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
All gains (losses)........................ $ (39,336) $ 37,909 $ (15,564)
Less reclassifications to net loss:
Gross realized gains.................... (8,059) (19,940) (4,448)
Gross realized losses................... 3,501 5,255 5,806
--------- -------- ---------
Unrealized gains (losses)................. $ (43,894) $ 23,224 $ (14,206)
========= ======== =========
</TABLE>
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Furniture and equipment............................ $ 5,522,248 $ 4,240,248
Leasehold improvements............................. 5,567,091 4,625,027
----------- -----------
11,089,339 8,865,275
Less accumulated depreciation and amortization..... 7,067,873 5,566,022
----------- -----------
$ 4,021,466 $ 3,299,253
=========== ===========
</TABLE>
Depreciation expense totaled $1,531,420 in 1999, $1,491,702 in 1998 and
$1,492,406 in 1997.
The Company has leased furniture and equipment, primarily laboratory
equipment under agreements deemed to be capital leases. The total cost of
leased furniture and equipment capitalized at December 31, 1999 and 1998 was
$3,784,055 and $2,857,915, respectively, with related accumulated amortization
of $2,489,772 and $1,553,880 at December 31, 1999 and 1998, respectively.
36
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Long-Term Obligations
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Capitalized lease obligations....................... $2,055,062 $1,705,375
Note payable to collaborator........................ 1,018,689 --
Deferred state sales tax............................ 193,320 308,609
Other............................................... -- 58,060
---------- ----------
3,267,071 2,072,044
Less current portion................................ 1,160,174 1,171,836
---------- ----------
$2,106,897 $ 900,208
========== ==========
</TABLE>
Future aggregate principal payments related to long-term obligations are
$1,141,485 in 2000, $606,346 in 2001, $419,129 in 2002, $77,115 in 2003 and
$1,004,307 in 2004.
The Company has an agreement with Medeva/Celltech under which, subject to
certain circumstances, Medeva/Celltech will loan the Company up to $2.0
million. Loan proceeds are unsecured and are required to be used to partially
finance the cost of establishing tgAAV-CF manufacturing facilities for the
supply of bulk product to be used in Phase III clinical trials and for initial
commercial launch. As of December 31, 1999, the Company has borrowed $1.0
million under the agreement. No amount was borrowed at December 31, 1998.
Interest on borrowings is payable annually in arrears at a rate that is 150
basis points over the one-month LIBOR rate, but not less than 5% nor more than
7% per year. The Company recognized $18,689 of interest expense in 1999.
Principal is due and payable in November 2003, or earlier if the cumulative
net product sales of the Company's cystic fibrosis product equal or exceed
$60.0 million. The loan agreement contains financial covenants including
limits on the Company's ability to declare or pay dividends. The Company can
at its option, and with Medeva's consent, repay the loan with its common stock
at any time during the loan term, at a conversion price equal to the average
closing price of the common stock over a twenty-day period preceding the
repayment date.
7. Shareholders' Equity
Series B Preferred Stock
In July 1999, Elan International Services, Ltd. purchased $12,015,000 of
the Company's Series B preferred stock in conjunction with the formation of
the Emerald Gene Systems Ltd. ("Emerald") joint venture. See note 13. This
preferred stock bears an annual dividend of 7%, accrued semi-annually and
added to principal. The Series B preferred stock is convertible until July
2005, at Elan's option, into the Company's common stock, at a price of $3.32
per share. As of December 31, 1999 the Company had accrued dividends of
$376,000. Elan's holdings of the Series B preferred stock were convertible
into 3,732,106 shares of the common stock as of December 31, 1999. The Company
would issue 5,740,548 shares of its common stock if Elan were to elect to
convert its preferred stock to shares of common stock as of July 21, 2005, the
expiration of the conversion option. Alternatively, Elan has an option to
exchange the Series B preferred stock and all accumulated dividends for a
30.1% interest in Emerald. This exchange option is exercisable up to six
months after the completion of a research and development program that is
currently anticipated to be 36 to 48 months in length. This exchange right
will terminate if the preferred stock is converted into common stock, unless
the conversion occurs as a result of a liquidation or certain transactions
involving a change of control of the Company.
37
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Should the Company liquidate or wind-down its operations, the agreement
gives Series B preferred shareholders priority over common shareholders with
respect to the assets legally available for distribution to shareholders. The
Series B shareholders' liquidation preference is at par value. The Company has
redemption rights to these shares only in certain instances involving change
of control. Holders of Series B preferred stock are not entitled to vote
together with holders of common stock with respect to election of directors or
other corporate governance matters.
Warrants
In June 1999, the Company issued warrants to purchase 2,000,000 shares of
its common stock to Alkermes, Inc. These warrants were issued in two tranches
of 1,000,000 shares each. The warrants expire in June 2007 and June 2009 and
are priced at $2.50 and $4.16 per share, respectively. See note 9.
In 1998, the Company completed a private placement of common stock and
warrants, which resulted in net proceeds of approximately $12.8 million.
Warrants to purchase a total of 4,333,333 shares of common stock were issued
in the transaction, with an exercise price of $2.00 per share and an
expiration of April 2003.
The Company has outstanding warrants to purchase a total of 126,016 shares
related to equipment financing, consulting and license agreements. These
warrants have a weighted average price of $4.42 per share and expire between
May 2001 and March 2004.
At December 31, 1999, 6,459,349 shares of common stock were reserved for
all outstanding warrants.
Shareholder Rights Plan
The Company has adopted a shareholder rights plan, under which it has
distributed a dividend of one right for each outstanding share of common
stock. These rights could cause substantial dilution to certain persons or
groups that attempt to acquire the Company on terms not approved by the
Company's Board of Directors.
38
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company has three stock option plans. Beginning in 1999 the Company
began granting all options from the 1999 Stock Option Plan (the "1999 Plan"),
and discontinued grants from the other two plans. The 1999 Plan provides for
option grants of up to a maximum of 1.5 million shares of common stock to
employees, directors and officers of the Company and consultants, agents,
advisors and independent contractors who provide services to the Company.
Generally, options vest in even quarterly or annual increments over a three-
to five-year period. All options expire ten years from date of grant. As of
December 31, 1999, options to purchase 1,175,125 shares were available for
future grant under the 1999 Plan. The following table summarizes activity
related to the Company's stock option plans:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance, December 31, 1996..................... 1,214,414 $ 3.57
Granted...................................... 571,728 3.75
Exercised.................................... (15,380) 0.55
Canceled..................................... (74,060) 4.42
---------
Balance, December 31, 1997..................... 1,696,702 3.62
Granted...................................... 1,269,277 1.49
Exercised.................................... (149,460) 0.55
Canceled..................................... (955,933) 3.61
---------
Balance, December 31, 1998..................... 1,860,586 2.42
Granted...................................... 835,265 1.94
Exercised.................................... (40,509) 1.39
Canceled..................................... (214,000) 2.51
---------
Balance, December 31, 1999..................... 2,441,342 2.26
=========
</TABLE>
During 1999, options were exercised at prices ranging from $0.55 to $2.25
per share. Options for 1,094,420, 628,785 and 611,465 shares were exercisable
at December 31, 1999, 1998 and 1997, respectively. In 1998, the Company
offered active employees, except executive officers, the opportunity to cancel
previously awarded stock option grants with exercise prices greater than the
current market price of common stock and be granted the same number of new
options at the closing market price on the grant date. Substantially all
eligible employees elected to replace their previously awarded stock option
grants, resulting in the cancellation of options to purchase 531,550 shares at
an average price of $3.77 per share and the issuance of options to purchase
the same number of shares at $1.22 per share. The new options awarded under
this offer vest over a three-year period, 25% upon the date six months after
the grant date, 25% upon the date twelve months after the grant date and 6.25%
at the end of each three-month period thereafter.
The following table summarizes information for outstanding and exercisable
options at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ ------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Exercise Contractual Exercise
Prices Shares Price Life Shares Price
-------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.50--$1.22 647,890 $ 1.07 7.38 426,476 $ 1.03
1.38-- 1.72 624,125 1.63 8.98 111,216 1.68
1.94-- 2.25 577,717 2.13 8.69 110,934 2.13
2.50-- 6.25 591,610 4.29 5.64 445,794 4.31
--------- ---------
0.50-- 6.25 2,441,342 2.54 7.68 1,094,420 2.54
========= =========
</TABLE>
39
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In conformity with the provisions of Statement No. 123, Accounting for
Stock-Based Compensation, the Company has elected to follow the intrinsic
value method allowed under that statement for its stock option plans and
present pro forma disclosures using the fair value accounting approach. Had
compensation costs been recorded, the following amounts would have been
reported:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
Net loss--as reported......... $ (27,030,648) $ (8,687,049) $ (14,187,774)
Net loss--pro forma........... (27,985,273) (9,512,398) (15,068,834)
Basic net loss per share--as
reported..................... (0.84) (0.33) (0.70)
Basic net loss per share--pro
forma........................ (0.87) (0.36) (0.75)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes multiple-option approach pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected dividend rate.......................... Nil Nil Nil
Expected stock price volatility................. 0.908 0.814 0.696
Risk-free interest rate......................... 5.05% 5.38% 6.53%
Expected life of options from vest date......... 3 years 3 years 3 years
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and
1997 was $1.94, $1.11 and $2.51 per share, respectively. Compensation expense
included in these pro forma amounts may not be representative of the effects
on pro forma earnings for future years
As of December 31, 1999, the Company had reserved a total of 13,807,922
shares of common stock for issuance pursuant to conversion of preferred stock
and stock options.
8. Collaborative Agreements
Celltech Group plc Agreement
In 1998 Targeted Genetics entered into a series of agreements (the "CF
Agreements") with Medeva. In January 2000, Medeva merged with
Celltech/Chiroscience to become part of the Celltech Group Plc. Celltech has
assumed Medeva's rights and responsibilities under our agreements. Targeted
Genetics and Medeva are collaborating to develop on a worldwide basis the
Company's tgAAV-CF gene therapy product for the treatment of cystic fibrosis.
Upon signing the CF Agreements, Targeted Genetics received a license and
technology access fee of $5.0 million and a milestone payment of $1.0 million
related to the start of Phase I clinical trials for the aerosolized version of
the tgAAV-CF product. Medeva agreed to pay up to $5.0 million per year for
three years to fund the Company's tgAAV-CF research and development activities
and certain Phase I clinical trial expenses. In addition, Medeva agreed to pay
the costs of Phase II and subsequent clinical trials of the product. Assuming
successful development and regulatory approval, Celltech will have the
exclusive right to market the product on a worldwide basis. Under a long-term
supply agreement, the Company will manufacture and supply bulk product to
Celltech under a pricing formula constructed to compensate with a fixed
percentage of Celltech's net product sales. The research and development
funding agreement is effective from October 1998 to October 2001, with options
to extend the term if both parties agree. The long-term supply agreement is
effective for the term of the patents covering the Company's tgAAV-CF
technology. Celltech has the option to terminate the CF Agreements at will
with 180 days notice. Should Celltech exercise this right to terminate the CF
Agreements, all rights related to tgAAV-CF technology would return to the
Company. The Company recognized $6.4 million and $7.0 million of revenue under
the CF Agreements in 1999 and 1998.
40
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under separate agreements, Medeva agreed to purchase $3.0 million of
Company common stock and, subject to certain provisions, to loan the Company
up to $12.0 million. Medeva purchased $3.0 million of common stock in two
tranches: 750,000 shares of common stock for $1.5 million upon signing of the
stock purchase agreement in 1998 and 677,392 shares of common stock for $1.5
million in 1999. Subject to certain conditions, the Company can draw up to
$2.0 million to partially fund construction of facilities to support Phase III
trials and initial commercialization. At December 31, 1999, the Company has
drawn $1.0 million. See note 6. Under certain conditions, Medeva agreed to
loan us up to an additional $10 million toward building a manufacturing
facility compliant with the FDA's Good Manufacturing Practices guidelines for
higher-volume production of tgAAV-CF. No amounts have been drawn under the
$10.0 million commitment.
Elan Corporation plc
In July 1999, the Company and Elan formed Emerald, a joint venture to
develop enhanced gene delivery technology and products.
Elan has agreed to loan the Company up to $12.0 million under a convertible
promissory note agreement to support its share of the joint venture's research
and development costs. The note has a six-year term, accrues interest at 12%
per year. The note and related accrued interest are convertible into the
Company's common stock at conversion prices set at 150% of the average closing
price of the Company's common stock for the 60 trading days ending two
business days before the time the Company draws loan proceeds. The note
agreement includes provisions allowing the Company to convert the debt into
the Company's common stock at the lesser of the current market price or the
conversion price, at its option. As of December 31, 1999, the Company has not
drawn on the note.
The Company also entered into an agreement with Elan that requires Elan to
purchase up to $10.0 million of the Company's common stock at a premium to
market price. Elan purchased $5.0 million of Targeted Genetics' common stock
in connection with closing of the joint venture transaction, or 2,148,899
shares. At the Company's option, Elan will purchase an additional $5.0 million
of Targeted Genetics common stock in July 2000 at 120% of the market price at
that time.
9. Alkermes License
On June 9, 1999, the Company entered into an agreement with Alkermes, Inc.
to acquire the exclusive rights to a patent for the manufacture of AAV
vectors. The license to this technology, first developed by Children's
Hospital in Columbus, Ohio, covers the use of cell lines for the manufacture
of AAV vectors and expands a previously acquired limited field license to
these rights. The Company issued 500,000 shares of its common stock and
warrants to purchase a total of up to 2,000,000 additional shares in exchange
for this technology license. See note 7. Under the terms of the license, the
Company is responsible for endeavoring to commercialize the technology.
Additionally, the Company is obligated to make milestone payments as products
using this technology reach clinical trial and regulatory milestones. The
Company is also obligated to pay royalties upon the sale of AAV products or
sub-licensing of the licensed technology. The Company recorded a $3.2 million
non-cash charge with respect to the Alkermes license in its 1999 operating
results, because the underlying technology is not complete and the Company
will have to invest significant resources to develop and prove its commercial
feasibility.
10. Lease Commitments
The Company leases its research and office facilities under two
noncancellable operating leases that expire beginning March 31, 2004. The
leases may be extended under two additional five-year renewal options at the
then-prevailing fair market value rental rate.
41
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum payments under noncancellable leases at December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Operating Capital
---------- ----------
<S> <C> <C>
Year Ending December 31:
2000.............................................. $ 617,713 $1,147,974
2001.............................................. 634,451 655,783
2002.............................................. 664,447 408,263
2003.............................................. 681,185 81,321
2004.............................................. 177,810 5,115
Thereafter........................................ -- --
---------- ----------
Total minimum lease payments........................ $2,775,606 2,298,456
==========
Less amount representing interest................... 243,394
----------
Present value of minimum capitalized lease payments. $2,055,062
==========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1999,
1998 and 1997 was $587,000, $533,000 and $533,000, respectively.
11. Employee Retirement Plan
The Company sponsors an employee retirement plan in accordance with Section
401(k) of the Internal Revenue Code. All employees at least 21 years old are
eligible to participate in the plan. Contributions made into the plan are at
the discretion of the board of directors. The Company incurred $90,181, $0,
and $99,426 of expense in 1999, 1998 and 1997, respectively, related to
contributions to the plan.
12. Income Taxes
At December 31, 1999, the Company had net operating loss carryforwards of
$70.1 million and research and experimental credit carryforwards of $1.8
million. The carryforwards are available to offset future federal income taxes
and begin to expire in 2008. The Company has provided a valuation allowance to
offset the excess of deferred tax assets over the deferred tax liabilities,
due to the uncertainty of realizing the benefits of the net deferred tax
asset. The valuation allowance increased by $3.9 million in 1999 and $2.8
million during 1998.
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 23,828,000 $ 20,354,000
Research and experimental credit
carryforwards................................ 1,815,000 1,628,000
Depreciation.................................. 842,000 721,000
Other......................................... 185,000 97,000
------------ ------------
Total deferred tax assets....................... $ 26,670,000 $ 22,800,000
============ ============
Valuation allowance for deferred tax assets..... $ 26,670,000 $ 22,800,000
============ ============
</TABLE>
Utilization of federal income tax carry-forwards is subject to certain
limitations under Section 382 of the Internal Revenue Code. The Company's past
sales and issuances of common stock have resulted in "ownership changes" as
defined under Section 382, that may result in limitations on the future use of
some portion of the net operating loss carryforwards.
42
<PAGE>
TARGETED GENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. Joint Venture
In July 1999, the Company and Elan formed Emerald, a joint venture to
develop enhanced gene delivery technology and products. At the time the joint
venture was formed, Elan purchased $12,015,000 of the Company's Series B
convertible exchangeable preferred stock. See note 7. The preferred stock is
convertible, at Elan's option, into Targeted Genetics common stock or into
shares representing a 30.1% interest in Emerald, increasing Elan's ownership
in Emerald to 50%. Targeted Genetics used the proceeds of the convertible
exchangeable preferred stock sale to purchase its 80.1% interest in Emerald.
Emerald used these proceeds to pay $15.0 million to Elan for a license giving
Emerald exclusive rights to use Elan drug delivery technologies within the
gene delivery field.
The Company formed Emerald by issuing Emerald preferred and common stock
valued at $15,000,000 to Targeted Genetics and Elan. The Company currently
owns an 80.1% interest in Emerald and Elan owns 19.9% (non-voting). While
Targeted Genetics owns 100% of the voting common shares, Elan and its
subsidiaries have retained significant minority investor rights that are
considered "participating rights" as defined in the Financial Accounting
Standards Board's Emerging Issues Task Force Bulletin 96-16, Investors'
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder Has Certain Approval or Veto Rights.
Elan's participating rights prevent the Company from exercising control over
Emerald. Accordingly, the Company does not consolidate the financial
statements of Emerald but instead accounts for its investment in Emerald under
the equity method of accounting.
The condensed financial information of Emerald as of December 31, 1999 and
for the period from July 21, 1999 (date of inception) through December 31,
1999 is as follows:
<TABLE>
<S> <C>
Current assets............................................. $ 2,250
-------------
Total assets............................................... $ 2,250
=============
Current liabilities........................................ $ 744,696
Total shareholders' equity................................. (742,446)
-------------
Total liabilities and shareholders' equity................. $ 2,250
=============
Revenue.................................................... $ --
Technology access fee...................................... 15,000,000
Operating expenses......................................... 742,446
-------------
Net loss................................................... $ (15,742,446)
=============
</TABLE>
Included in the Company's December 31, 1999 balance sheet are a $445,818
receivable from Emerald for services performed by the Company for Emerald and
a payable to Emerald of $594,699 for the Company's 80.1% share of Emerald's
funding requirements as of December 31, 1999. The Company expects to advance
Emerald its share of the required funding and collect the $445,818 Emerald
account receivable during the first quarter of 2000. The Company is required
to provide additional funding to Emerald as needed in relation to its
ownership interest in Emerald.
14. Subsequent Events
On March 1, 2000, Targeted Genetics announced that it had entered into a
definitive agreement for the placement of 2,164,285 shares of newly issued
common stock that resulted in gross proceeds to the Company of $30.3 million.
43
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Emerald Gene Systems, Ltd.
We have audited the balance sheet of Emerald Gene Systems, Ltd. as at
December 31, 1999 and the statement of loss shareholders' deficit and cash
flow for the 166 day period then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1999 and
the results of its operations for the 166 day period then ended in accordance
with accounting principles generally accepted in the United States.
Ernst & Young
Chartered
Accountants
February 29, 2000
Hamilton, Bermuda
44
<PAGE>
EMERALD GENE SYSTEMS, LTD.
(Incorporated in Bermuda)
BALANCE SHEET
December 31, 1999
(expressed in United States dollars)
<TABLE>
<CAPTION>
1999
------------
<S> <C>
ASSETS
Current assets
Prepaid expenses................................................ $ 2,250
============
LIABILITIES
Current liabilities
Accounts payable and accrued expenses........................... $ 6,350
Due to related party (Note 3)................................... 277,502
Due to shareholders (Note 3).................................... 460,844
------------
744,696
------------
SHAREHOLDERS' EQUITY
Share capital (Note 5)............................................ 12,000
Contributed surplus (Note 6)...................................... 14,988,000
Deficit........................................................... (15,742,446)
------------
(742,446)
------------
$ 2,250
============
</TABLE>
See accompanying notes.
45
<PAGE>
EMERALD GENE SYSTEMS, LTD.
(Incorporated in Bermuda)
STATEMENT OF LOSS
For the 166 Day Period Ended December 31, 1999
(expressed in United States dollars)
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Revenue......................................................... $ --
Expenses
License fee (Note 4).......................................... 15,000,000
Research and development (Note 3)............................. 723,320
General and administrative expenses........................... 19,126
-------------
Net loss........................................................ $ (15,742,446)
=============
</TABLE>
See accompanying notes.
46
<PAGE>
EMERALD GENE SYSTEMS, LTD.
(Incorporated in Bermuda)
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE 166 DAY PERIOD ENDED DECEMBER 31,1999
(expressed in United States dollars)
<TABLE>
<CAPTION>
Preferred Common Total
Preferred Shares Common Shares Contributed Accumulated Shareholders'
Shares Amount Shares Amount Surplus Deficit Deficit
--------- --------- ------ ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 19,
1999................... -- $ -- -- $ -- $ -- -- $ --
Issuance of common
shares................. 7,491 7,491 1,199,478 1,206,969
Issuance of preferred
shares................. 4,509 4,509 13,788,522 13,793,031
Net loss--1999.......... -- -- -- -- -- (15,742,446) (15,742,446)
----- ------- ----- ------- ------------ ------------- ------------
Balance at December 31,
1999................... 4,509 $ 4,509 7,491 $ 7,491 $ 14,988,000 $ (15,742,446) $ (742,446)
===== ======= ===== ======= ============ ============= ============
</TABLE>
See accompanying notes.
47
<PAGE>
EMERALD GENE SYSTEMS, LTD.
(Incorporated in Bermuda)
STATEMENT OF CASH FLOWS
FOR THE 166 DAY PERIOD ENDED DECEMBER 31, 1999
(expressed in United States dollars)
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Operating activities
Net Loss....................................................... $(15,742,446)
Adjustment to convert to a cash basis
Prepaid expenses............................................. (2,250)
Accounts payable and accrued expenses........................ 6,350
Due to related party......................................... 277,502
Due to shareholders.......................................... 460,844
------------
(15,000,000)
Financing activities
Proceeds from issuance of common shares........................ 7,491
Proceeds from issuance of preferred shares..................... 4,509
Increase in contributed surplus................................ 14,988,000
------------
15,000,000
Changes in cash, and cash at end of period....................... $ --
============
</TABLE>
See accompanying notes.
48
<PAGE>
EMERALD GENE SYSTEMS, LTD.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
(expressed in United States dollars)
1. Operations
The company was incorporated July 19, 1999 in Bermuda. The company is owned
by Elan International Services Ltd. ("EIS") a wholly-owned subsidiary of Elan
Corporation plc, and Targeted Genetics Corporation ("TGC"), holding 19.9%
(non-voting shares) and 80.1% of the shares respectively. The primary
objective of the company is to carry on the business of the development,
testing, registration, manufacturing, commercialization, and licensing of
"Products" (as defined in the Subscription, Joint Development and Operating
Agreement ("JDOA") dated July 21, 1999 between EIS, TGC and others). The focus
of the collaborative venture will be to develop the "Products" using the Elan
Intellectual Property, the TGC Intellectual Property and the Emerald
Technology pursuant to the JDOA.
2. Significant accounting policy
The company follows accounting principles generally accepted in the United
States. Significant accounting policies are as follows:
(a) Research and development costs
Research costs are charged as an expense of the period in which they are
incurred. Development costs are deferred to future periods if certain criteria
relating to future benefits are satisfied and if the costs do not exceed the
expected future benefits.
(b) Use of estimates
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amount
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates.
3. Related party transactions
The following table summarizes the company's related party transactions for
the period:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Research and development costs
To companies related through common ownership.................. $277,502
To shareholders................................................ 445,818
</TABLE>
These transactions are in the normal course of operations and are measured
at the exchange amount, which is the amount of consideration established and
agreed to by the related parties.
At the end of the period, the amounts due to related entities are as
follows:
<TABLE>
<S> <C>
Due to shareholders............................................. $460,844
Due to companies related through common ownership............... 277,502
</TABLE>
These balances are unsecured, and interest free with no set terms of
repayment.
49
<PAGE>
EMERALD GENE SYSTEMS, LTD.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(expressed in United States dollars)
4. License Fee
During 1999, the company paid a license fee to Elan Corporation plc in the
amount of $15,000,000 to acquire rights to certain Elan intellectual property.
5. Share capital
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Authorized, issued and fully paid:
6,000 voting common shares, of par value $1.00 per share......... $ 6,000
1,491 non-voting common shares (with option to convert into
voting common shares after July 21, 2001), par value $1.00 per
share........................................................... 1,491
3,612 non-voting preferred shares, of par value $1.00 per share.. 3,612
897 non-voting preferred shares (with option to convert into
voting common shares upon exercise of Exchange Right)........... 897
-------
$12,000
=======
</TABLE>
6. Contributed surplus
Contributed surplus represents share premium on amounts contributed by
shareholders in addition to their subscription to the issued share capital.
7. Year 2000 Issue (unaudited)
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than
a date.
Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may effect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved.
8. Taxes
Under current Bermuda law the company is not required to pay any taxes in
Bermuda on either income or capital gains. The company has received an
undertaking from the Minister of Finance in Bermuda that in the event of such
taxes being imposed the company will be exempted from taxation until the year
2016.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
(a) The information required by this item concerning our directors is
incorporated by reference to the section captioned "Election of Directors" in
the proxy statement for our annual meeting of shareholders to be held on May
12, 2000. We will file the proxy statement within 120 days of December 31,
1999, our fiscal year end.
(b) The information required by this item concerning our executive officers
is provided in Part I of this annual report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation" in the proxy statement for our
annual meeting of shareholders to be held on May 12, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Principal Shareholders" in the proxy statement for our
annual meeting shareholders to be held on May 12, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements are submitted in Item 8 of this report.
<TABLE>
<CAPTION>
Page(s) in
10-K
----------
<S> <C>
Targeted Genetics Corporation Report of Ernst and Young LLP,
Independent Auditors............................................... 29
Targeted Genetics Corporation Balance Sheets at December 31, 1999
and 1998........................................................... 30
Targeted Genetics Corporation Statements of Operations for the years
ended December 31, 1999, 1998 and 1997............................. 31
Targeted Genetics Corporation Statements of Shareholders' Equity for
the period from December 31, 1996 through December 31, 1999........ 32
Targeted Genetics Corporation Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997............................. 33
Targeted Genetics Corporation Notes to Financial Statements......... 34-43
Emerald Gene Systems, Ltd. Report of Ernst and Young Chartered
Accountants, Independent Auditors.................................. 44
Emerald Gene Systems, Ltd. Balance Sheet at December 31, 1999....... 45
Emerald Gene Systems, Ltd. Statements of Operations for the 166 day
period ended December 31, 1999..................................... 46
Emerald Gene Systems, Ltd. Statements of Shareholders' Equity for
the 166 day period ended 1999...................................... 47
Emerald Gene Systems, Ltd. Statements of Cash Flows for the 166 day
period ended 1999.................................................. 48
Emerald Gene Systems, Ltd. Notes to Financial Statements............ 49-50
</TABLE>
2. Financial Statement Schedules
All financial statement schedules have been omitted because the required
information is either included in the financial statements or the notes
thereto or is not applicable.
3. Exhibits
<TABLE>
<C> <S> <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 (K)
Washington on July 21, 1999 (Exhibit 1.8)
4.1 Rights Agreement, dated as of October 17, 1996, between the Company (C)
and ChaseMellon Shareholder Services (Exhibit 2.1)
4.2 Registration Rights Agreement, dated as of July 21, 1999, by and (K)
among the Company and Elan International Services, Ltd. (Exhibit
1.2)
4.3 First Amendment of Rights Agreement, dated July 21, 1999, between (K)
the Company and ChaseMellon Shareholder Services (Exhibit 1.9)
4.4 Warrant to purchase 2,000,000 shares of common stock of the (J)
Company, issued to Alkermes, Inc. on June 9, 1999. (Exhibit 10.38)
10.1 Form of Indemnification Agreement between the registrant and its
officers and directors
10.2 Form of Senior Management Employment Agreement between the (D)
registrant and its executive officers (Exhibit 10.2)
</TABLE>
52
<PAGE>
<TABLE>
<C> <S> <C>
10.3 Gene Transfer Technology License Agreement, dated as of February
18, 1992, between Immunex Corporation and the Company*
10.4 PHS Patent License Agreement-Non-Exclusive, dated as of July 13,
1993, between 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 of Florida Research Foundation, Inc. and the
Company*
10.6 Research and Exclusive License Agreement, dated as of January 1, (E)
1994, between the Company and the Fred Hutchinson Cancer Research
Center* (Exhibit 10.9)
10.7 PHS Patent License Agreement--Exclusive, dated as of March 10, (E)
1994, between 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 (E)
and the University of Michigan* (Exhibit 10.13)
10.9 Patent and Technology License Agreement, effective as of March 1, (A)
1994, between 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 (A)
October 12, 1995, 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 (B)
as of June 19, 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, (G)
dated as of April 17, 1998, between The University of Tennessee
Research Corporation and RGene Therapeutics, Inc.*
10.13 Revised License Agreement, effective as of October 1, 1996, (D)
between the 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 (E)
Institute and the Company* (Exhibit 10.23)
10.15 Exclusive Sublicensing Agreement, dated June 9, 1999, between the (J)
Company and Alkermes, Inc. (Exhibit 10.36)
10.16 Common Stock Purchase Agreement, dated June 9, 1999, between the (J)
Company and Alkermes, Inc. (Exhibit 10.37)
10.17 License Agreement, dated as of August 31, 1999, between the
Company and the University of North Carolina Research Center**
10.18 Master Agreement, dated as of November 23, 1998, between the (H)
Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.1)
10.19 License and Collaboration Agreement, dated as of November 23, (H)
1998, between the Company and Medeva Pharmaceuticals, Inc.*
(Exhibit 1.2)
10.20 Supply Agreement, dated as of November 23, 1998, between the (H)
Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.3)
10.21 Common Stock Purchase Agreement, dated as of November 23, 1998, (H)
between the Company, Medeva Pharmaceuticals, Inc. and Medeva PLC*
(Exhibit 1.4)
10.22 Credit Agreement, dated as of November 23, 1998, between the (H)
Company, Medeva Pharmaceuticals, Inc. and Medeva PLC* (Exhibit
1.5)
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
10.23 Securities Purchase Agreement, dated as of July 21, 1999, between the Company, Elan (K)
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 International Services, (K)
Ltd., and Elan Corporation, plc (Exhibit 1.3)
10.25 Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among (K)
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 International (K)
Services, Ltd. (Exhibit 1.5)
10.27 License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and the (K)
Company * (Exhibit 1.6)
10.28 License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Elan (K)
Pharmaceutical Technologies, a division of Elan Corporation, plc * (Exhibit 1.7)
10.29 Olive Way Building Lease to Olive Way Building Lease, dated as of November 20, 1993, as
amended between the 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 and the (D)
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)
21.1 Subsidiaries
23.1 Consents of Ernst & Young, independent auditors
27.1 Financial Data Schedule
27.2 Emerald Gene Systems Ltd. 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.
** 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.
(C) 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 on January 6, 1999.
54
<PAGE>
(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.
(b) Reports on Form 8-K
We filed a Form 8-K on December 15, 1999 to revise the factors included
under "Risk Factors" in Amendment No. 3 to the Company's Registration
Statement on Form S-3 (No. 333-86509) and in Post-Effective Amendment No. 2 to
the Company's Registration Statement on Form S-3 (No. 333-51625) to comply
with the SEC's plain English requirements.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TARGETED GENETICS CORPORATION
/s/ H. Stewart Parker
By: _________________________________
H. Stewart Parker
President and Chief Executive
Officer
Date: March 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ H. Stewart Parker President and Chief March 22, 2000
____________________________________ Executive Officer,
H. Stewart Parker Director (Principal
Executive Officer)
/s/ James A. Johnson Senior Vice President, March 22, 2000
____________________________________ Finance and
James A. Johnson Administration, Chief
Financial Officer,
Treasurer and
Secretary (Principal
Financial and
Accounting Officer)
/s/ Jeremy L. Curnock Cook Chairman of the Board, March 22, 2000
____________________________________ Director
Jeremy L. Curnock Cook
/s/ Jack L. Bowman Director March 22, 2000
____________________________________
Jack L. Bowman
/s/ James D. Grant Director March 22, 2000
____________________________________
James D. Grant
/s/ Louis P. Lacasse Director March 22, 2000
____________________________________
Louis P. Lacasse
/s/ Nelson L. Levy, Ph.D. M.D. Director March 22, 2000
____________________________________
Nelson L. Levy, Ph.D. M.D.
/s/ Mark Richmond, Ph.D. Director March 22, 2000
____________________________________
Mark Richmond, Ph.D.
</TABLE>
<PAGE>
EXHIBIT 10.1
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1999
Page 1
<PAGE>
TARGETED GENETICS CORPORATION
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT, dated as of March 30, 1994, between TARGETED
GENETICS CORPORATION, a Washington corporation (the "Company"), and
_________________, a director and/or officer of the Company (the "Indemnitee").
RECITALS
A. Indemnitee is a director and/or officer of the Company and in such
capacity is performing valuable services for the Company.
B. The Company and Indemnitee recognize the difficulty in obtaining
directors' and officers' liability insurance, the significant cost of such
insurance and the general reduction in the coverage of such insurance.
C. The Company and Indemnitee further recognize the substantial increase
in litigation subjecting directors and officers to expensive litigation risks at
the same time that such liability insurance has been severely limited.
D. The shareholders of the Company have adopted bylaws (the "Bylaws")
providing for the indemnification of the directors, officers, agents and
employees of the Company to the full extent permitted by the Business
Corporation Law of Washington (the "Statute").
E. The Bylaws and the Statute specifically provide that they are not
exclusive, and thereby contemplate that contracts may be entered into between
the Company and the members of its Board of Directors and its officers with
respect to indemnification of such directors and officers.
F. In order to induce Indemnitee to serve, or to continue to serve, as a
director and/or officer of the Company, the Company has agreed to enter into
this Agreement with Indemnitee.
AGREEMENTS
Page 2
<PAGE>
In consideration of the recitals above, the mutual covenants and agreements
herein contained, and Indemnitee's continued service as a director and/or
officer after the date hereof, the parties to this Agreement agree as follows:
1. Indemnity of Indemnitee
1.1. Scope
The Company agrees to hold harmless and indemnify Indemnitee to the full
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by this Agreement, the Company's Articles of
Incorporation, the Bylaws, the Statute or otherwise. In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
regarding the right of a Washington corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent that they would
expand Indemnitee's rights hereunder, shall be within the purview of
Indemnitee's rights and the Company's obligations hereunder, and, to the extent
that they would narrow Indemnitee's rights hereunder, shall be excluded from
this Agreement; provided, however, that any change that is required by
applicable laws, statutes or rules to be applied to this Agreement shall be so
applied regardless of whether the effect of such change is to narrow
Indemnitee's rights hereunder.
1.2. Nonexclusivity
The indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the Company's
Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders
or disinterested directors, the Statute, or otherwise, whether as to action in
Indemnitee's official capacity or otherwise.
1.3. Included Coverage
If Indemnitee was or is made a party, or is threatened to be made a party,
to or is otherwise involved (including, without limitation, as a witness) in any
Proceeding (as defined below), the Company shall hold harmless and indemnify
Indemnitee from and against any and all losses, claims, damages, liabilities or
expenses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, amounts paid in settlement and other expenses incurred in connection
with such Proceeding) (collectively, "Damages").
1.4. Definition of Proceeding
For purposes of this Agreement, "Proceeding" shall mean any actual, pending
or threatened action, suit, claim or proceeding, whether civil, criminal,
administrative
Page 3
<PAGE>
or investigative and whether formal or informal, in which Indemnitee is, was or
becomes involved by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company or that, being or having been such a
director, officer, employee or agent, Indemnitee is or was serving at the
request of the Company as a director, officer, employee, trustee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise (collectively a "Related Company"), including service with respect to
an employee benefit plan, whether the basis of such proceeding is alleged action
(or inaction) by Indemnitee in an official capacity as a director, officer,
employee, trustee or agent or in any other capacity while serving as a director,
officer, employee, trustee or agent; provided, however, that, except with
respect to an action to enforce the provisions of this Agreement, "Proceeding"
shall not include any action, suit, claim or proceeding instituted by or at the
direction of Indemnitee unless such action, suit, claim or proceeding is or was
authorized by the Company's Board of Directors.
1.5. Determination of Entitlement
In the event that a determination of Indemnitee's entitlement to
indemnification is required pursuant to Section 23B.08.550 of the Statute or a
successor statute or pursuant to other applicable law, the appropriate decision-
maker shall make such determination; provided, however, that Indemnitee shall
initially be presumed in all cases to be entitled to indemnification, that
Indemnitee may establish a conclusive presumption of any fact necessary to such
a determination by delivering to the Company a declaration made under penalty of
perjury that such fact is true and that, unless the Company shall deliver to
Indemnitee written notice of a determination that Indemnitee is not entitled to
indemnification within twenty (20) days after the Company's receipt of
Indemnitee's initial written request for indemnification, such determination
shall conclusively be deemed to have been made in favor of the Company's
provision of indemnification and Company hereby agrees not to assert otherwise.
1.6. Survival
The indemnification provided under this Agreement shall apply to any and
all Proceedings, notwithstanding that Indemnitee has ceased to be a director,
officer, employee, trustee or agent of the Company or a Related Company.
Page 4
<PAGE>
2. Expense Advances
2.1. Generally
The right to indemnification of Damages conferred by Section 1 shall
include the right to have the Company pay Indemnitee's expenses in any
Proceeding as such expenses are incurred and in advance of such Proceeding's
final disposition (such right is referred to hereinafter as an "Expense
Advance").
2.2. Conditions to Expense Advance
The Company's obligation to provide an Expense Advance is subject to the
following conditions:
2.2.1. Undertaking
If the Proceeding arose in connection with Indemnitee's service as a
director or an officer of the Company (and not in any other capacity in which
Indemnitee rendered service, including service to any Related Company), then
Indemnitee or his representative shall have executed and delivered to the
Company an undertaking, which need not be secured and shall be accepted without
reference to Indemnitee's financial ability to make repayment, by or on behalf
of Indemnitee to repay all Expense Advances if and to the extent that it shall
ultimately be determined by a final, unappealable decision rendered by a court
having jurisdiction over the parties and the question that Indemnitee is not
entitled to be indemnified for such Expense Advance under this Agreement or
otherwise.
2.2.2. Cooperation
Indemnitee shall give the Company such information and cooperation as
it may reasonably request and as shall be within Indemnitee's power.
2.2.3. Affirmation
Indemnitee shall furnish, upon request by the Company and if required
under applicable law, a written affirmation of Indemnitee's good faith belief
that any applicable standards of conduct have been met by Indemnitee.
3. Procedures for Enforcement
3.1. Enforcement
In the event that a claim for indemnity, an Expense Advance or otherwise is
made hereunder and is not paid in full within sixty days (twenty days for an
Expense
Page 5
<PAGE>
Advance) after written notice of such claim is delivered to the Company,
Indemnitee may, but need not, at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim (an "Enforcement Action").
3.2. Presumptions in Enforcement Action
In any Enforcement Action the following presumptions (and limitation on
presumptions) shall apply:
(a) The Company shall conclusively be presumed to have entered into this
Agreement and assumed the obligations imposed on it hereunder in order to induce
Indemnitee to continue as a director and/or officer of the Company;
(b) Neither (i) the failure of the Company (including the Company's Board
of Directors, independent or special legal counsel or the Company's
shareholders) to have made a determination prior to the commencement of the
Enforcement Action that indemnification of Indemnitee is proper in the
circumstances nor (ii) an actual determination by the Company, its Board of
Directors, independent or special legal counsel or shareholders that Indemnitee
is not entitled to indemnification shall be a defense to the Enforcement Action
or create a presumption that Indemnitee is not entitled to indemnification
hereunder; and
(c) If Indemnitee is or was serving as a director, officer, employee,
trustee or agent of a corporation of which a majority of the shares entitled to
vote in the election of its directors is held by the Company or in an executive
or management capacity in a partnership, joint venture, trust or other
enterprise of which the Company or a wholly owned subsidiary of the Company is a
general partner or has a majority ownership, then such corporation, partnership,
joint venture, trust or enterprise shall conclusively be deemed a Related
Company and Indemnitee shall conclusively be deemed to be serving such Related
Company at the request of the Company.
3.3. Attorneys' Fees and Expenses for Enforcement Action
In the event Indemnitee is required to bring an Enforcement Action, the
Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's
fees and expenses in bringing and pursuing the Enforcement Action (including
attorneys' fees at any stage, including on appeal); provided, however, that the
Company shall not be required to provide such indemnity for such attorneys' fees
or expenses if a court of competent jurisdiction determines that each of the
material assertions made by Indemnitee in such Enforcement Action was not made
in good faith or was frivolous.
Page 6
<PAGE>
4. Limitations on Indemnity; Mutual Acknowledgment
4.1. Limitation on Indemnity
No indemnity pursuant to this Agreement shall be provided by the Company:
(a) On account of any suit in which a final, unappealable judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company in violation of the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto; or
(b) For Damages that have been paid directly to Indemnitee by an insurance
carrier under a policy of officers' and directors' liability insurance
maintained by the Company.
4.2. Mutual Acknowledgment
The Company and Indemnitee acknowledge that, in certain instances, federal
law or public policy may override applicable state law and prohibit the Company
from indemnifying Indemnitee under this Agreement or otherwise. For example,
the Company and Indemnitee acknowledge that the Securities and Exchange
Commission (the "SEC") has taken the position that indemnification is not
permissible for liabilities arising under certain federal securities laws, and
federal legislation prohibits indemnification for certain ERISA violations.
Furthermore, Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the SEC to submit
the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
5. Notification and Defense of Claim
5.1. Notification
Promptly after receipt by Indemnitee of notice of the commencement of any
Proceeding, Indemnitee will, if a claim in respect thereof is to be made against
the Company under this Agreement, notify the Company of the commencement
thereof; but the omission so to notify the Company will not relieve the Company
from any liability which it may have to Indemnitee under this Agreement unless
and only to the extent that such omission can be shown to have prejudiced the
Company's ability to defend the Proceeding.
Page 7
<PAGE>
5.2. Defense of Claim
With respect to any such Proceeding as to which Indemnitee notifies the
Company of the commencement thereof:
(a) The Company may participate therein at its own expense;
(b) The Company, jointly with any other indemnifying party similarly
notified, may assume the defense thereof, with counsel satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its election so to
assume the defense thereof, the Company shall not be liable to Indemnitee under
this Agreement for any legal or other expenses (other than reasonable costs of
investigation) subsequently incurred by Indemnitee in connection with the
defense thereof unless (i) the employment of counsel by Indemnitee has been
authorized by the Company, (ii) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of the defense of such action, or (iii) the Company shall not in fact
have employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of counsel shall be at the expense of the Company.
The Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which Indemnitee
shall have made the conclusion provided for in (ii) above;
(c) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding effected without
its written consent;
(d) The Company shall not settle any action or claim in any manner which
would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent; and
(e) Neither the Company nor Indemnitee shall unreasonably withhold its, his
or her consent to any proposed settlement.
6. Severability
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable, as provided in
this Section 6. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been
Page 8
<PAGE>
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
7. Governing Law; Binding Effect; Amendment and Termination
(a) This Agreement shall be interpreted and enforced in accordance with the
laws of the state of Washington.
(b) This Agreement shall be binding upon Indemnitee and upon the Company,
its successors and assigns, and shall inure to the benefit of Indemnitee,
Indemnitee's heirs, personal representatives and assigns and to the benefit of
the Company, its successors and assigns.
(c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
TARGETED GENETICS CORPORATION
By _______________________________________
Its
INDEMNITEE:
_________________________________________
Executive Officer or Director
Page 9
<PAGE>
EXHIBIT 10.3
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1999
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a grant of
confidential treatment.
<PAGE>
GENE TRANSFER TECHNOLOGY LICENSE AGREEMENT
Effective this 18th day of February, 1992,
IMMUNEX CORPORATION, a corporation of the state of Delaware, having its
principal place of business at 51 University Street, Seattle,
Washington 98101, hereinafter referred to as "Immunex,"
and
TARGETED GENETICS CORPORATION, a corporation of the state of Washington,
having its principal place of business at 1201 Western Avenue,
Seattle, Washington 98101, hereinafter referred to as "TGC",
hereby agree and declare as follows:
Section 1: Background
---------------------
1.1 In the course of conducting basic research in molecular biology,
retrovirology, oncogenesis, immunology and hematopoiesis, Immunex has developed
certain technology enabling transfer and expression of heterologous DNAs in
mammalian cells (the "Gene Transfer Technology").
1.2 Immunex believes that the Gene Transfer Technology may have value in
treatment and prevention of human and animal diseases, for example genetic
diseases such as hemophilia, sickle cell anemia. cystic fibrosis, Huntington's
disease, phenylketonria, Duchenne muscular dystrophy, and others.
1.3 Immunex has formed TGC to develop the Gene Transfer Technology for use
in genetic therapy.
1.4 Immunex is willing to grant to TGC, and TGC desires to acquire from
Immunex, certain exclusive rights to the Gene Transfer Technology for use in
genetic therapy.
1.5 Accordingly, Immunex and TGC (the "Parties") have elected to enter
into this Agreement to achieve the objectives set forth in this Article.
1
<PAGE>
Section 2: Definitions
2.1 "Affiliate" of a Person (the "Subject") shall mean a person that
-----------
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Subject "Control" (and, with
correlative meanings, the terms "controlled by" and "under common control with")
shall mean the possession of the power to direct or cause the direction of the
management and policies of an entity, whether through the ownership of voting
stock, by contract or otherwise. In the case of a corporation, "control" shall
mean the direct or indirect ownership of more than fifty percent (50%) of the
outstanding voting stock.
2.2 "Biological Materials" means, without limitation, all cell lines,
--------------------
vectors, retroviral DNA constructions, and any and all other biological
materials owned or controlled by Immunex which are transferred by Immunex to TGC
hereunder, for example, the materials listed in Exhibit A. As used herein,
"ownership and control" shall mean possession of the right to grant a valid
license of the scope set forth in Section 3.1 herein.
2.3 "Closing" shall have the meaning assigned to that term in paragraph
---------
4.2 hereof.
2.4 "Closing Date" shall mean February 18. 1992, upon which TGC shall have
--------------
issued and transferred to Immunex 4,800,000 shares of Series A Preferred Stock.
2.5 "Field" means research, development, manufacturing and marketing of
-----
products and services which are used to transfer heterologous genetic material
into cells of a host patient, or to transplant cells or organs comprising cells
which have incorporated heterologous genetic material to a host patient, for
genetic therapy of human or animal diseases or undesirable conditions.
2.6 "Immunex Improvements" shall have the meaning set forth in Section 7.2
---------------------
hereof.
2.7 "Information" means, without limitation, public or nonpublic technical
-----------
or other information, whether or not patented, trade secrets, know-how,
processes, concepts, ideas, data, experimental methods and results, assays,
descriptions, business or scientific plans, depictions, supplier lists, nucleic
acid sequence listings and any other written, printed, or electronically stored
materials relating to the foregoing including intellectual property of any
nature whatsoever.
2
<PAGE>
2.8 "Licensed Patent Rights" shall mean the U.S. and foreign patent
----------------------
applications listed in Exhibit B, and rights under any patents or patent
applications licensed exclusively within the Field to TGC as Improvements
hereunder, and any patent issued or issuing upon any of the foregoing patents or
applications, or any counterpart, reissue, extension, continuation, division or
continuation-in-part thereof.
2.9 "Licensed Technology" means, collectively, the Biological Materials
-------------------
and all Information transferred by Immunex to TGC concerning use of the
Biological Materials and any additional Information transferred to TGC as an
Improvement hereunder.
2.10 "Person" shall mean an individual, a corporation, a partnership, an
------
association, an organization, a firm, a trust or a government agency.
2.11 "Preferred Stock" shall mean Targeted Genetics Corporation Series A
---------------
Preferred Stock, as set forth in the Certificate of Designations, Rights and
Preference of Series A Preferred Stock attached hereto as Exhibit C.
2.12 "TGC Improvements" shall have the meaning set forth in Section 7.3
hereof.
Section 3: Grant of Licenses
----------------------------
3.1 Field-Limited Exclusive License. Effective as of the Closing, and
-------------------------------
subject to the continued fulfillment of all other terms and conditions of this
Agreement, Immunex hereby grants to TGC a fully paid worldwide sole and
exclusive (against Immunex and all other Persons) right and license, including
the right to grant sublicenses and to authorize further sublicenses, in each
case expressly limited to the Field, to (a) make, use and sell products and
services incorporating or derived from the Licensed Technology; and (b) to make,
use and sell products or processes covered by one or more claims of the Licensed
Patent Rights.
3.2 Best Efforts. TGC shall employ its best efforts in the exploitation of
------------
the rights granted hereunder to research and commercially develop the Licensed
Technology, Licensed Patent Rights and Improvements for use in genetic therapy.
3
<PAGE>
Section 4: Issuance and Delivery of Preferred Stock
- ---------------------------------------------------
4.1 Delivery at Closing. In consideration of the rights granted to TGC by
-------------------
Immunex under this Agreement, TGC shall issue and deliver to Immunex 4,800,000
shares of Series A Preferred Stock at the Closing.
4.2 Closing. The execution of this Agreement, grant of licenses set forth
-------
in Section 3 hereof, and delivery of the Common Stock hereunder shall take place
on the Closing Date at 9:00 a.m., Seattle time, at the offices of Immunex in
Seattle, Washington, or at such other time and place as Immunex and TGC may
otherwise agree.
Section 5: Representations and Warranties of TGC
------------------------------------------------
5.1 Corporate Existence. TGC is a corporation duly organized, validly
-------------------
existing and in good standing under the laws of the state of Washington with
powers adequate for executing and performing this Agreement and issuing the
Common Stock to Immunex hereunder.
5.2 Authorization. The execution, delivery and performance of this
-------------
Agreement, including the issuance of the Common Stock, have been duly authorized
by all necessary corporate action required by the Articles of Incorporation and
Bylaws of TGC and all applicable laws.
5.3 Due Execution: Binding Effect This Agreement has been duly executed
-----------------------------
and delivered by TGC and is a legal, valid and binding obligation of TGC,
enforceable against TGC in accordance with its terms.
5.4 Authorized Capitalization. The authorized capital of TGC consists of
-------------------------
the following:
5.4.1 Common Stock. Forty Million (40,000,000) shares of common stock,
------------
$.0l par value per share (the "Common Stock"), of which 300,000
shares were issued and outstanding as of February 18, 1992.
5.4.2 Preferred. Fifteen Million (15,000,000) shares of Preferred
---------
Stock, of which 4,800,000 were issued and outstanding as of February
18, 1992.
4
<PAGE>
Section 6: Representations and Warranties of Immunex
- ----------------------------------------------------
6.1 Corporate Existence. Immunex is a corporation duly organized, validly
-------------------
existing and in good standing under the laws of the state of Delaware with
powers adequate for executing and performing this Agreement and granting the
licenses to TGC hereunder.
6.2 Authorization. The execution, delivery and performance of this
-------------
Agreement including the granting of licenses hereunder, have been duly
authorized by all necessary corporate action on the part of Immunex
6.3 Due Execution: Binding Effect. This Agreement has been duly executed
------------------------------
and delivered by Immunex and is a legal, valid and binding obligation of
Immunex, enforceable against Immunex in accordance with its terms.
6.4 No Conflicts. The execution, delivery and performance of this
------------
Agreement do not and will not conflict with or contravene any provision of the
charter documents or by-laws of Immunex or any agreement document instrument
indenture or other obligation of Immunex;
6.5 Right to Grant Licenses. To the best of its knowledge as of the
-----------------------
Closing, Immunex owns all rights in and title to the Licensed Patent Rights and
Licensed Technology and is free of any obligations preventing Immunex from
providing to TGC the rights and licenses granted herein. Notwithstanding the
foregoing, Immunex makes no representation or warranty hereunder with respect to
TGCs freedom to employ any recombinant DNA technologies or methods for gene
therapy without securing additional licenses from other persons. Immunex makes
no representation or warranty concerning title to or the right to transfer any
reagents or Biological Materials which Immunex or TGC acquired in whole or in
part from any other Person.
Section 7: Technology Transfer
------------------------------
7.1 Transfer of Technical Information and Biological Materials by Immunex.
---------------------------------------------------------------------
Within a reasonable time following the Closing, Immunex shall disclose to TGC
the Information and such Biological Materials listed in Exhibit A as TGC shall
request, plus any additional materials, reagents or Information which Immunex
and TGC agree will be useful in commencing TGC operations. With such disclosure,
Immunex shall provide or make available to TGC viable samples of the Biological
Materials. To the extent that any Biological Materials listed in Exhibit A are
identified generically and not by reference to specific plasmids or samples,
Exhibit A shall be
5
<PAGE>
considered to constitute a general guideline only. Except as provided in Section
7.2 hereof, Immunex shall not be required to search for, identify or transfer
more than one viable sample or embodiment of any Biological Materials identified
generically in Exhibit A, or to transfer any Biological Materials to TGC after
the one-year start-up period referenced in Section 8.1.
7.2 Disclosure and Licensing of Immunex Improvements. For a period of
------------------------------------------------
seven (7) years from the Closing Date, Immunex shall, from time to time,
disclose to TGC Information concerning new techniques, biological materials,
inventions and developments discovered or developed by Immunex which, in the
sole opinion of Immunex, relate to and would be useful in the Field
(collectively, "Immunex Improvements"). In the event that any Immunex
Improvement disclosed to TGC hereunder is materially useful in the research,
development manufacturing or marketing of TGC's products or services within the
Field, Immunex shall, upon the request of TGC, grant TGC a nonexclusive,
worldwide, fully-paid royalty-free right and license to such Immunex Improvement
solely for use within the Field. Immunex shall not grant a license to another
Person for an Immunex Improvement which TGC can demonstrate will be reasonably
useful to it in conducting its business within the Field. Immunex and TGC shall,
in appropriate cases, negotiate reasonable terms under which a non-exclusive
license to an Immunex Improvement may be made exclusive. Each such license shall
be included within the scope of the rights and licenses granted to TGC pursuant
to Section 3.1 hereof and shall be subject to all other terms and conditions of
this Agreement. Notwithstanding the foregoing, Immunex shall not be obligated to
disclose any Information or grant any right or license with respect to any
Information which is or has been developed by Immunex on behalf of or in
collaboration with another Person, if Immunex is obligated by an agreement with
such Person to maintain such Information in confidence or is otherwise
restricted with respect to the use of such Information, nor shall Immunex be
obligated to grant any rights to TGC which would tend to place TGC in direct or
indirect competition with Immunex, or any sublicensee or Affiliate of Immunex,
with respect to the manufacture, use or sale of any product which Immunex or
such sublicensee or Affiliate intends to develop for uses outside the Field. Any
license granted to TGC by Immunex hereunder which relates to a therapeutic
product developed or acquired by Immunex shall expressly exclude the right to
sell such product if such product has any use outside the Field.
7.3 Disclosure and Licensing of TGC Improvements. For a period of seven
--------------------------------------------
(7) years from the Closing Date, TGC shall, from time to time, disclose to
Immunex Information concerning new techniques, biological materials, inventions
and developments discovered or developed by TGC, including any new cytokines
discovered or developed by TGC (collectively, "TGC Improvements"). TGC shall,
upon the request of Immunex, grant Immunex a nonexclusive
6
<PAGE>
license to any such TGC Improvement solely for use internally by Immunex or a
sublicensee of Immunex in research, development or manufacturing operations.
During the term of this Agreement TGC shall not enter into any agreement or make
any commitment that would contravene or materially derogate Immunex's rights or
ability to obtain the foregoing license from TGC under Sections 7.3, 7.4, 7.5 or
7.6 hereof.
7.4 New Cytokines. In the event that TGC discovers a new cytokine, or
-------------
identifies a biological activity indicating the possibility of a previously
uncharacterized cytokine during the period referenced in Sections 7.2 and 7.3,
above, information regarding the discovery shall be promptly communicated to the
other party. The parties shall thereafter confer to determine the most
appropriate means for commercial application of the discovery. Such means may
include an exclusive license to Immunex for therapeutic uses, the terms of which
shall be subject to good-faith negotiation between the parties.
7.5 Right of First Disclosure. Prior to disclosing any TGC Improvement
-------------------------
(whether or not relating to the Field) to an unrelated third party for purposes
of licensing, TGC shall provide Immunex with a reasonably complete disclosure of
such Improvement and such additional information as Immunex may reasonably
request in order to evaluate the Improvement If Immunex is interested in
securing a license to such Improvement Immunex will provide TGC with a written
licensing offer within sixty (60) days following receipt of such disclosure from
TGC, which TGC may accept or reject.
7.6 Right of First Refusal. Prior to transferring rights to an unrelated
----------------------
third party in any Improvement for which Immunex has provided TGC with a
licensing offer as provided in Section 7.5 hereof, TGC shall provide Immunex
with a confidential disclosure of all material terms of the proposed
transaction. Immunex shall have thirty (30) days from the date of disclosure to
provide TGC with an offer meeting or exceeding the terms disclosed to Immunex,
which TGC may accept or reject TGC's right to accept any offer made by Immunex
pursuant to this or the preceding Section shall expire thirty (30) days
following the date of receipt of the offer, unless otherwise agreed by the
Parties.
7.7 Confidentiality Obligations. With respect to Information, Biological
---------------------------
Materials or Improvements disclosed hereunder by Immunex to TGC or TGC to
Immunex, the Party receiving such disclosure shall, during the life of this
Agreement and for a period of five (5) years after the termination or expiration
of this Agreement maintain the confidential and proprietary status of such
Information, Biological Materials, or Improvements and otherwise use the same
degree of care as it
7
<PAGE>
exercises with respect to its own confidential information to prevent disclosure
of the same to any third party, and shall not use the same for any purpose other
than exercising any right or rights granted to it herein; provided, however,
that nothing herein shall restrict either party with respect to the disclosure
and/or use of information which the recipient party can show (i) was in its
possession at the time of its receipt of the same from the disclosing party as
shown by contemporaneous written records, or (ii) was in the public domain at
the time of its receipt from the disclosing party or thereafter becomes part of
the public domain other than as a result of an act or omission to act on the
part of the recipient party, or (iii) was received from a third party having the
right to disclose such information. Specific information shall not be deemed to
be within the exceptions of the preceding sentence merely because it is embraced
by more general information within such exceptions, nor shall a combination of
elements be deemed to be within such exceptions merely because the individual
elements are within such exceptions.
7.8 Permitted Disclosures. Notwithstanding the provisions of Section 7.7,
---------------------
TGC and Immunex may, to the extent necessary, disclose and use confidential
information disclosed to them by the other Party:
(a) for purposes of securing institutional or government approval to
clinically test or government approval to market any product or service; or
(b) where the disclosure and use of such confidential information will be
useful or necessary to the procurement of patent protection for an Immunex
Improvement or TGC Improvement provided that each Party shall have been notified
of such disclosure and that any such disclosure shall be in confidence and
subject to provisions the same, or substantially the same, as those in Section
7.7 hereof, whenever reasonably possible.
7.9 Compliance with Export Control Laws. All use and disclosure of
-----------------------------------
Information, Biological Materials and Improvements acquired pursuant to this
Agreement and the exercise of patent rights granted hereunder shall be subject
to and in compliance with the export control regulations of the United States of
America.
Section 8: Technical and Administrative Assistance
--------------------------------------------------
8.1 Start-up. For a period of one (1) year following the Closing, Immunex
shall provide reasonable access to its facilities by TGC personnel in order to
permit TGC to complete the transfer of technology contemplated by this Agreement
and initiate the operations of TGC. During this period, Immunex shall provide
space in its laboratories and storage facilities, and adequate
8
<PAGE>
laboratory supplies, to enable TGC personnel to begin work and maintain and
transfer the Biological Materials. Immunex shall maintain reserve stocks and
cultures of the Biological Materials during such period to reasonably facilitate
a successful transfer to the facilities of TGC. TGC shall reimburse Immunex for
all direct labor and supply costs associated with such services as well as
reasonable charges for associated direct and indirect overhead costs based upon
TGC's actual use of Immunex facilities and supplies.
8.2 Continuing Technical Support. For a period of five (5) years
----------------------------
following the Closing Date, Immunex shall provide TGC with the following
technical services:
(a) oligonucleotide synthesis;
(b) protein and DNA sequencing;
(c) use of fluorescence-activated cell sorter
(d) biological assays routinely conducted by Immunex; and
(e) such other services as TGC and Immunex determine by mutual agreement The
cost and quantity of all services to be provided by Immunex to TGC pursuant to
this paragraph shall be specified in written workplans and budgets, which shall
be negotiated on an annual basis prior to the time such services are to be
provided. The charges to TGC by Immunex shall reflect Immunex full costs,
including reasonable charges for direct and indirect overheads and applicable
general and administrative expenses.
8.3 Continuing Administrative Services. For a period of three (3) years
----------------------------------
following the Closing, Immunex shall provide TGC reasonable assistance with
administrative services, including accounting, patent general legal, information
systems, public relations, finance, regulatory affairs, clinical affairs, health
and safety, human resources, and management consulting. All such services shall
be provided only to the extent that Immunex's resources are available, after
meeting all of Immunex's own requirements, and TGC shall reimburse Immunex for
all direct labor costs associated with such services as well as reasonable
charges for associated direct and indirect overheads and applicable general and
administrative expenses.
Section 9: Reports
------------------
9.1 Commercialization Progress Reports. Within sixty (60) days following
----------------------------------
the last day of each calendar half-year, beginning with the first calendar half-
year following the Closing Date, TGC shall provide a written Commercialization
Progress Report to Immunex setting forth TGC's progress in research, development
and commercialization of genetic therapy products and services using the
Licensed Technology during such half-year, as well as TGC's goals and objectives
for
9
<PAGE>
use of the Licensed Technology during the following half-year and five-year
periods. This obligation shall continue for a period of seven (7) years
following the Closing Date. All such Reports shall be deemed to be TGC
confidential information for purposes of Section 7.7 hereof.
9.2 Immunex Reports. Immunex shall permit TGC personnel to attend Immunex
---------------
research meetings, seminars and conferences which Immunex and TGC agree are
appropriate to TGC's activities within the Field. All TGC personnel who attend
such meetings shall be required to execute a confidentiality agreement suitable
to Immunex to protect Immunex proprietary and confidential information. In
addition, Immunex shall provide to TGC a biannual written summary of any Immunex
research findings applicable to the Field which have not been previously
disclosed to TGC hereunder. All such disclosures shall be deemed to be Immunex
confidential information for purposes of Section 7.7 hereof.
Section 10: Patent Infringement
-------------------------------
10.1 Notification of Infringement. TGC shall notify Immunex of any
----------------------------
infringement by third parties of any patent within Licensed Patent Rights and
shall provide Immunex with the available evidence, if any, of such infringement.
10.2 Enforcement of Licensed Patents. Immunex shall retain the sole right
-------------------------------
at its sole discretion, to enforce Licensed Patent Rights against third-party
infringers; provided, however, that so long as TGC holds an exclusive license
hereunder, in the event that an unlicensed third party is infringing Licensed
Patent Rights to the material detriment of TGC, and Immunex fails to take action
to abate the infringement within six (6) months after receipt of notice pursuant
to Section 6, TGC shall be entitled to enforce Licensed Patent Rights as its
sole remedy hereunder. Immunex shall cooperate with TGC in the enforcement of
Licensed Patent Rights.
10.3 No Warranty of Non-Infringement. Nothing in this Agreement shall be
-------------------------------
construed as a representation made or warranty given by Immunex that the
practice by TGC of any right or license granted hereunder, or use of any
Information, Biological Materials or Improvements will not infringe the patent
or proprietary rights of any third party.
Section 11: Indemnification and Financial Responsibility
--------------------------------------------------------
11.1 Disclaimer. While it is expected that the Information and Biological
----------
Materials provided by Immunex to TGC pursuant to this Agreement will not present
a risk of personal
10
<PAGE>
injury, bodily injury or property damage, the Parties recognize that genetic
therapy is an experimental therapy having largely unknown risks and benefits.
Accordingly, Immunex does not warrant or guarantee that any beneficial results
will be obtained, and Immunex will not be liable to TGC, its licensees,
employees, officers, directors, shareholders, customers, or any participant in
genetic therapy clinical trials for any reason, except for third party losses or
expenses which are caused by the gross negligence or willful misconduct of
Immunex. TGC recognizes that the use of the Information and Biological Materials
provided to it by Immunex hereunder, or materials made using the Information or
Biological Materials, may involve health, safety or other hazards to persons or
property. Immunex will transmit to TGC all relevant information in the
possession of Immunex to minimize such hazards. However, Immunex does not
warrant the accuracy, completeness or suitability of such information or that
its use will eliminate all hazards to users of the information, or employees or
customers of TGC. All Information provided to regulatory agencies or users of
products or services developed by TGC, including health and safety information
and instructions for use, shall be determined by and be the sole responsibility
of TGC.
11.2. Immunex Right to Indemnification. Consistent with the foregoing, TGC
--------------------------------
shall defend, indemnify and hold Immunex harmless against any and all liability,
damage, loss, cost or expense (including attorneys' fees) resulting from any
claim, suit or other action, whether based upon negligence, warranty, strict
liability, violation of government regulation or any other theory of liability,
arising out of or based on TGC's activities within the Field, including without
limitation the use of any Information or Biological Materials transferred to TGC
hereunder for any purpose or practice of Licensed Patent Rights, except claims
based upon the gross negligence or willful misconduct of Immunex. Upon the
filing of any such claim or suit Immunex shall promptly notify TGC and permit
TGC at TGC's cost to defend such claim or suit and shall cooperate in the
defense thereof. Neither Immunex nor TGC shall enter into any settlement of any
such suit without the express written consent of the other party. Immunex may,
at its option and expense, have its own counsel participate in any proceeding
which is under the direction of TGC and will cooperate with TGC and its insurer
in the disposition of any such matter.
11.3 Evidence of Financial Responsibility. TGC shall not (a) market
------------------------------------
distribute or sell any product or service for treatment of human beings which is
based upon the Information or Biological Materials transferred or licensed to
TGC by Immunex hereunder,
(b) conduct or have conducted any clinical trials involving human
beings and the use or administration of a product or service which is based
upon the Information or Biological Materials transferred or licensed to TGC
by Immunex hereunder or
11
<PAGE>
(c) grant any rights to or otherwise enable a third party to use, sell,
test or administer any product or service for treatment of human beings which is
based upon the Information or Biological Materials transferred or licensed to
TGC by Immunex hereunder, unless TGC shall have first:
(1) obtained the prior written consent of Immunex to such action; or
(2) provided Immunex with a certificate of insurance proving that TGC
or a third party has in force, during the term of this Agreement and reasonable
time thereafter, a policy or policies of insurance including personal and
advertising injury, products and completed operations coverage, which will
indemnify or pay on behalf of Immunex, its directors, officers and employees
against liability claims (including attorneys' fees and legal and other
necessary expenses) for injury or damages arising from the manufacture, use,
sale or distribution of any product or service developed hereunder using the
Information or Biological Materials transferred or licensed to TGC by Immunex
(hereinafter "Claims") and which:
(i) is written in an amount not less than ten million dollars
($10,000,000) per occurrence or claim, having a self-insured retention not
greater than one million dollars ($1,000,000), for liability arising out of
bodily injury, personal injury, death or property damage (self-insured
retentions under such policy are the sole responsibility of TGC); and
(ii) is endorsed to name Immunex, its directors, officers and
employees as additional insureds under such policy of insurance;
(iii) which contains an endorsement that the required coverage
will not be reduced, materially altered, nonrenewed or cancelled without first
giving at least thirty (30) days' prior written notice to Immunex;
(iv) which is endorsed to provide coverage that is primary and
noncontributory with any insurance or self-insurance program maintained by
Immunex; and
(v) which is of a financial and management quality acceptable
to Immunex. Immunex shall have the right to designate a reasonable period
following termination of this Agreement during which TGC shall maintain
insurance as described above if TGC has engaged in any of the acts defined in
subparagraphs (a), (b) or (c) above prior to termination. Immunex and TGC shall
review the requirements of this Section 11.3 from time to time in view of TGC's
scientific, clinical and financial progress, in order to remove any unreasonable
impediments to TGC's operations while protecting Immunex from liability for
Claims resulting from TGC's operations hereunder.
12
<PAGE>
Section 12: Term and Termination
- --------------------------------
12.1 Term. This Agreement shall be effective as of the Closing and shall
----
continue in full force and effect, unless earlier terminated as provided
hereinafter, until the expiration of the last to expire of any patent within the
scope of Licensed Patent Rights, or until December 31,2011, whichever date shall
last occur. Following termination under this paragraph, all rights licensed to
TGC hereunder shall become irrevocable.
12.2 Termination for Breach. Either Party shall have the right to
----------------------
terminate this Agreement and any license or sublicense granted hereunder upon
thirty (30) days' written notice to the other of the other Party's material
breach of this Agreement if such Party has failed to cure such breach within
thirty (30) days' notice thereof.
12.3 Termination by TGC. TGC may terminate this Agreement in its entirety
------------------
at any time upon sixty (60) days' written notice to Immunex.
12.4 Other Termination. Should TGC (1) become insolvent or unable to pay
-----------------
its debts as they mature, or (2) make an assignment for the benefit of
creditors, or (3) permit or procure the appointment of a receiver or trustee for
its assets, or (4) become the subject of any bankruptcy, insolvency or similar
proceeding, then Immunex be provided within (60) days with a written plan of
reorganization or other document setting forth a plan under which the assets and
licenses transferred to TGC hereunder will be conserved and employed to further
the objectives of this Agreement. Immunex shall have the right to accept or
reject such plan, and in the event of rejection, may at any time thereafter on
written notice to TGC, effective forthwith, terminate this Agreement and any
sublicenses granted by TGC hereunder.
12.5 Effect of Termination. Upon termination of this Agreement under
---------------------
Sections 12.3 or 12.4 hereof, or upon termination by Immunex pursuant to Section
12.2 hereof, all licenses and sublicenses granted to TGC by Immunex hereunder,
including any sublicenses granted by TGC, shall terminate simultaneously and all
Immunex rights shall revert to Immunex; provided however, that any license
granted by TGC pursuant to Section 7.2 hereunder shall not terminate; upon such
termination TGC shall return to Immunex all Licensed Technology, however
embodied. Upon termination of this Agreement by TGC under Section 12.2 hereof,
the licenses granted by TGC to Immunex under Section 7.3 hereunder shall
terminate but the licenses granted by Immunex to TGC under Sections 3.1 and 3.2
hereof shall not terminate.
13
<PAGE>
12.6 Survival. Termination or expiration of this Agreement, in whole or in
--------
part, shall be without prejudice to the right of any party who is not in default
hereunder to receive all payments accrued and unpaid at the effective date of
such expiration or termination, to the remedy of either party in respect to any
previous breach of any of the covenants herein contained and to any other
provisions herein which expressly or necessarily call for performance after such
expiration or termination. The confidentiality and nonnuse provisions of Section
7 and the indemnification and financial responsibility provisions of Section 11
shall survive expiration or termination.
Section 13: General Provisions
------------------------------
13.1 Notices. Any notice, request, approval, or other document required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been officially given when delivered in person, transmitted by
telex, telecopy, telegraph, or deposited in the mail, postage prepaid, for
mailing by first class, certified or registered mail, return receipt requested,
addressed as follows:
If to TGC, addressed to:
Targeted Genetics Corporation
1201 Western Avenue
Seattle, Washington 98101
Attn: President
If to Immunex, addressed to:
Immunex Corporation
51 University Street
Seattle, Washington 98101
Attn: General Counsel
or to such other address or addresses as may be specified from time to time in a
written notice.
13.2 Limitation upon Assignment This Agreement and the rights granted
--------------------------
hereunder to Immunex may be assigned by Immunex to any third party at any time;
provided, however, that the rights and obligations of this Agreement shall not
be assignable by TGC without the written consent of Immunex.
13.3 Washington Law. This Agreement shall in all respects, including all
--------------
matters of construction, validity and performance, be governed by, and construed
and enforced in accordance
14
<PAGE>
with, the laws of the state of Washington applicable to contracts entered into
in that state between citizens of that state and to be performed entirely within
that state without reference to any rules governing conflicts of laws.
13.4 Relationship of the Parties. Nothing in this Agreement is intended or
--------------- --- -------
shall be deemed to constitute a partnership, agency, employer, employee or joint
venture relationship between the Parties.
13.5 Use of Names. Neither Party shall use the name of the other in any
------------
publication, press release, or other public disclosure without the express
written consent of the other.
13.6 Severability. In the event that any one or more of the provisions of
------------
this Agreement shall for any reason be held by any court or authority having
jurisdiction over this Agreement or any of the Parties thereto to be invalid,
illegal or unenforceable, such provision or provisions shall be validly reformed
to as nearly approximate the intent of the Parties as possible and if
unreformable the Parties shall meet to discuss which steps should be taken to
remedy the situation; elsewhere this Agreement shall not be effected.
13.7 Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the Parties and supersedes any and all prior negotiations, correspondence,
understandings and agreements between the Parties respective of the subject
matter hereof. This Agreement may be amended or modified or one or more
provisions hereof waived only by a written instrument signed by the Parties.
IN WITNESS WHEREOF, TGC and Immunex have caused this Agreement to be
executed in duplicate counterpart originals by their duly authorized
representatives.
IMMUNEX CORPORATION TARGETED GENETICS CORPORATION
By /s/ Michael L. Kranda By /s/ H. Stewart Parker
Its President Its President
Date 2/24/92 Date 2/18/92
15
<PAGE>
Schedule A
Materials to be made available to TGC by Immunex
[*]
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
APPENDIX A: cytokines and cytokine receptors
[*]
[*] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
APPENDIX B: mammalian expression constructs
<PAGE>
EXHIBIT 10.4
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1999
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a grant of
confidential treatment.
<PAGE>
NATIONAL INSTITUTES OP HEALTH
CENTERS FOR DISEASE CONTROL
PATENT LICENSE AGREEMENT - NONEXCLUSIVE
COVER PAGE
For Office of Technology Transfer/NIH internal use only:
Patent License Number: L-232-92
-------------------------------------
Serial Numbers of Licensed Patents: USPA SN 06/712.236 (USPN
------------------------
4.797.368)
------------------------------------------------------------
Licensee: Targeted Genetics Corporation
--------------------------------------------------
CRADA Number (if applicable):_______________________________
Additional Remarks:_________________________________________
This Patent License Agreement, hereinafter referred to as the "Agreement"
consists of this Cover Page, an attached agreement, a Signature Page, Appendix A
(Patent or Patent Application), Appendix B (Fields of Use and Territory),
Appendix C (Royalties), and Appendix D (Modifications). This Cover Page serves
to identify the Parties to this Agreement as follows:
(1) the National Institutes of Health ("NIH") or the Centers for Disease
Control ("CDC"), hereinafter singly or collectively referred to as "PHS,"
agencies of the United States Public Health Service within the Department of
Health and Human Services ("DHHS"); and
(2) The person, corporation, or institution identified on the Signature
Page, having offices at the address indicated on the Signature Page, hereinafter
referred to as "LICENSEE".
<PAGE>
PHS PATENT LICENSE AGREEMENT - NONEXCLUSIVE
PHS and LICENSEE agree as follows:
l. BACKGROUND
----------
1.01 In the course of conducting biomedical and behavioral research, PHS
investigators made inventions that may have commercial applicability.
1.02 By assignment of rights from PHS employees and other inventors, DHHS,
on behalf of the United States Government, owns the intellectual property rights
claimed in any United States and foreign patent applications or patents
corresponding to the assigned inventions. DHHS also owns any tangible
embodiments of these inventions actually reduced to practice by PHS.
1.03 The Assistant Secretary for Health of DHHS has delegated to PHS the
authority to enter into this Agreement for the licensing of the rights to these
inventions under the patent law, 35 U.S.C. (S)(S)200-212 and the Federal
Technology Transfer Act of 1986, 15 U.S.C. (S)3710a.
1.04 PHS desires to transfer these inventions to the private sector
through conmmercialization licenses to facilitate the conmmercial development of
products and processes for public use and benefit.
1.05 LICENSEE desires to acquire commercialization rights to certain of
these inventions in order to develop processes, methods or marketable products
for public use and benefit.
2. DEFINITIONS
-----------
2.01 Licensed Patent Rights shall mean:
a) U.S. patent applications and patents listed in Appendix A, all
divisions and continuations of these applications, all patents issuing from such
applications, divisions and continuations, and any reissues, reexaminations and
extensions of all such patents,
b) to the extent that the following contain one or more claims to the
invention or inventions claimed in a) above: continuations-in-part of a) above,
all divisions and continuations of these continuations-in-part, all patents
issuing from such continuations - in-part, divisions and continuations, and any
reissues, reexaminations and extensions of all such patents;
<PAGE>
c) to the extent that the following contain one or more claims to the
invention or inventions claimed in a) above: all counterpart foreign
applications and patents to a) and b) above, including those listed in Appendix
A.
Licensed Patent Rights shall not include b) or c) above to the extent that
they contain one or more claims directed to new matter which is not the subject
matter of a claim in a) above.
2.02 Licensed Product(s) means tangible materials which, in the course of
manufacture, use or sale would, in the absence of this Agreement, infringe one
or more claims of the Licensed Patent Rights that have not been held invalid or
unenforceable by an unappealed or unappealable judgement of a court of competent
jurisdiction.
2.03 Licensed Process(es) means processes which, in the course of being
practiced would, in the absence of this Agreement, infringe one or more claims
of the Licensed Patent Rights that have not been held invalid or unenforceable
by an unappealed or unappealable judgment of a court of competent jurisdiction.
2.04 Licensed Territory means the geographical area identified in Appendix
B.
2.05 Net Sales means the total gross receipts for sales of Licensed
Products or practice of Licensed Processes by or on behalf of LICENSEE and from
leasing, renting, or otherwise making Licensed products available to others
without sale or other dispositions, whether invoiced or not, less returns and
allowances actually granted, packing costs, insurance costs, freight out, taxes
or excise duties imposed on the transaction (if separately invoiced), and
wholesaler and cash discounts in amounts customary in the trade. No deductions
shall be made for commissions paid to individuals, whether they be with
independent sales agencies or regularly employed by LICENSEE and on their
payroll, or for the cost of collections.
2.06 Net Sales Price means the Net Sales divided by the quantity of
Licensed Product sold or Licensed Process practiced.
2.07 Combined Product means a product that contains a Licensed Product
along with at least one other active component or ingredient not covered by the
Licensed Patent Rights.
2.08 First Commercial Sale means the initial transfer by or on behalf of
LICENSEE, of Licensed products in exchange for cash or some equivalent to which
value can be assigned for the purpose of determining Net Sales, and First
Commercial Use means the initial practice of a Licensed Process by LICENSEE.
<PAGE>
2.09 Government means the United States Government.
2.10 Licensed Fields of Use means the fields of use identified in Appendix
B.
3. GRANT OF RIGHTS
---------------
3.01 PHS hereby grants and LICENSEE accepts, subject to the terms and
conditions of this Agreement, a Nonexclusive License to LICENSEE under the
Licensed Patent Rights in the Licensed Territory to make and have made, to use
and have used and to sell and have sold any Licensed products in the Licensed
Fields of Use and to practice and have practiced any Licensed Processes in the
Licensed Fields of Use.
3.02 LICENSEE has no right to grant sublicenses.
3.03 This Agreement is effective when signed by all parties and shall
extend to the expiration of the last to expire of the Licensed Patent Rights
unless sooner terminated as provided in Article 11 below.
3.04 This Agreement confers no license or rights by implication, estoppel
or otherwise under any patent applications or patents of PHS other than Licensed
Patent Rights regardless of whether such patents are dominant or subordinate to
Licensed Patent Rights.
4. STATUTORY AND PHS REQUIREMENTS AND RESERVED GOVERNMENT RIGHTS
-------------------------------------------------------------
4.01 LICENSEE agrees that products used or sold in the United States
embodying Licensed Products or produced through use of Licensed Processes shall
be manufactured substantially in the United States, unless a written waiver is
obtained in advance from PHS.
4.02 DHHS has responsibility for funding basic biomedical research, for
funding medical treatment through programs such as Medicare and Medicaid, for
providing direct medical care and, more generally, for protecting the health and
safety of the public. Because of these responsibilities, and the public
investment in the research that culminated in the Licensed Patent Rights, PHS
may require LICENSEE to submit documentation in confidence showing a reasonable
relationship between the pricing of a Licensed Product, the public investment in
that product and the health and safety needs of the public. This paragraph shall
not restrict the right of LICENSEE to price a Licensed Product or Licensed
Process so as to obtain a reasonable profit for its sale or use. This Paragraph
4.02 does not permit PHS or any other government agency to set or dictate prices
for Licensed Products or Licensed Processes.
<PAGE>
5. ROYALTIES AND REIMBURSEMENT
-------------------------------
5.01 LICENSEE agrees to pay to PHS a noncreditable, nonrefundable license
issue royalty as set forth in Appendix C within thirty (30) days from the date
that this Agreement becomes effective.
5.02 LICENSEE agrees to pay to PHS a nonrefundable minimum annual royalty
as set forth in Appendix C. The minimum annual royalty is due and payable on
January 1 of each calendar year, and may be credited against any earned
royalties due for sales made in that year. The minimum annual royalty for the
first calendar year of this Agreement is due and payable within thirty (30) days
from the effective date of this Agreement and may be prorated according to the
fraction of the calendar year remaining between the effective date of this
Agreement and the next subsequent January l.
5.03 LICENSEE agrees to pay PHS earned royalties as set forth in Appendix
C.
5.04 A claim of a patent application licensed under this Agreement shall
cease to fall within the Licensed Patent Rights for purposes of computing the
minimum annual royalty and earned royalty payments in any given country on the
earliest of the dates that it: (a) has been abandoned but not continued, or (b)
has been pending (including the pendency time of any parent cases) but not
allowed for more than six (6) years from its effective filing date; but shall be
reinstated for purposes of computing these royalty payments on the date that a
patent issues thereon. A claim of a patent licensed under this Agreement shall
cease to fall within the Licensed Patent Rights for the purpose of computing the
minimum annual royalty and earned royalty payments in any given country on the
earliest of the dates that: (a) the patent expires, (b) the patent is no longer
maintained by the Government, or (c) all claims of the Licensed Patent Rights
have been held to be invalid or unenforceable by an unappealed or unappealable
decision of a court of competent jurisdiction or administrative agency.
5.05 No multiple royalties shall be payable because any Licensed products
or Licensed Processes are covered by more than one of the Licensed Patent
Rights.
5.06 On sales of Licensed products by LICENSEE in other than an arm's
1ength transaction, the Net Sales Price attributed under this Article 5 to such
a transaction shall be that which would have been received in an arm's length
transaction, based on sales of like quantity and quality products on or about
the time of such transaction.
5.07 LICENSEE agrees to pay PHS, within (60) days of PHS's submission of a
statement and request for payment, a royalty amount
<PAGE>
equivalent to all patent expenses previously incurred by PHS in the preparation,
filing, prosecution and maintenance of Licensed Patent Rights incurred during
the previous calendar year, to be divided equally among all nonexclusive
LICENSEES of record as of the date the statement and request for payment is sent
by PHS to LICENSEE. [*] of the cumulative amount of such payments may be
credited against royalties due under Paragraph 5.03, however, the net royalty
payment in any calendar year may not be lower than the minimum annual royalty
specified in Appendix C. LICENSEE may elect to surrender its rights in any
country of the Licensed Territory under any Licensed Patent Rights upon sixty
(60) days written notice to PHS and owe no payment obligation under this
Paragraph for subsequent patent-related expenses incurred in that country.
6. RECORD KEEPING
--------------
6.01 LICENSEE agrees to keep, accurate and correct records of Licensed
Products made, used or sold and Licensed Processes practiced under this
Agreement appropriate to determine the amount of royalties due PHS. Such records
shall be retained for at least five (5) years following a given reporting
period. They shall be available during normal business hours for inspection at
the expense of PHS by an accountant or other designated auditor selected by PHS
for the sole purpose of verifying reports and payments hereunder. The accountant
or auditor shall only disclose to PHS information relating to the accuracy of
reports and payments made under this Agreement. If an inspection shows an
underreporting or underpayment in excess of ten percent (10%) for any twelve
(12) month period, then LICENSEE shall reimburse PHS for the cost of the
inspection at the time LICENSEE pays the unreported royalties.
7. REPORTS ON PROGRESS SALES AND PAYMENTS
--------------------------------------
7.01 Prior to signing this Agreement, LICENSEE has provided to PHS a
written commercialization plan ("Commercial Development Plan") under which
LICENSEE intends to bring the subject matter of the Licensed Patent Rights into
commercial use upon execution of this Agreement. The Commercial Development Plan
is hereby incorporated by reference into this Agreement.
7.02 LICENSEE shall provide written annual reports on its product
development progress or efforts to commercialize under the Commercial
Development Plan for each of the Licensed Fields of Use within sixty (60) days
after December 31 of each calendar year. These progress reports shall include,
but not be limited to: progress on research and development, status of
applications for regulatory approvals, manufacturing, marketing and sales during
the preceding calendar year, as well as plans for the present calendar
_____________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
year. LICENSEE agrees to provide any additional data reasonably required by PHS
to evaluate LICENSEE's performance.
7.03 LICENSEE shall report to PHS the date of the First Commercial Sale of
Licensed Products or the First Commercial Use of Licensed Processes in each
country in the Licensed Territory within thirty (30) days of such occurrence.
7.04 LICENSEE shall submit to PHS within sixty (60) days after each
calendar half year ending June 30 and December 31, a royalty report setting
forth for the preceding half year period the amount of the Licensed Products
sold or Licensed Processes practiced by or on behalf of LICENSEE in each country
within the Licensed Territory, the Net Sales, and the amount of royalty
accordingly due. With each such royalty report, LICENSEE shall submit payment of
the earned royalties due. If no earned royalties are due to PHS for any
reporting period, the written report shall so state. The royalty report shall be
certified as correct by an authorized officer of LICENSEE and shall include a
detailed listing of all deductions made under Paragraph 2.05 to determine Net
Sales or made under Article 5 to determine royalties due.
7.05 Royalties due under Article 5 shall be paid in U. S. dollars. For
conversion of foreign currency to U. S. dollars, the conversion rate shall be
the rate quoted in the Wall Street Journal on the day that the payment is due.
All checks and bank drafts shall be drawn on United States banks and shall be
payable to NIH/Patent Licensing at the address on the Signature Page below. Any
loss of exchange, value, taxes or other expenses incurred in the transfer or
conversion to U. S. dollars shall be paid entirely by LICENSEE.
7.06 Late charges will be applied to any overdue payments as required by
the U. S. Department of Treasury in the Treasury Fiscal Requirements Manual,
Section 8020.20. The payment of such late charges shall not prevent PHS from
exercising any other rights it may have as a consequence of the lateness of any
payment.
7.07 All plans and reports required by this Article 7 and marked
"confidential" by LICENSEE shall be treated by PHS as commercial and financial
information obtained from a person, and as privileged and confidential, and to
the extent permitted by law, shall and not be subject to disclosure under the
Freedom of Information Act, 5 U.S.C. (S)552.
8. REASONABLE BEST EFFORTS
-----------------------
8.01 LICENSEE shall use its reasonable best efforts to introduce the
Licensed Products into the commercial market or apply the Licensed Processes to
commercial use as soon as practicable,
<PAGE>
consistent with sound and reasonable business practices and judgment.
"Reasonable best efforts" for the purpose of this provision shall include, but
not .be limited to, adherence to the Commercial Development Plan. LICENSEE
agrees to apply at least the same level of effort that it applies to the
commercial development of its own products and processes.
8.02 Upon the First Commercial Sale of Licensed Products or the First
Commercial Use of Licensed Processes, until the expiration of this Agreement,
LICENSEE shall use its reasonable best efforts to keep Licensed Products and
Licensed Processes available to the public.
9. INFRINGEMENT AND PATENT ENFORCEMENT
-----------------------------------
9.01 PHS and LICENSEE agree to notify each other promptly of each
infringement or possible infringement, as well as any facts which may affect the
validity, scope or enforceability of the Licensed Patent Rights of which either
Party becomes aware.
9.02 If PHS has been unable to eliminate a substantial infringement within
one year of written notification to the Office of Technology Transfer from
LICENSEE of the existence of a substantial infringement and has not instituted
infringement litigation, LICENSEE shall be excused from the payment of the
minimum annual royalty and earned royalties in any country in which the
substantial infringement occurred. Thereafter, when the substantial infringement
has ceased or an infringement suit has been initiated, PHS shall so notify the
LICENSEE in writing, at which time LICENSEE's obligation to pay such royalties
shall resume as of the date of such notification.
9.03 In the event that a declaratory judgment action alleging invalidity
of any of the Licensed Patent Rights shall be brought against PHS, PHS agrees to
notify LICENSEE that an action alleging invalidity has been brought. PHS does
not represent that it will commence legal action to defend against a declaratory
action alleging invalidity. LICENSEE shall take no action to compel the
Government either to initiate or to join in any such declaratory judgment
action. Should the Government be made a party to any such suit by motion or any
other action of LICENSEE, LICENSEE shall reimburse the Government for any costs,
expenses or fees which the Government incurs as a result of its defending
against such motion or other action taken in response to the motion. Upon
LICENSEE's payment of all costs incurred by the Government as a result of
LICENSEE's joinder motion or other action, these actions by LICENSEE will not be
considered a default in the performance of any material obligation under this
Agreement.
<PAGE>
10. NEGATION OF WARRANTIES AND INDEMNIFICATION
10.01 PHS offers no warranties other than those specified in Article l.
10.02 PHS does not warrant the validity of the Licensed Patent Rights, and
makes no representations whatsoever with regard to the scope of the Licensed
Patent Rights, or that the Licensed Patent Rights may be exploited without
infringing other patents or other intellectual property rights of third parties.
10.03 PHS MAKE NO WARRANTIES, EXPRESSED OR IMPLIED, OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE of any subject matter defined by the claims of
the Licensed Patent Rights
10.04 PHS does not represent that it will commence legal actions against
third parties infringing the Licensed Patent Rights.
10.05 LICENSEE shall defend, indemnify and hold PHS and its employees,
students, fellows, agents and consultants harmless from and against all
liability, demands, damages, expenses and losses, including but not limited to
death, personal injury, illness or property damage in connection with or arising
out of (a) the use by or on behalf of LICENSEE, or its directors, employees or
third parties of any Licensed Patent Rights, or (b) the design, manufacture,
distribution or use of any Licensed Products, Licensed Processes, or other
products or processes developed in connection or arising out of the Licensed
Patent Rights. LICENSEE agrees to maintain a liability insurance program
consistent with sound business practice.
11. TERMINATION AND MODIFICATION OF RIGHTS
--------------------------------------
11.01 In the event that LICENSEE is in default in the performance of any
material obligations under this Agreement, and if the default has not been
remedied within ninety (90) days after the date of notice in writing of such
default, PHS may terminate this Agreement by written notice.
11.02 At least 30 days prior to filing a petition in bankruptcy LICENSEE
must inform PHS in writing of its intention to file the petition in bankruptcy
or of a third party's intention to file an involuntary petition in bankruptcy.
11.03 In the event that LICENSEE becomes insolvent, makes an assignment of
Licensed Patent Rights for the benefit of creditors, files a petition in
bankruptcy, has such a petition filed against it, determine to file the petition
in bankruptcy, or receives notice of a third party's intention to file an
involuntary petition
<PAGE>
in bankruptcy, LICENSEE shall immediately notify PHS in writing. Furthermore,
PHS shall have the right to terminate this Agreement by giving LICENSEE written
notice. Termination of this Agreement is effective upon LICENSEE'S receipt of
the written notice.
11.04 LICENSEE shall have a unilateral right to terminate this Agreement
and/or any licenses in any country by giving PHS sixty (60) days written notice
to that effect.
11.05 PHS shall specifically have the right to terminate this Agreement,
if PHS determines that the LICENSEE: (1) is not executing the Conmmercial
Development Plan submitted with its request for a license and the LICENSEE
cannot otherwise demonstrate to PHS's satisfaction that the LICENSEE has taken,
or can be expected to take within a reasonable time, effective steps to achieve
practical application of the Licensed Products or Licensed Processes; (2) has
willfully made a false statement of, or willfully omitted, a material fact in
the license application or in any report required by the licensed agreement; (3)
has committed a substantial breach of a covenant or agreement contained in the
license; (4) is not keeping Licensed Products or Licensed Processes reasonably
available to the public after commercial use commences; (5) cannot reasonably
satisfy unmet health and safety needs; or (6) cannot reasonably justify a
failure to comply with the domestic production requirement of Paragraph 4.02
unless waived. In making this determination, PHS will take into account the
normal course of such commercial development programs conducted with sound and
reasonable business practices and judgment and the annual reports submitted by
LICENSEE under Paragraph 7.02. Prior to invoking this right, PHS shall give
written notice to LICENSEE providing LICENSEE specific notice of and a ninety
(90) day opportunity to satisfy PHS's concerns as to the previous items (1) to
(6). If LICENSEE fails to satisfy or reasonably begin to rectify such concerns
within the ninety (90) day period, PHS may terminate this Agreement.
11.06 PHS reserves the right according to 35 U.S.C. (S)209(f) (4) to
terminate this Agreement if it is determined that such action is necessary to
meet requirements for public use specified by Federal regulations issued after
the date of the license and such requirements are not reasonably satisfied by
LICENSEE.
11.07 Within thirty (30) days of receipt of written notice of PHS's
unilateral decision to terminate this Agreement, LICENSEE may, consistent with
the provisions of 37 C.F.R. (S)404.11, appeal the decision by written submission
to the Assistant Secretary for Health or designee. The Assistant Secretary for
Health or designee's decision shall be the final agency decision. LICENSEE may
thereafter exercise any and all administrative or judicial remedies that may be
available.
<PAGE>
11.08 Within ninety (90) days of termination of this Agreement under this
Article 11 or expiration under Paragraph 3.03, a final report shall be submitted
by LICENSEE. Any royalty payments and unreimbursed patent expenses due to PHS
become immediately due and payable upon termination.
11.09 Paragraphs 6.01, 7.05, 7.06, 10.05 and 11.08 of this Agreement shall
survive termination of this Agreement.
12. GENERAL PROVISIONS
------------------
12.01 Neither Party may waive or release any of its rights or interests in
this Agreement except in writing. The failure of the Government to assert a
right hereunder or to insist upon compliance with any term or condition of this
Agreement shall not constitute a waiver of that right by the Government or
excuse a similar subsequent failure to perform any such term or condition by
LICENSEE.
12.02 This Agreement constitutes the entire agreement between the Parties
relating to the subject matter of the Licensed Patent Rights, and all prior
negotiations, representations, agreements and understandings are merged into,
extinguished by and completely expressed by this Agreement.
12.03 The provisions of this Agreement are severable, and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of law, such determination shall not in
any way affect the validity or enforceability of the remaining provisions of
this Agreement.
12.04 If either Party desires a modification to this Agreement, the
Parties shall, upon reasonable notice of the proposed modification by the Party
desiring the change, confer in good faith to determine the desirability of such
modification. No modification will be effective until a written amendment is
signed by the signatories to this Agreement or their designees.
12.05 The construction, validity, performance and effect of this Agreement
shall be governed by Federal law as applied by the Federal Courts in the
District of Columbia.
12.06 All notices required or permitted by this Agreement shall be given
by prepaid registered or certified mail properly addressed to the other Party at
the address designated on the following signature page, or to such other address
as may be designated in writing by such other Party, and shall be effective as
of the date of the postmark of such notice.
<PAGE>
12.07 This Agreement shall not be assigned by LICENSEE except (a) with the
prior written consent of PHS, such consent to be reasonably given; or (b) as
part of a sale or transfer of substantially the entire business of LICENSEE
relating to operations which concern this Agreement.
12.08 LICENSEE agrees in its practice of the Licensed Patent Rights to
comply with all applicable Government regulations and guidelines including, for
example, those relating to research involving human or animal subjects or
recombinant DNA.
12.09 LICENSEE acknowledges that it is subject to and agrees to abide by
the United States laws and regulations (including the Export Administration Act
of 1979 and Arms Export Control Act) controlling the export of technical data,
computer software, laboratory prototypes, biological material and other
commodities. The transfer of such items may require a license from the cognizant
agency of the U. S. Government or written assurances by LICENSEE that it shall
not export such items to certain foreign countries without prior approval of
such agency. PHS neither represents that a license is or is not required or
that, if required, it shall be issued.
12.10 LICENSEE agrees to mark the Licensed Products or their packaging
sold in the United States with all applicable U. S. patent numbers and similarly
to indicate "Patent Pending" status. All Licensed Products manufactured in,
shipped to or sold in other countries shall be marked in such a manner as to
preserve PHS patent right in such countries.
12.11 By entering into this Agreement, PHS does not directly or indirectly
endorse any product or service provided, or to be provided, by LICENSEE whether
directly or indirectly related to this Agreement. LICENSEE shall not state or
imply that this Agreement is an endorsement by the Government, PHS, any other
Government organizational unit, or any Government employee. Additionally,
LICENSEE shall not use the names of PHS, NIH, CDC or ADAMHA or their employees
in any advertising, promotional or sales literature without the prior written
consent of PHS.
12.12 The Parties agree to attempt to settle amicably any controversy or
claim arising under this Agreement or a breach of the Agreement, except for
appeals of modification or termination decisions provided for in Article 11.
LICENSEE agrees first to appeal any such unsettled claims or controversies to
the Director of NIH, whose decision shall be considered the final agency
decision. Thereafter, LICENSEE may exercise any administrative or judicial
remedies that may be available.
12.13 Nothing relating to the grant of a license, nor the grant itself,
shall be construed to confer upon any person any
<PAGE>
immunity from or defenses under the antitrust laws or from a charge of patent
misuse and the acquisition and use of rights pursuant to this part shall not be
immunized from the operation of state or Federal law by reason of the source of
the grant.
SIGNATURES BEGIN ON NEXT PAGE
<PAGE>
PHS PATENT LICENSE AGREEMENT - NONEXCLUSIVE
-------------------------------------------
SIGNATURE PAGE
--------------
FOR PHS
/s/ Reid G. Adler, J.D. July 13, 1993
- ----------------------- -------------
Reid Adler, J.D. Date
Director, Office of Technology Transfer
Mailing Address for Notices and Payments:
Director
Office of Technology Transfer
Box OTT
National Institutes of Health
Bethesda, Maryland 20892
(301) 496-7735
FAX (301) 402-0220
FOR LICENSEE (Upon information and belief, the undersigned expressly certifies
or affirms on information and belief that the contents of any statements of
LICENSEE made or referred to in this document are truthful and accurate.)
/s/ H. Stewart Parker July 7, 1993
- --------------------- ------------
H. Stewart Parker Date
President
Mailing Address for Notices:
President
Targeted Genetics Corporation
1100 Olive Way, Ste 100
Seattle, WA 98101
(206) 623-7612
<PAGE>
APPENDIX A - Patent or Patent Application
Patent or Patent Application: USPA SN 06/712,236 (USPN 4,797,368)
"Adeno-Associated Virus as Eukaryotic Expression Vector"
<PAGE>
APPENDIX B - Licensed Fields of Use and Territory
Licensed Territory: The United States, its territories and possessions.
Licensed Fields of Use: Diagnosis and treatment of human disease.
<PAGE>
APPENDIX C - Royalties
[*]
_____________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
APPENDIX D - Modifications
PHS and LICENSEE agree to the following modifications to the Articles and
Paragraphs of this Agreement:
ARTICLE TWO
2.01(c) (Deleted in its entirety).
2.07 (Deleted in its entirety)
2.08 (amended) First Commercial Sale means the initial transfer by or on
behalf of LICENSEE, of Licensed Products in exchange for cash or some equivalent
to which value can be assigned for the purpose of determining Net Sales
following approval of a Product License Application by the U.S. Food and Drug
Administration, and First Commercial Use means the initial practice of a
Licensed Process by LICENSEE.
ARTICLE FIVE
5.02 (amended) LICENSEE agrees to pay to PHS a nonrefundable minimum
annual royalty as set forth in Appendix C. The minimum annual royalty is due and
payable on January 1 of each calendar year that this Agreement is in force, and
may be credited against any earned royalties due for sales made in that year.
The minimum annual royalty for the first calendar year of this Agreement is due
and payable within thirty (30) days from the effective date of this Agreement
and may be prorated according to the fraction of the calendar year remaining
between the effective date of this Agreement and the next subsequent January l.
5.07 (amended) LICENSEE agrees to pay PHS, within (60) days of PHS's
submission of a statement and request for payment ("Statement Date"), a royalty
amount equivalent to all patent expenses incurred by PHS prior to the effective
date of this Agreement in the preparation, filing, prosecution and maintenance
of Licensed Patent Rights, to be divided equally among all nonexclusive
LICENSEES of record as the Statement Date.
5.08 (new paragraph) Beginning the first subsequent January 1 after the
effective date of this Agreement, LICENSEE agrees to pay PHS, within (60) days
of PHS's submission of a statement and request for payment, a royalty amount
equivalent to all patent expenses incurred by PHS in the previous calendar year
in the preparation, filing, prosecution and maintenance of Licensed Patent
Rights, to be divided equally among all nonexclusive LICENSEES of record as of
the date the request for payment is sent by PHS to LICENSEE. Such request for
payment for the first calendar year shall exclude the patent expenses incurred
by PHS prior to the
<PAGE>
effective date of this Agreement which are payable under Paragraph 5.07.
5.09 (new paragraph) [*] of the cumulative amount of payments due under
Paragraphs 5.07 and 5.08 may be credited against royalties due under Paragraph
5.03, however, the net royalty payment in any calendar year may not be lower
than the minimum annual royalty specified in Appendix C. LICENSEE may elect to
surrender its rights in any country of the Licensed Territory under any Licensed
Patent Rights upon sixty (60) days written notice to PHS and owe no payment
obligation under this Paragraph for subsequent patent-related expenses incurred
in that country.
5.10 (New Paragraph) LICENSEE agrees to pay PHS benchmark royalties as set
forth in Appendix C.
5.11 (New Paragraph) PHS agrees that any licenses granted to Licensed
Patent Rights after the earlier of: a) the Statement Date; or b) December 31,
1993, shall provide for earned royalty rates of [*] in excess of those set forth
in Appendix C.
ARTICLE SEVEN
7.03 (amended) LICENSEE shall report to PHS the date of the First
Commercial Sale of Licensed products or the First Commercial Use of Licensed
Processes in the Licensed Territory within thirty (30)days of such occurrence.
7.04 (amended) Beginning after the date of First Commercial Use or First
Commercial Sale, LICENSEE shall submit to PHS within sixty (60) days after each
calendar half year ending June 30 and December 31, a royalty report setting
forth for the preceding half year period the amount of the Licensed products
sold or Licensed Processes practiced by or on behalf of LICENSEE in each country
within the Licensed Territory, the Net Sales, and the amount of royalty
accordingly due. With each such royalty report, LICENSEE shall submit payment of
the earned royalties due. If no earned royalties are due to PHS for any
reporting period, the written report shall so state. The royalty report shall be
certified as correct by an authorized officer of LICENSEE and shall include a
detailed listing of all deductions made under Paragraph 2.05 to determine Net
Sales or made under Article 5 to determine royalties due.
7.08 (New Paragraph) LICENSEE shall report to PHS the date of its first
human use for Licensed products or the approval of any Product License
Application (PLA) with the Food and Drug Administration for Licensed Products
within thirty (30) days of such occurrence.
_____________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
ARTICLE NINE
9.02 (amended) If PHS has been unable to eliminate a substantial
infringement within one year of written notification to the Office of Technology
Transfer from LICENSEE of the existence of a substantial infringement and has
not instituted infringement litigation, LICENSEE shall be excused from the
payment of the minimum annual royalty and earned royalties as of one year after
written notification. Thereafter, when the substantial infringement has ceased
or an infringement suit has been initiated, PHS shall so notify the LICENSEE in
writing, at which time LICENSEE's obligation to pay such royalties shall resume
as of the date of such notification.
9.03 (amended) In the event that a declaratory judgment action alleging
invalidity of any of the Licensed Patent Rights shall be brought against PHS,
PHS agrees to notify LICENSEE that an action alleging invalidity has been
brought. PHS does not represent that it will commence legal action to defend
against a declaratory action alleging invalidity. LICENSEE shall take no action
to compel the Government either to initiate or to join in any such declaratory
judgment action. Should the Government be made a party to any such suit by
motion or any other action of LICENSEE, LICENSEE shall reimburse the Government
for any costs, expenses or fees which the Government incurs as a result of its
defending against such motion or other action taken in response to the motion.
Such reimbursement amount shall be fully creditable against earned royalties
payments due PHS hereunder. Upon LICENSEE's payment of all costs incurred by the
Government as a result of LICENSEE's joinder motion or other action, these
actions by LICENSEE will not be considered a default in the performance of any
material obligation under this Agreement.
ARTICLE TWELVE
12.10 LICENSEE agrees to mark the Licensed products or their packaging
sold in the United States with all applicable U. S. patent numbers and similarly
to indicate "Patent Pending" status.
NEW ARTICLE (THIRTEEN)
13. MOST FAVORED LICENSEE
---------------------
13.01 Except as provided for in Paragraph 5.11, PHS intends that the
royalty terms of all other licenses under Licensed Patent Rights will be
essentially similar to the terms of this Agreement. PHS will advise LICENSEE as
to those terms in other agreements under Licensed Patent Rights in the Licensed
Fields of Use in the Licensed Territory signed after the effective date of this
Agreement that are different from this Agreement as to Minimum Annual Royalty,
Benchmark Royalty or Earned Royalty or the basis on
<PAGE>
which these royalties are computed. LICENSEE may determine whether such package
of royalty terms are more favorable than those granted under this Agreement, and
shall be entitled upon written notice to PHS, within sixty (60) days after
receipt from PHS of the different terms, to have this Agreement amended to
substitute this package of terms as of the date upon which more favorable
license terms become effective.
13.02 PHS may have entered into prior license agreement for Licensed Patent
Rights. The Article 13 does not apply to the royalty terms for past sales or
any settle agreements of infringement suits.
<PAGE>
EXHIBIT 10.5
TO
FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1999
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a grant of
confidential treatment.
NON-EXCLUSIVE PATENT LICENSE AGREEMENT
University of Florida Research Foundation, Inc.
and
Targeted Genetics Corporation
TABLE OF CONTENTS
PREAMBLE
ARTICLES:
I DEFINITIONS
II GRANT
III DUE DILIGENCE
IV ROYALITIES
V REPORTS AND RECORDS
VI PATENT PROSECUTION
VII INFRINGEMENT & PATENT ENFORCEMENT
VIII INDEMNIFICATION AND PRODUCT LIABILITY
IX NEGATION OF WARRANTIES
X EXPORT CONTROLS
XI NON-USE OF NAMES
XII ASSIGNMENT
XIII TERM & TERMINATION
XIV PAYMENTS, NOTICES AND OTHER
COMMUNICATIONS
XV MISCELLANEOUS PROVISIONS
APPENDIX A SUBLICENSE
Agreement is made and entered into this 25/th/ day of December 1993, (the
Effective Date) by and between THE UNIVERSITY OF FLORIDA RESEARCH FOUNDATION,
INC., a not-for-profit corporation duly organized and
<PAGE>
existing under the laws of the State of Florida and having its principal office
at 223 Grinter Hall, Gainesville, Florida, 32611-2037, U.S.A. (hereinafter
referred to as UFRFI), and Targeted Genetics Corporation, a corporation duly
organized under the laws of Washington and having its principal office at 1100
Olive Way., Suite 100, Seattle, Washington, 98101 (hereinafter referred to as
LICENSEE).
<PAGE>
WITNESSETH
WHEREAS, UFRFI warrants that it is the owner of certain "Patent Rights" by
assignment from the University of Florida (hereinafter referred to as
University) relating to UFRFI Case No 0431, U.S. Patent No. 5,139,941, Issued
08/18/92, "AAV Transduction Vectors" invented by Drs. Nicholas Muzyczka, Kenneth
I. Berns, Richard J. Samulski & Paul L. Hermonat, and has the right to grant
licenses under said Patent Rights, subject only to a royalty-free, nonexclusive
license heretofore granted to the United States Government;
WHEREAS, UFRFI desires to have the Patent Rights developed and utilized to
the fullest extent so that the benefits can be enjoyed by the general public and
is willing to grant a nonexclusive license thereunder;
WHEREAS, LICENSEE shall commit itself to a thorough, vigorous and diligent
program of exploiting the Patent Rights commercially so that public utilization
and royalty income to UFRFI shall result therefrom; and
WHEREAS, LICENSEE desires to obtain a non-exclusive license under the
Patent Rights upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein the parties hereto agree as follows:
ARTICLE I DEFINITIONS
- ---------------------
For the purposes of this Agreement, the following words and phrases shall
have the following meanings:
1.1 "LICENSEE" shall mean the following:
(a) a related company of LICENSEE, the voting stock of which is
directly or indirectly at least fifty percent (50%) owned or
controlled by LICENSEE;
(b) an organization which directly or indirectly controls more than
fifty percent (50%) of the voting stock of LICENSEE;
(c) an organization, the majority ownership of which is directly or
indirectly common to the ownership of LICENSEE.
<PAGE>
1.2 "Patent Rights" shall mean all of the following UFRFI intellectual
property:
(a) the United States Patents No. 5,139,941, Issued 08/18/92, "AAV
Transduction Vectors" invented by Drs. Nicholas Muzyczka, Kenneth
I. Berns, Richard J. Samulski & Paul L. Hermonat;
(b) to the extent that the following contain one or more claims to
the invention or inventions claimed in (a) above: continuations-
in-part of (a) above, all divisions and continuations of these
continuations-in-part, divisions and continuations, and any
reissues, extensions or reexaminations of such patents;
(c) to the extent that the following contain one or more claims to
the invention or inventions claimed in (a) above: all counterpart
foreign applications and patents to (a) and (b) above.
1.3 A "Licensed Product" shall mean any tangible product or part thereof
which, in the course of manufacture, use or sale would, in the absence of this
Agreement, infringe one or more claims of the Patent Rights that have not been
held invalid or unenforceable by an unappealed or unappealable judgement of a
court of competent jurisdiction.
1.4 A "Licensed Process" shall mean any process which, in the course of
being practiced, would, in the absence of this Agreement, infringe one or more
claims of the Patent Rights that have not been held invalid or unenforceable by
an unappealed or unappealable judgement of a court of competent jurisdiction.
1.5 "Net Sales" shall mean LICENSEE's (and its sublicensee's) billings for
or revenue received from sales of Licensed Products and Licensed Processes
produced hereunder less the sum of the following:
(a) discounts allowed in amounts customary in the trade,
(b) sales taxes, tariff duties, and/or use taxes which are directly
imposed and are with reference to particular sales;
(c) outbound transportation prepaid or allowed; and
(d) amounts allowed or credited on returns; and
(e) charges deemed uncollectible under generally
<PAGE>
accepted accounting principles.
No deductions shall be made for commissions paid to individuals whether they be
with independent sales agencies or regularly employed by LICENSEE and on its
payroll, or for cost of collections. Licensed Products shall be considered
"sold" when billed out or invoiced.
1.6 "Territory" shall mean the United States.
1.7 "Field(s) of Use" shall mean the following:
[*]
1.8 "Optioned Field(s) of Use" shall mean the following:
[*]
Upon written notice to UFRFI of LICENSEE's exercise of the option according to
Article 2.2 below, any Optioned Field of Use shall be redefined as a Field of
Use.
(f) Veterinary; All Uses.
ARTICLE II- GRANT
- -----------------
2.1 UFRFI hereby grants to LICENSEE a non-exclusive right and license to
make, have made, use, lease, have sold and sell the Licensed Products, and to
practice the Licensed Processes in the Territory for the Field(s) of Use to the
end of the term for which the Patent Rights are granted unless sooner terminated
according to the terms hereof.
2.2 UFRFI hereby grants to LICENSEE an option to acquire a non-exclusive
right and license to make, have made, use, lease and sell the Licensed Products,
and to practice the Licensed Processes in the Territory for the Optioned
Field(s) of Use, under the same terms and conditions as the agreement for the
Licensed Fields of Use. Such option shall automatically expire three (3) years
from the Effective Date of this Agreement ("Option Period") unless exercised
earlier by LICENSEE upon written notice to UFRFI. During the Option Period,
LICENSEE shall have the right to make, have made, use but not to sell Licensed
Products, and to practice Licensed Processes, for internal research purposes
only.
2.3 LICENSEE agrees that Licensed Products leased or sold in the United
States shall be manufactured substantially in the United States.
2.4 UFRFI reserves the right to practice under the Patent Rights and to
use and
<PAGE>
___________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
Substitute for Page 4
Targeted Genetics License Agreement, Final 12/6/93
Field 3. Human; Cancer.
1.8 "Optioned Field(s) of Use shall mean the following:
[*]
Upon written notice to UFRFI of LICENSEE's exercise of the option according to
Article 2.2 below, any Optioned Field of Use shall be redefined as a Field of
Use.
__________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
ARTICLE II- GRANT
- -----------------
2.1 UFRFI hereby grants to LICENSEE a non-exclusive right and license,
subject only to a royalty-free, nonexclusive license hereto fore granted to the
United States Government, to make, have made, use, lease, have sold and sell the
Licensed Products, and to practice the Licensed Processes in the Territory for
the Field(s) of Use to the end of the term for which the Patent Rights are
granted unless sooner terminated according to the terms hereof.
2.2 UFRFI hereby grants to LICENSEE an option to acquire a non-exclusive
right and license to make, have made, use, lease and sell the Licensed Products,
and to practice the Licensed Processes in the Territory for the Optioned
Field(s) of Use, under the same terms and conditions as the agreement for the
Licensed Fields. of Use. Such option shall automatically expire three (3) years
from the Effective Date of this Agreement ("Option Period") unless exercised
earlier by LICENSEE upon written notice to UFRFI. During the Option Period,
LICENSEE shall have the right to make, have made, use but not to sell Licensed
Products, and to practice Licensed Processes, for internal research purposes
only.
2.3 LICENSEE agrees that Licensed Products leased or sold in the United
States shall be manufactured substantially in the United States.
2.4 UFRFI reserves the right to practice under the Patent Rights and to
use and distribute to third parties the Tangible Property for its own
noncommercial research purposes.
<PAGE>
distribute to third parties the Tangible Property for its own noncommercial
research purposes.
2.5 UFRFI reserves the right to grant other licenses under the Patent
Rights.
2.6
UFRFI hereby grants to LICENSEE the right to sublicense as defined in Appendix
A.
2.7 The license granted hereunder shall not be construed to confer any
rights upon LICENSEE by implication, estoppel or otherwise as to any
technology not specifically set forth herein.
2.8 The Patent Rights covered by this Agreement are subject to the
rights and limitations of U.S. Code, Title 35, Chapter 38, and implementing
regulations thereof, and the grant under this Article II is subject to such
rights and limitations.
ARTICLE III - DUE DILIGENCE
- ---------------------------
3.1 LICENSEE shall use its best efforts to bring one or more Licensed
Products or Licensed Processes to market through a thorough, vigorous and
diligent program for exploitation of the Patent Rights to attain maximum
commercialization of Licensed Products or Licensed Processes.
3.2 LICENSEE's failure to perform in accordance with Paragraph 3.1 above
shall be grounds for UFRFI to terminate this Agreement pursuant to Article 13.3
hereof.
3.3 LICENSEE agrees to keep UFRFI fully and promptly informed of its
progress on the commercial exploitation of Licensed Products and/or Licensed
Processes. Beginning December 31, 1994 and continuing annually thereafter until
first Net Sale, LICENSEE shall submit to UFRFI within 60 days of the end of each
calendar year a written report with respect to progress made toward
commercialization of a Licensed Product and/or use of a Licensed Process during
the 12 months preceding.
ARTICLE IV - ROYALTIES
- ----------------------
4.1 For the rights, privileges and license granted hereunder, LICENSEE
shall pay royalties to UFRFI in the manner hereinafter provided to the end of
the term of the Patent Rights or until this Agreement shall be terminated as
hereinafter provided:
<PAGE>
(a) [*], which said License Issue Fee shall be deemed earned and due
---
immediately upon the execution of this Agreement. [*] shall be
payable on the Effective Date and [*] shall be payable one (1) year
from the Effective Date.
(b) License Maintenance Fees of are payable beginning January 1,1996
and on January 1 of each year thereafter and are a function of the
number of Fields under Paragraphs 1.7 and 1.8 that are licensed by
LICENSEE as of the date that a License Maintenance Fee is due, as
provided in the following table:
Fields of Use Licensed Annual License Maintenance
- ---------------------- --------------------------
1 [*]
2 [*]
3 [*]
4 [*]
5 [*]
6 [*]
The License Maintenance Fee for a given year shall be creditable against
any Running Royalties subsequently due during said year under Articles
4.1(e) and 4.1(f) below.
(c) Option Issue Fee of [*] which said Option Issue Fee shall be deemed earned
and due immediately upon the execution of this Agreement. [*] shall be
payable on the Effective Date and [*] shall be payable one (1) year from
the Effective Date.
(d) Regulatory Milestone Fees for the first Licensed Product within the each
Field of Use, as follows:
(i) [*] upon filing of the Investigational New Drug Application (IND) or
other governmental regulatory approval whichever comes first.
__________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
(ii) [*] upon entering Phase 2 clinical trials, "Phase 2" as defined by 21
Code of Federal Regulations, Chapter 1;
(iii) [*] upon entering Phase 3 clinical trials, "Phase 3" as defined by 21
Code of Federal Regulations, Chapter 1;
(iv) [*] upon filing the New Drug Application ("NDA") or Product License
Application ("PLA") as defined by 21 Code of Federal Regulations,
Chapter 1;
(v) [*] upon NDA or PLA approval.
(e) Running Royalty in an amount equal to [*] of the Net Sales of the Licensed
Products or Licensed Processes manufactured used, leased or
sold by or for LICENSEE or its sublicensees in the United
States, except, however that the foregoing royalty rate may be
reduced by one half the amount of third party royalties
payable on licenses required to make, use or sell Licensed
Products or to practice a Licensed Process but in no case
shall the Running Royalty be less than [*] of Net Sales.
(f) Running Royalty in an amount equal to [*] of the Net Sales of
the Licensed Products or Licensed Processes manufactured by or
for LICENSEE or its sublicensees in the United States, but
sold outside the United States, except, however that the
foregoing royalty rate may be reduced by one half the amount
of third party royalties payable on licenses required to make,
us or sell Licensed Products or to practice a Licensed but
case shall the Running Royalty be less than [*] of Net Sales.
_____________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
4.2 For the rights, privileges and license granted hereunder upon exercise of
the Option Agreement, LICENSEE shall pay royalties to UFRFI in
the manner hereinafter provided until the last to expire of the
Patent Rights or until this Agreement shall be terminated as
provided in Article 13, below:
(a) License Issue Fee of [*] for the first Optioned Field of Us,
which said License Issue Fee shall be deemed earned and due
immediately upon the execution of the Option Agreement.
(b) License Issue Fee of [*] for each subsequent Optioned Field of
Use, which said License Issue Fee shall be deemed earned and due
immediately upon the execution of the Option Agreement.
(c) Regulatory Milestone Fees as defined in Article 4.1(d) above and
Running Royalties as defined in Article 4.1(e) and 4.1(f) above.
4.3 No multiple royalties shall be payable because any Licensed Product,
its manufacture, use, lease or sale are or shall be covered by multiple claims
or more than one Patent Rights patent licensed under this Agreement.
4.4 Royalty payments shall be paid in United States dollars in Gainesville,
Florida or at such other place as UFRFI may reasonably designate consistent with
the laws and regulations controlling in any foreign country. If any currency
conversion shall be required in connection with the payment of royalties
hereunder, such conversion shall be made by using the exchange rate prevailing
at the Chase Manhattan Bank (N.A.) on the last business day of the calendar
quarterly reporting period to which such royalty payments relate.
__________________
[ * ] = omitted, confidential material, which material has been separately filed
with the Securities and Exchange Commission pursuant to a grant of confidential
treatment.
<PAGE>
4.5 In the event the royalties set forth herein are higher than the
maximum royalties permitted by the law or regulations of a particular
country, the royalty payable for sales in such country shall be equal
to the maximum permitted royalty under such law or regulations. Notice
of said event shall be provided to UFRFI. An authorized representative
of LICENSEE shall notify UFRFI, in writing, within thirty (30) days of
discovering that such royalties are approaching or have reached the
maximum amount, and shall provide UFRFI with written documentation
regarding the laws or regulations establishing such maximum.
4.6 In the event that any taxes, withholding or otherwise, are levied by
any taxing authority in connection with accrual or payment of any royalties
payable by LICENSEE under this Agreement, and LICENSEE determines in good faith
that it must pay such taxes, LICENSEE shall have the right to pay such taxes to
the local tax authorities on behalf of UFRFI and payment of the net amount due
after reduction by the amount of such taxes, shall fully satisfy LICENSEE's
royalty obligations under this Agreement. LICENSEE shall provide UFRFI with
appropriate receipts or other documentation supporting such payment. LICENSEE
shall inform UFRFI in writing, within thirty (30) days of notification that
taxes will or have been levied by a taxing authority.
<PAGE>
ARTICLE V - REPORTS AND RECORDS
-------------------------------
5.1 LICENSEE shall keep full, true and accurate books of account containing
all particulars that may be necessary for the purpose of showing the amounts
payable to UFRFI hereunder. Said books of account shall be kept at LICENSEE's
principal place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times for three (3) years
following the end of the calendar year to which they pertain, to the inspection
of an independent auditor mutually acceptable to the parties, for the purpose of
verifying LICENSEE's royalty statement or compliance in other respects with this
Agreement.
5.2 Beginning with the first Net Sale, LICENSEE, within forty-five (45)
days after March 31, June 30, September 30 and December 31, of each year, shall
deliver to UFRFI true and accurate reports, giving such particulars of the
business conducted by LICENSEE and its sublicensee(s) during the preceding
three-month period under this Agreement as shall be pertinent to a royalty
accounting hereunder. These shall include at least the following:
(a) number of Licensed Products manufactured and sold
(b) total billings for Licensed Products sold.
(c) accounting for all Licensed Processes used or sold.
(d) deductions applicable as provided in Paragraph 1.5.
(e) total royalty due.
(f) names and addresses of all sublicensees of LICENSEE.
5.3 With each such report submitted, LICENSEE shall pay to UFRFI the
royalties due and payable under this Agreement. If no royalties shall be due,
LICENSEE shall so report. If royalties are reduced according to Article 7.4,
LICENSEE shall submit written evidence from a credible source validating the
extent of the reduction.
5.4 The license fees and royalty payments set forth in this Agreement
shall, if overdue, bear interest until payment at the monthly rate of one
percent (1%). The payment of such interest shall not foreclose UFRFI from
exercising any other rights it may have as a consequence of the lateness of any
payment.
<PAGE>
ARTICLE VI- PATENT PROSECUTION
------------------------------
6.1 UFRFI shall maintain during the term of this Agreement the Patent
Rights in the United States. The maintenance of all Patent Rights patents shall
be the primary responsibility of UFRFI; provided, however, LICENSEE shall assist
UFRFI in obtaining patent extension pursuant to U.S. Code, Title 35, Section
156.
6.2 Payment of all fees and costs relating to the maintenance and
extension of the Patent Rights shall be the responsibility of UFRFI.
ARTICLE VII- INFRINGEMENT & PATENT ENFORCEMENT
----------------------------------------------
7.1 LICENSEE shall inform UFRFI promptly in writing of any alleged
infringement or possible infringement of the Patent Rights by a Third Party and
of any available evidence thereof, as well as any facts which may affect the
validity, scope or enforceability of the Patent Rights.
7.2 UFRFI shall, at its discretion, use diligence to cause infringement
to cease by the grant of a license or other remedy or use diligence in bringing
an infringement action against the Third Party. UFRFI reserves the right to
identify LICENSEE in such suit as having rights under Patent Rights. UFRFI shall
not name LICENSEE as a co-party in such suit without an express written request
from LICENSEE.
7.3 In a case in which UFRFI brings an infringement action against a
Third Party, this action shall be at no cost to LICENSEE unless LICENSEE joins
the suit as a co-party. LICENSEE is under no obligation to join any such suit
and UFRFI must approve, at its sole discretion, the addition of LICENSEE as a
co-party.
7.4 Nothing in this Agreement shall be construed as an Agreement by UFRFI
to bring or prosecute actions or suits against Third Parties for infringement of
Patent Rights. However, if UFRFI and/or any other party granted the right to
bring or prosecute actions or suits against Third Parties for infringement of
Patent Rights opts not to prosecute an Infringer and LICENSEE's sales suffer
from competition by the Infringer, LICENSEE shall be entitled to reduce the
royalty in proportion to the percent decrease in LICENSEE's Net Sales of a
Licensed Product or Licensed Process, based on credible written evidence
submitted to UFRFI before any reduction is taken. Such reduction shall remain in
effect until such time as such infringement ends. LICENSEE shall report its
reductions in royalties according to
<PAGE>
Article 5.
7.5 In the event that a declaratory judgement or action alleging
invalidity of any of the Patent Rights shall be brought against UFRFI, UFRFI
agrees to notify LICENSEE that an action alleging invalidity has been brought.
UFRFI does not represent that it will commence legal action against a
declaratory action alleging invalidity.
ARTICLE VIII- INDEMNIFICATION & PRODUCT LIABILITY
-------------------------------------------------
8.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold UFRFI and the University, their trustees,
officers, employees and affiliates, harmless against all claims and expenses,
including legal expenses and reasonable attorneys' fees, arising out of the
death of or injury to any person or persons or out of any damage to property or
the environment, and against any other claim, proceeding, demand, expense and
liability of any kind whatsoever resulting from the production, manufacture,
sale, use, lease, consumption or advertisement by LICENSEE of the Licensed
Product(s) and/or Licensed Process(es) or arising from any obligation of
LICENSEE hereunder.
8.2 LICENSEE shall obtain and carry in full force and effect liability
insurance which shall protect LICENSEE and UFRFI in regard to events covered by
Article 8.1 above.
ARTICLE IX NEGATION OF WARRANTIES
---------------------------------
9.1 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, UFRFI MAKES
NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR
A PARTICULAR PURPOSE, AND VALIDITY OF PATENT RIGHTS CLANS, ISSUED OR PENDING.
NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR
WARRANTY GIVEN BY UFRFI THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED
HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OR OTHER INTELLECTUAL PROPERTY
RIGHTS OF ANY THIRD PARTY.
9.2 UFRFI does not warrant the validity of the Patent Rights, and makes no
representations whatsoever with regard to the scope of the Patent Rights.
ARTICLE X -EXPORT CONTROLS
- --------------------------
LICENSEE hereby agrees that it shall not sell, transfer, export or reexport
any Licensed Products or Licensed Processes or related
<PAGE>
information in any form, or any direct products of such information, except in
compliance with all applicable laws, including the export laws of any U.S.
government agency and any regulations thereunder, and will not sell, transfer,
export or reexport any such Licensed Products or Licensed Processes or
information to any persons or any entities with regard to which there exist
grounds to suspect or believe that they are violating such laws. LICENSEE shall
be solely responsible for obtaining all licenses, permits or authorizations
required from the U.S. and any other government for any such export or reexport.
To the extent not inconsistent with this Agreement, UFRFI agrees to provide
LICENSEE with such assistance as it may reasonably request in obtaining such
licenses, permits or authorization.
ARTICLE XI- NON-USE OF NAMES
----------------------------
LICENSEE shall not use the names of the University of Florida or University
of Florida Research Foundation, Inc. nor of any of either institution's
employees, nor any adaptation thereof, in any advertising, promotional or sales
literature without prior written consent obtained from UFRFI in each case,
except that LICENSEE may state that it is licensed by UFRFI under the patent
comprising the Patent Rights.
ARTICLE XII - ASSIGNMENT
- ------------------------
This Agreement is not assignable and any attempt to do so shall be void,
except that LICENSEE may assign this Agreement to a successor by merger or sale
of all of LICENSEE's business related to Licensed Products and Licensed
Processes. The assignor shall remain liable and responsible for the performance
and observance of all its duties and obligations under this Agreement.
ARTICLE XIII TERM & TERMINATION
-------------------------------
13.1 This Agreement is effective when signed by all parties and shall
extend to the last to expire of the Patent Rights unless sooner terminated as
provided in Article 13 herein.
13.2 If LICENSEE shall cease to carry on its business, this Agreement
shall terminate upon notice by UFRFI.
13.3 Should LICENSEE fail to pay UFRFI royalties due and payable
hereunder, UFRFI shall have the right to terminate this Agreement on thirty (30)
days' notice, unless LICENSEE shall pay UFRFI within the thirty (30) day period,
all such royalties and interest due and payable. Upon the expiration of the
thirty (30) days period, if
<PAGE>
LICENSEE shall not have paid all such royalties and interest due and payable,
the rights, privileges and license granted hereunder shall terminate.
13.4 Upon any material breach or default of this Agreement by LICENSEE,
other than those occurrences set out in Paragraphs 12.1, 12.2 and 12.3
hereinabove, which shall always take precedence in that order over any material
breach or default referred to in this Paragraph 12.4, UFRFI shall have the right
to terminate this Agreement and the rights, privileges and license granted
hereunder by ninety (90) days' notice to LICENSEE. Such termination shall become
effective unless LICENSEE shall have cured any such breach or default prior to
the expiration of the ninety (90) day period.
13.5 LICENSEE shall have the right to terminate this Agreement at any time
on three (3) months' written notice to UFRFI, and upon payment of all amounts
due UFRFI through the effective date of the termination.
13.6 UFRFI may terminate this Agreement upon the occurrence of the third
separate default by LICENSEE within any consecutive three (3) year period for
failure to pay royalties when due.
13.7 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination. LICENSEE and any sublicensee
thereof may, however, after the effective date of such termination, sell all
Licensed Products, and complete Licensed Products in the process of manufacture
at the time of such termination and sell the same, provided that LICENSEE shall
pay to UFRFI the royalties thereon as required by Article IV of this Agreement
and shall submit the reports required by Article V hereof on the sales of
Licensed Products.
13.8 In the event either party files for bankruptcy or a receiver is
appointed, this Agreement may immediately thereafter be terminated at the option
of the other party.
13.9 LICENSEE shall have the right to terminate its license to a Field of
Use upon thirty (30) days written notice to UFRFI without effect to its rights
or obligations to any other Fields of Use licensed or any Optioned Fields of
Use. Termination of a license to a Field of Use shall not release either party
from any obligation that matured prior to the effective date of such
termination.
<PAGE>
ARTICLE XIV - PAYMENTS, NOTICES AND OTHER COMMUNICATION
-------------------------------------------------------
Any payment, notice or other communication pursuant to this Agreement shall
be sufficiently made or given on the date of mailing if sent to such party by
certified first class mail, postage prepaid, addressed to it at its address
below or as it shall designate by written notice given to the other party:
In the case of UFRFI:
President
University of Florida Research Foundation, Inc.
223 Grinter Hall
Gainesville, Florida 32611-2037
With a copy to:
Director
Office of Patent, Copyright and Technology Licensing
186 Grinter Hall
Gainesville, Florida 32611-2037
All payments to:
Director
Office of Patent, Copyright and Technology Licensing
186 Grinter Hall
Gainesville, Florida 32611-2037
PLEASE MAKE ALL CHECKS PAYABLE TO:
University of Florida Research Foundation, Inc.
In the case of LICENSEE:
President
Targeted Genetics Corporation
1100 Olive Way, Suite 100
Seattle, WA 98101
ARTICLE XV - MISCELLANEOUS PROVISIONS
- -------------------------------------
15.1 This Agreement shall be construed, governed, interpreted and applied
in accordance with the laws of the State of Florida, U.S.A., except
that questions affecting the construction and effect of any patent
shall be determined by the law of the country in which the patent was
granted.
15.2 The parties hereto acknowledge that this Agreement sets forth the
entire Agreement and understanding of the parties hereto as to the
subject matter hereof, and shall not be subject to any change or
modification except by the execution of a written instrument
subscribed to by the parties hereto.
15.3 The provisions of this Agreement are severable, and in the
<PAGE>
event that any provisions of this Agreement shall be determined to be
invalid or unenforceable under any controlling body of the law, such
invalidity or unenforceability shall not in any way affect the
validity or enforceability of the remaining provisions hereof.
15.4 LICENSEE agrees to mark the Licensed Products sold in the United
States with all applicable United States patent numbers. All Licensed
Products shipped to or sold in other countries shall be marked in
such a manner as to conform with the patent laws and practice of the
country of manufacture or sale.
15.5 The failure of either party to assert a right hereunder or to insist
upon compliance with any term or condition of this Agreement shall
not constitute a waiver of that right or excuse a similar subsequent
failure to perform any such term or condition by the other party.
15.6 If UFRFI grants a license under the Patent Rights to any third party
that requires a royalty rate lower than that required of LICENSEE
under this Agreement, then UFRFI shall offer those terms to LICENSEE,
to be effective as of the effective date of the license to such third
party.
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals and
duly
executed this Agreement the day and year set forth below.
UNIVERSITY OF FLORIDA RESEARCH FOUNDATION, INC.
By /s/ Karen A. Holbrook
Name Karen A. Holbrook
Title President
Date 12/25/93
TARGETED GENETICS CORPORATION
By /s/ H. Stewart Parker
Name H. Stewart Parker
Title President and CEO
Date December 16, 1993
<PAGE>
APPENDIX A - SUBLICENSE
LICENSEE shall have the right to enter into one sublicensing agreement per
Field of Use for the rights, privileges and licenses granted under Article II
However. LICENSEE shall notify UFRFI in writing of the initiation of license
negotiations with all potential sublicensees.
LICENSEE hereby agrees that every sublicensing agreement to which it shall
be a party and which shall relate to the rights. privileges and license granted
hereunder shall contain a statement setting forth the date upon which LICENSEE's
rights. privileges and license hereunder shall terminate.
LICENSEE agrees that any sublicenses granted by it shall provide that the
obligations to UFRFI of this Agreement shall be binding upon the sublicensee as
if it were a party to this Agreement. LICENSEE further agrees to attach copies
of this Agreement to sublicensee agreements.
LICENSEE agrees to forward to UFRFI a copy of any and all sublicense
agreements within thirty (30) days of the execution of such sublicense
agreements and further agrees to forward to UFRFI annually a copy of such
reports received by LICENSEE from its sublicensees during the preceding twelve
(12) month period under the sublicenses as shall be pertinent to a royalty
accounting under said sublicense agreements.
LICENSEE shall not receive from sublicensees anything of value in lieu of
cash payments in consideration for any sublicense under this Agreement, without
the express prior written permission of UFRFI.
Upon termination of this Agreement for any reason, any sublicensee not then
in default shall have the right to seek a license from UFRFI.
<PAGE>
EXHIBIT 10.17
TO
Targeted Genetics Corporation's
Annual Report on Form 10-K
"[ * ]" = Portions of this exhibit have been omitted based on a request for
confidential treatment filed with the Securities and Exchange Commission. The
omitted material has been filed separately with the SEC.
<PAGE>
OPTION AGREEMENT
THIS AGREEMENT is made this 31st day of August, 1999 between The University
of North Carolina at Chapel Hill (hereinafter referred to as "UNIVERSITY"), a
university having an office at CB #4105, 308 Bynum Hall, Chapel Hill, North
Carolina 27599-4105 and Targeted Genetics Corporation (hereinafter referred to
as "COMPANY"), a corporation incorporated under the laws of the State of
Washington and having an office at 1100 Olive Way, Suite 100, Seattle, WA 98181.
W I T N E S S E T H:
WHEREAS, University is the owner of an invention, hereinafter defined,
relating to "rAAV Vectors" an invention by Dr. Christopher E. Walsh,
-------------
(hereinafter referred to as "Inventor(s)")and identified as University File No.
OTD#00-06 (hereinafter referred to as "Invention"); and
WHEREAS, Company wishes to obtain an option for a license under the Patent
Rights and University is willing to grant such option upon the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereto do mutually agree as follows:
1. Definitions
As used in this Option Agreement, the following terms shall have the
following meanings:
(a) "Patent Rights" means any and all patents and applications for patents
covering the Invention that are owned by University during the term of this
Option Agreement, including all patents and reissue patents issuing on said
patent applications and any divisionals, continuations, continuations-in-
part, provisionals, substitutions, renewals, confirmations, supplementary
protection certificates, registrations, reissues or continued prosecution
applications.
(b) "Option Exercise Period" means the period commencing on the Effective
Date of this Option Agreement and expiring either [ * ] months after the
expiration of the Sponsored Research Agreement, or [ * ], whichever is
sooner.
(c) "Effective Date" means the date first above written.
(d) "Confidentiality Agreement" means the mutual Confidentiality Agreement
entered into between University and Company which relates to the Invention
and that was signed by University and Company and dated on 07/12/1999.
<PAGE>
(e) "Territory" means the entire world.
2. Disclosure and Evaluation
(a) University shall provide Company with a copy of each U.S. and/or
foreign Patent Application filed on the Invention during or before the
Option Exercise Period. Company shall, based upon such disclosure and/or
any disclosure made in accordance with the Confidentiality Agreement,
evaluate the technical, economic and commercial advantages of the
Invention.
(b) University shall also furnish to Company reasonable opportunity to
confer with the Inventor(s) of the Invention.
(c) The right to evaluate the Patent Rights and granted herein shall not
include the right to sell or otherwise furnish to any third party the
Invention, or any product made thereby, nor shall it include the right to
disclose any product made thereby to any third party.
3. Consideration
(a) As consideration for the Option granted Company in Article 4 hereof,
Company hereby agrees to pay to University all costs, including attorney's
fees, associated with the preparation, filing, prosecution, issuance and
maintenance of a U.S. Patent application on the Invention. Payment for such
shall be due upon receipt of monthly billings from the University.
(b) During the term of this Option Agreement, copies of all filings and
drafts thereof shall be transmitted to Company by University's counsel
simultaneously with the transmittal thereof to University.
(c) As regards filing of foreign patent applications corresponding to the
U.S. applications described in subparagraph (b), above, Company shall also
reimburse University for the costs of such foreign patent filings. If
Company later decides not to reimburse University for the costs of such
foreign patent filings, Company shall no longer have any rights to acquire
a license to jurisdictions covered by such foreign patent filings and
University shall be free to exclusively or nonexclusively license to third
parties. Company shall designate that country or those countries, if any,
in which it desires such corresponding patent application(s) to be filed.
Company shall pay all costs and legal fees associated with the preparation,
filing and maintenance of such designated foreign patent applications and
such applications shall be in the University's name. University may elect
to file corresponding patent applications in countries other than those
designated by Company, but in that event University shall be responsible
for all costs associated with such nondesignated filings. In such event,
Company shall forfeit its rights
2
<PAGE>
under this license in the country(ies) not designated by Company where
University exercises its option to file such corresponding patent
applications. Company shall make the required designation(s) in good time
prior to any bar dates to allow University time to exercise its option to
make its own filings.
(d) As further consideration for the granting of the Option, Company agrees
to pay to the University, within 30 days of the Effective Date, the amount
of [ * ] U.S. dollars.
(e) Any amounts paid under this Article 3 shall not be refundable under any
circumstances, nor shall such amounts be a credit against future royalties
or other income related to the Invention.
4. Option
(a) Subject to the rights, if any, of the U.S. Government arising out of
its sponsorship of the research leading to the Invention, University grants
to Company and Company accepts, a non-transferable, exclusive Option to
obtain an exclusive license under the Patent Rights in the territory. The
Option may be exercised by Company at any time during the Option Exercise
Period upon written notice to University. In the event that Company
exercises the Option, the parties shall commence good faith negotiations
forthwith regarding the terms of the license.
(b) The Option Exercise Period may be extended if Company continues to
sponsor research directly relating to the Invention for a time period and
at an amount not less than the budget of the existing Sponsored Research
Agreement between Company and University. Such option shall extend for an
additional [ * ] months beyond the expiration of any subsequent Sponsored
Research Agreements, however, in no event shall the Option Exercise period
be greater than [ * ] years from the Effective Date of this Agreement ([ *
]).
(c) If Company wishes to extend the Option Exercise Period without
sponsoring additional research at the University in the Inventor's
laboratory, it may do so at a cost of $[ * ] for each additional year,
however, in no event shall the Option Exercise period be greater than [ * ]
years from the Effective Date of this Agreement ([ * ]).
(d) Any amounts paid under this Article 4 shall not be refundable under any
circumstances, nor shall such amounts be a credit against future royalties
or other income related to the Invention.
3
<PAGE>
5. Termination
(a) If the Option granted by University pursuant to Article 4 hereof is not
exercised by Company within the Option Exercise Period this Option
Agreement shall terminate on [ * ] (or such other date as is consistent
with any extension of the Option Exercise Period pursuant to Article 4 (b)
hereof). If the Option granted by University pursuant to Article 4 hereof
is exercised by Company within the Option Exercise Period and if University
and Company have not negotiated and executed a license agreement within [ *
] days of the date Company notifies University that it intends to exercise
this Option this Option Agreement shall terminate on the expiration of such
[ * ]-day period, provided that such date may be extended by mutual consent
of the parties in writing, such consent not to be unreasonably withheld by
either party.
(b) Company may terminate the Option Exercise Period at any time by
notifying University in writing of its decision not to exercise said
option. In such event, Company's obligations for reimbursement of patent
expenses under Article 3 hereof shall terminate on the date University
receives written notice of termination; however, Company shall be obligated
to reimburse University for all patent application expenses incurred
through the date of University's receipt of notice of termination, whether
or not Company or University have been billed for such expenses as of said
date.
(c) In the event this Option Agreement expires or is terminated in
accordance with the immediately preceding paragraphs, Company shall
promptly return to University any and all patent applications filed or
drafted pursuant to this Option Agreement, including any complete or
partial copies thereof made by or on behalf of Company.
6. Default
If Company shall fail to perform or fulfill at the time and in the manner
herein provided, any obligation or condition required to be performed or
fulfilled by Company hereunder, and if Company shall fail to remedy such
default within sixty (60) days after written notice thereof from
University, University shall have the right to terminate this Option
Agreement by written notice of termination to Company. Any termination of
this Agreement pursuant to this Article 7 shall be in addition to, and
shall not be exclusive of or prejudicial to, any other rights or remedies
at law or in equity that University may have on account of the default of
Company.
7. Survival of Terms
4
<PAGE>
The provisions of Articles 11, 12, 13, 14, 15 and 17 shall survive the
termination or expiration of this Option agreement.
8. Governing Law
This Agreement shall be construed as having been entered into in the State
of North Carolina and shall be interpreted and its performance governed by
the laws of said State.
9. Severability
In the event that a court of competent jurisdiction holds any provision of
this Agreement to be invalid, such holding shall have no effect on the
remaining provision of this Agreement, and they shall continue in full
force and effect.
10. Non-assignability
Any assignment by Company of this Agreement or of any of the rights or
licenses granted to it hereunder, without the written consent of
University, shall be void; provided, however, that nothing contained herein
shall restrict the transfer of this Agreement as a part of a merger or
corporate acquisition to which Company may be a party.
11. Notices
It shall be a sufficient giving of any notice, request, report, statement,
disclosure or other communication hereunder, if the party giving the same
shall deposit it with the U.S. Postal Service, postage prepaid, addressed
to the other party at its address hereinafter set forth or at such other
address as the other party shall hereafter designate in writing:
University of North Carolina at Targeted Genetics Corporation
Chapel Hill Ms. H. Stewart Parker
Dr. Francis J. Meyer President and Chief Executive Officer
Associate Vice Provost 1100 Olive Way, Suite 100
Office of Technology Development Seattle, WA 98101
CB #4105, 308 Bynum Hall
Chapel Hill, N.C. 27599-4105
12. Indemnification
Company agrees to indemnify University, its employees and officers and to
hold such parties harmless from any action, claim, or liability, including
without limitation
5
<PAGE>
liability for death, personal injury, and/or property damage, arising
directly or indirectly from Company's possession, testing, screening,
distribution or other use of Patent Rights provided under this Option
Agreement, and/or from Company's publication or distribution of test
reports, data, and other information relating to said items.
13. Non-Commercial Use
Company promises to allow use of Invention, Patent Rights only by its
authorized personnel and only for the purpose of ascertaining its interest
in pursuing licensing negotiations with University and will not employ same
for any gain prior to exercising its option hereunder. Should Company
market or in any way make or use Invention in a way other than as set forth
herein, Company shall be liable to University in damages.
14. University Use
It is expressly agreed that, notwithstanding any provisions herein,
University is free to use the results of the research performed during the
Option Exercise period for its own research, public service, clinical,
teaching and educational purposes without payment of royalties.
Furthermore, University shall be free to publish University Technology,
pursuant to Section 6 of the Sponsored Research Agreement and during the
Option Exercise Period, as it sees fit.
15. Confidentiality
Company agrees to accept information, samples and other disclosures
hereunder on a confidential basis. The obligations of this article 15 shall
survive and continue for three years after termination of this Agreement.
Specifically excluded from such confidential treatment shall be: (a)
information which, at the time of disclosure, was published, known
publicly, or otherwise in the public domain; (b) information which, after
disclosure, is published, becomes known publicly, or otherwise becomes part
of the public domain through no fault of the Company or its affiliated
companies; (c) information which the Company can establish was in its
possession prior to the time of disclosure; or (d) information which, after
disclosure, is made available to the Company in good faith by a third party
under no obligation of confidentiality to the University. The provisions
of this article 15 shall not modify or supercede the rights and obligations
of University or Company under the Confidentiality Agreement.
16. Transfer
It is expressly agreed that the University does not transfer by operation
of this Option Agreement any rights it now has or hereafter acquires in the
Invention.
6
<PAGE>
17. Use of University Name
It is agreed that in no circumstances shall Company use the name of the
University or its employees in any advertisement, press release, or
publicity with reference to this Option Agreement, without prior written
approval of the University.
18. Data Sharing
Company agrees that at the end of its evaluation hereunder, it will provide
to the University a detailed, written scientific report including, but not
limited to all data resulting from evaluation and all of its findings about
the Invention. University shall be free to use the results for its own
research, educational and licensing purposes. However, University shall
not publish data provided by Company consistent with the Confidentiality
Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
UNIVERSITY OF NORTH CAROLINA TARGETED GENETICS CORPORATION
AT CHAPEL HILL
BY: /s/ Francis J. Meyer BY: /s/ Michael T. Burke
----------------------- ------------------------
Francis J. Meyer, Ph.D. Michael T. Burke
Associate Vice Provost, Vice President,
Technology Development Corporate Development
Date: September 2, 1999 Date: August 26, 1999
----------------- ----------------------
REVIEWED AND ACCEPTED:
/s/ Christopher E. Walsh
- ----------------------------
Christopher E. Walsh, MD
Principal Investigator
Date: August 2, 1999
----------------------
8
<PAGE>
EXHIBIT 10.29
OLIVE WAY BUILDING LEASE
METROPOLITAN FEDERAL SAVINGS AND LOAN ASSOCIATION
LANDLORD
TARGETED GENETICS CORPORATION
TENANT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. FUNDAMENTAL LEASE PROVISIONS 1
2. PREMISES 2
3. USE 2
4. TERM 3
4.01 Term and Commencement Date 3
4.02 Option to Extend 3
5. POSSESSION FOR TENANT'S WORK/DELAY IN COMMENCEMENT/
EARLY POSSESSION 4
6. BASE RENT 4
6.01 Initial Term Rent 5
6.02 First Extension Term Rent 5
6.03 Second Extension Term Rent 5
6.04 Third Extension Term Rent 5
6.05 Determination of Market Rent 5
7. SECURITY DEPOSIT 6
8. OPERATING EXPENSES 6
8.01 Operating Expenses 6
8.02 Tenant's Proportionate Share 8
9. BUILDING SERVICES AND MAINTENANCE 10
9.01 Office Services 10
9.2 Landlord's Utility, Maintenance and Repair
Obligations 10
9.3 Tenant's Utility. Maintenance and Repair
Obligations 10
10. CONDITION OF PREMISES 11
11. TENANT'S IMPROVEMENTS 11
11.01 Landlord's Work 11
11.02 Tenant's Work 11
11.03 Initial Tenant Improvement Allowance 12
11.04 First Extension Term Refurbishment Allowance 12
11.05 Expansion Space Tenant Improvement Allowances 13
11.06 Reimbursement of Glazing Expenses 13
11.07 Amortization of Tenant Improvements 13
11.08 Tenant's Construction and Approvals 13
12. ALTERATIONS AND ADDITIONS 13
13. LIENS 14
14. ASSIGNMENT, SUBLETTING OR SUBSTITUTION OF TENANTS 14
14.01 Assignment or Subletting by Tenant 14
14.02 Assignment by Landlord 16
15. INSURANCE AND INDEMNIFICATION 16
15.01 Liability Insurance 16
15.02 Property Insurance 16
15.03 Insurance Policies 17
15.04 Waiver of Subrogation 17
15.05 Indemnity 17
15.06 Exemption of Landlord from Liability 18
16. PERSONAL PROPERTY TAXES 18
17. DAMAGE OR DESTRUCTION OF PREMISES 18
17.01 Partial Damage--Insured 18
17.02 Partial Damage--Uninsured 19
17.03 Damage Near End of Term 19
17.04 Total Destruction 19
17.05 Abatement of Rent; Tenant's Remedies 19
18. CONDEMNATION 19
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
19. DEFAULTS; REMEDIES 20
19.01 Defaults 20
19.02 Remedies 21
19.03 Default by Landlord 21
19.04 Late Charges 22
20. ESTOPPEL CERTIFICATES 22
21. BROKER 22
22. SUBORDINATION 23
23. GENERAL PROVISIONS 23
23.01 Severability 23
23.02 Time of Essence 24
23.03 Incorporation of Prior Agreements; Amendments 24
23.04 Notices 24
23.05 Waiver 24
23.06 Recording 24
23.07 Holding Over 24
23.08 Covenants and Conditions 24
23.09 Binding Effect 25
23.10 Common Areas/Access/and Parking 25
23.11 Corporate Authority 25
23.12 Sale of Building 25
23.13 Attorneys' Fees 26
23.14 Landlord's Access 26
23.15 Signs and Auctions 26
23.16 Ouiet Possession 26
23.17 Building Rules and Regulations 26
23.18 Relationship of Parties 26
23.19 Landlord's Representations 26
23.20 Annual Financial Statements 26
23.21 Riders 27
24. SPECIAL PROVISIONS 27
24.01 Medical and Hazardous Waste and Materials 27
24.02 Right of First Opportunity to Lease 28
24.03 Limitations in New Leases 29
24.04 Expansion Space Undertaking 29
24.05 Lease Cancellation 29
24.06 Storage Space 30
EXHIBIT A Legal Description
EXHIBIT B Premises Description
EXHIBIT C Tenant's Plans and Specifications
EXHIBIT D Landlord's Work
EXHIBIT E Tenant Construction and Approvals
EXHIBIT F Rules and Regulations
</TABLE>
<PAGE>
OLIVE WAY BUILDING LEASE
THIS LEASE, dated for reference purposes November 20TH, 1992, is made between
Metropolitan Federal Savings and Loan Association of Seattle, a federally
chartered savings and loan association ("Landlord"), and Targeted Genetics
Corporation, a Washington corporation ("Tenant").
1. FUNDAMENTAL LEASE PROVISIONS
In the event of any conflict between a fundamental lease provision and the
provisions in the balance of the Lease, the latter controls.
LANDLORD:
Metropolitan Federal Savings and Loan Association of Seattle, a federally
chartered savings and Loan Association of savings and loan association
whose business address is 1520 Fourth Avenue, Seattle, Washington 98101-
1648. (Fax No. 206-654-7883.)
TENANT:
Targeted Genetics Corporation, a Washington corporation whose business
address is 1201 Western Avenue, Seattle, Washington 98101. (Fax No. 206-
587-0606.)
PREMISES:
Office and laboratory space comprising approximately 25,300 square feet of
rentable space in the Olive Way Building located at 1100 Olive Way, Suite
100, Seattle, Washington, and legally described on Exhibit A attached
hereto and incorporated herein by this reference. The exact square footage
of rentable space contained in the Premises will be determined following
completion of Tenant's Final Plans (as defined in Exhibit E) in accordance
with the procedure described in Article 2 below.
TERM:
The term of this Lease shall be for a period of six (6) years as set forth
in Article 4.
OPTIONS TO EXTEND:
Three (3) five (5) year options to extend the term of this Lease as
provided in Article 4.
MONTHLY BASE RENT:
The initial monthly Base Rent will be based on an annual base rent of
Eleven and 25/100 dollars ($11.25) per rentable square foot, and shall be
increased in accordance with Article 6. Assuming total rentable square
feet of Twenty Five Thousand Three Hundred, the initial monthly Base Rent
will be Twenty-Three Thousand Seven Hundred Eighteen and 75/100 Dollars
($23,718.75). Said Base Rent is subject to adjustment pending the
determination of the exact square footage of space in accordance with
Article 2 below.
1
<PAGE>
RENT INCREASES:
The Base Rent shall be increased in accordance with the Schedule contained
in Article 6.
OPERATION COSTS/ADDITIONAL RENT:
Tenant shall pay additional rent equal to Tenant's Proportionate Share of
increases in Building operating costs over those costs incurred during the
Base Year (Article 8).
BASE YEAR:
1993 calendar year.
SECURITY DEPOSIT:
Twenty-Three Thousand Seven Hundred Eighteen and 7S/100 dollars
($23,718.75) (Article 7).
USE:
The Premises may be used by Tenant for the purposes described in Article
3.
2. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord for the term, at the
rental, and upon all of the conditions in this Lease, space situated in the
Olive Way Building, located at 1100 Olive Way, Suite 100, Seattle, Washington
(the "Building's) as described in Exhibit B attached hereto and made a part of
this Lease (the "Premises"). The Premises comprise approximately 25,300 rentable
square feet of space in the Building, and include a nonexclusive right to use
the common areas of the Building. The exact square footage of rentable space
contained in the Premises will be determined following completion of Tenant's
Final Plans (as defined on Exhibit E attached hereto). The square footage will
be based on BOMA standards of office building measurement. Upon the
determination of the square footage of rentable area, Landlord and Tenant shall
execute a certificate setting forth such area, and based upon such area, such
certificate shall state the initial monthly Base Rent payable under this Lease,
Tenant's Proportionate Share under this Lease, and the Tenant Improvement
Allowance payable by Landlord under this Lease.
3. USE
Tenant shall use the Premises for general office and research laboratory
purposes. Such uses by Tenant, or any Subtenant, will not involve the use of
primates or large animals on the Premises. Tenant shall not use or permit the
Premises to be used for any other purpose without the Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. Tenant
shall not do or permit any act in or about the Premises nor bring or keep
anything in the Premises which will
<PAGE>
increase the existing rate of any fire or other insurance upon the Building or
its contents, or cause cancellation of any insurance policy covering any part or
all of the Building or any of its contents, or which will unreasonably interfere
with the rights of other tenants or occupants of the Building. Tenant will not
use or allow the Premises to be used for any improper, immoral, or unlawful
purpose, and it will not commit or allow any nuisance or waste in or about the
Premises. Tenant shall, at its sole cost and expense, promptly comply with all
laws, statutes, ordinances and governmental rules or regulations and with the
requirements of any board of fire insurance underwriters or other similar bodies
relating to, or affecting the condition, use or occupancy of the Premises.
4. TERM
4.01 Term and Commencement Date. The term of this Lease is six (6) years,
commencing on April 1, 1993, or ten (10) days following the issuance of a
temporary or permanent Certificate of Occupancy for the Premises, which ever
shall occur sooner (the "Commencement Date"). In no event will the Commencement
Date be later than April 1, 1993 and Tenant agrees to commence paying rent on
that date even if the tenant improvements being constructed by Tenant are not
completed by that date. Notwithstanding the previous sentence, in no event will
the Commencement Date be earlier than the date that Landlord has completed
Landlord's Work (as defined in Exhibit D attached), except that if the
installation of the elevator by Landlord is the only element of Landlord's Work
not completed, then the Lease term shall commence, and the Landlord shall have
until April 15, 1993 to complete the installation of the elevator. In the event
the elevator is not installed and operating by April 15, 1993, rent shall be
abated for each day after April 15, 1993 until the elevator is installed. Tenant
agrees to use its reasonable efforts to complete its improvements and occupy the
Premises as soon as possible. If the Commencement Date is the first day of a
calendar month, the Lease term will begin on that date. If the Commencement Date
is other than the first day of a month, then the period of time between the
Commencement Date and the first day of the following month shall be added to the
term of this Lease, and rent prorated over that period shall be paid by Tenant.
Notwithstanding any other provision of this Lease, Tenant shall have the right,
by written notice delivered to Landlord on or prior to December 15, 1992, to
terminate this Lease on December 15, 1992 if Tenant has not received the Master
Use Permit necessary for the construction of Tenant's Improvements and the use
of the Premises by Tenant as a research facility in accordance with the Final
Plans.
4.02 Options to Extend. Landlord grants to Tenant the option to extend
this Lease for three (3) five (5) year terms on the same terms and conditions of
this Lease, provided that Base Rent payable under Article 6 of this Lease shall
be increased in accordance with the terms of Article 6.
Tenant's right to extend the Lease in accordance with the immediately preceding
paragraph is subject to the following conditions:
<PAGE>
a. Tenant shall have delivered to Landlord, at least nine (9) month's prior to
the expiration of the existing initial term or renewed term of this Lease,
written notice stating Tenant's exercise of the extension option; and
b. Tenant shall not be in material default under this Lease at the time said
notice is given nor anytime thereafter prior to or on the date of
commencement of the extension term; and
c. This Lease shall be in full force and effect at the time said notice is
given and at all times thereafter prior to or on the date of commencement
of the extension term; and
Upon receipt of Tenant's notice of extension, Landlord shall prepare an
amendment modifying the Lease for execution by Tenant and Landlord.
5. POSSESSION FOR TENANT'S WORK/DELAY IN COMMENCEMENT/EARLY POSSESSION
Landlord shall make the Premises available to Tenant for the purpose of
commencing construction of tenant improvements within fifteen (15) days of the
date of execution of this Lease by Landlord and Tenant. Tenant's access to the
Premises shall be shared with Landlord so as to permit Landlord to accomplish
Landlord's Work where Landlord's Work affects the Premises. Tenant's occupancy
of the Premises prior to the Commencement Date for the purpose of construction
of tenant improvements shall not subject Tenant to the payment of rent under
this Lease, but such occupancy shall be subject to the provisions of this Lease
not pertaining to rent.
If Landlord does not deliver exclusive possession of the Premises (including
installation of the elevator) for any reason at the Commencement Date, this
Lease is not void or voidable, and the Landlord is not liable to the Tenant for
any resulting loss or damage. The expiration date of the Lease term will be
extended accordingly, however all rent shall be abated during the period between
the Commencement Date and the Landlord's delivery of possession. In the event
Landlord does not deliver exclusive possession of the Premises within six (6)
months of April 1, 1993, Tenant shall be entitled to terminate this Lease by
written notice delivered to Landlord within fifteen (15) days of the end of the
six (6) month period and Tenant's security deposit shall be returned to Tenant
within thirty (30) days.
6. BASE RENT
All rent payable under this Lease is payable without deduction or offset on the
first day of the month. Rent is payable in lawful money of the United States to
Landlord at its address stated herein or at such other address as Landlord shall
direct Tenant in writing.
The rent payable under this Lease shall be on a per rentable square foot basis
as determined pursuant to Article 2 above.
The rent payable by Tenant for the Premises does not include any of the
following: janitorial service; any water and sewer charges (which will be
separately metered/calculated and
<PAGE>
charged to Tenant); any electricity charges (including electricity utilized by
the HVAC system located in or directly servicing Tenant's Premises) (which will
be separately metered calculated and charged to Tenant); nor does the Base Rent
include any increases in Operating Expenses (defined in paragraph 8.01) beyond
the Base Year.
6.01 Initial Term Rent Tenant will, without prior notice or demand, pay
to Landlord a Base Rent in accordance with the following schedule during the
initial term of this
Lease:
LEASE YEAR ANNUAL BASE RENT PER RENTABLE FOOT
1 $11.25
2 $11.25
3 $12.75
4 $13.25
5 $13.75
6 $14.25
6.02 First Extension Term Rent. If the Tenant has exercised Tenant's option to
extend the term of this Lease for the first extension period (years 7 through
11), Tenant will, without prior notice or demand, pay to Landlord a Base Rent in
accordance with the following schedule during said extension term of this Lease:
LEASE YEAR ANNUAL BASE RENT PER RENTABLE FOOT
7 $15.00
8 $15.50
9 $16.00
10 $16.50
11 $17.00
6.03 Second Extension Term Rent. The Base Rent for the second extension term
shall be adjusted to a base rent which has the same ratio to the Base Rent on
the Commencement Date ($11.25) as the applicable Consumer Price Index (the
"Index" as defined in Paragraph 6.05 below) published most recently preceding
the second extension term has to the Index published most recently before the
Commencement Date. However, the annual Base Rent for the second extension term
shall in no event be less than $17.00 per rentable square foot.
6.04 Third Extension Term Rent. The Base Rent for the third extension term
shall be adjusted to a base rent which has the same ratio to the Base Rent on
the Commencement Date ($11.25) as the applicable Consumer Price Index (the
"Index" as defined in Paragraph 6.05 below) published most recently preceding
the third extension term has to the Index published most recently before the
Commencement Date. However, the annual Base Rent for the third extension term
shall in no event be less than the greater of $17.00 per rentable square foot,
or the rent during the year immediately preceeding the third extension term.
6.05 Definition of Index. As used in this Lease, the term "Index" shall mean
the Consumer Price index, All Items, All Urban Consumers, U.S. City Average,
(1982--1984 = 100),
<PAGE>
published by the United States Department of Labor, Bureau of Labor Statistics.
In the event the Index is no longer available or in use, the parties agree to
use the index which replaces said Index or, if there is no such replacement, to
use a generally accepted index which most closely measures the same items as the
original Index.
7. SECURITY DEPOSIT
Upon execution of this Lease, Tenant will pay Landlord Twenty-Three Thousand
Seven Hundred Eighteen and 7S/100 ($23,718.75) as a security deposit. Any
security deposit shall be held by Landlord in an interest bearing account with
interest to accrue to the Tenant as security for the performance by Tenant of
its covenants and obligations under this Lease. It is not an advance payment of
rent or a measure of damages in case of default by Tenant. Landlord may without
prejudice to any other remedy use the security deposit as necessary to make good
any arrearages of rent or any other damage, expense, or liability caused to
Landlord by Tenant's breach or default under this Lease. Following any such use
of the security deposit, Tenant shall pay to Landlord within ten (10) days after
written demand the amount necessary to restore the security deposit to its
original amount. Upon termination of this Lease any remaining balance of the
security deposit shall be returned to Tenant within thirty (30) days after
Tenant ceases occupancy of the premises. In the event Tenant has not been in
default during the first two years of the lease term, said deposit shall be
returned in full to Tenant within thirty (30) days after the expiration of the
second year of the lease term.
8. OPERATING EXPENSES
8.01 .Operating Expenses. Subject to Tenant's payment of its Proportionate
Share of Operating Expenses, Landlord shall provide for those Building operation
and maintenance items delineated in Article 9. Operating Expenses are all the
direct costs of operation and maintenance of the Building determined by standard
accounting practices, including without limitation: common area water and sewer
charges; all utilities charges for utilities not separately metered to or
calculated for the Premises (but not specifically relating to other tenant
spaces) and taxes; common area janitorial services; window cleaning; snow, trash
or debris removal; gardening and landscape maintenance; direct labor and
accounting costs incurred in the management of the Building; management fees;
common area air-conditioning and heating; elevator maintenance; supplies,
materials, equipment, and tools, and maintenance costs and upkeep of all parking
and common areas, all property taxes and assessments, rent taxes, personal
property taxes, gross receipts taxes, and insurance premiums on the Building.
Landlord shall use all reasonable efforts to minimize operating expenses.
"Operating Expenses" shall not include any income, franchise, corporate, estate
or inheritance tax of Landlord, or any assessment upon the Building (including,
but not limited to, the initial cost of developing the Building) that Landlord
elects to be placed upon the Building in the form of an assessment or tax
payable over a term of years (e.g., sewers initially installed and connection of
utilities) or any tax or assessment on rent or any other charge payable by
Tenant under this Lease. In addition, notwithstanding anything in this
<PAGE>
Lease to the contrary, the following costs, charges and expenses of Landlord
shall not be included among the Operating Expenses charges for which Tenant is
responsible under this Lease:
(a) leasing commissions and other costs of seeking to rent space;
(b) managing agents' fees or commissions in excess of the rates then
customarily charged for property management for buildings of like
class and character to the Building;
(c) executives' salaries above the grade of property manager;
(d) expenditures for capital improvements, except those which under
generally applied real estate practice are expensed or regarded as
deferred expenses and except for capital expenditures required by law,
in either of which cases the cost thereof shall be included in
Operating Expenses for the year in which such costs are incurred and
subsequent years, and shall be amortized over an appropriate period on
a straight--line basis;
(e) amounts received by Landlord through proceeds of insurance to the
extent such proceeds are compensation for expenses that were
previously included in the Operating Expenses hereunder;
(f) cost of repairs or replacements incurred by reason of fire or other
casualty to the extent Landlord is compensated therefor through
proceeds of insurance, or caused by the exercise of the right of
eminent domain;
(g) consulting fees, marketing fees, advertising and promotional
expenditures;
(h) legal fees for disputes with tenants and legal and auditing fees,
other than legal and auditing fees reasonably incurred in connection
with the maintenance and operation of the Premises or in connection
with the preparation of statements required pursuant to additional
rent or lease escalation provisions;
(i) costs incurred in performing work or furnishing services for
individual tenants (including Tenant) at such tenant's expense to the
extent that such work or service is in excess of any work or service
Landlord at its expense is obligated to furnish to Tenant; costs of
performing work or furnishing services for tenants other than Tenant
at Landlord's expense to the extent that such work or services are in
excess of any work or service Landlord is obligated to furnish to
Tenant at Landlord's expense;
<PAGE>
(j) principal and interest payments on loans secured by mortgages or deeds
of trust on, or assignments of rent from, all or any portion of the
Premises;
(k) depreciation;
(1) penalties due to any violation of law by Landlord or other tenants;
(m) costs of preparing tenant space for tenant occupancy;
(n) costs of any utilities, services or capital improvements relating to
all or any portion of the Premises that were paid directly by Tenant
or any other tenant;
(o) costs allocable to properties other than the Building in which the
Premises are located in which Landlord has an interest;
(p) structural repairs or replacements; and
(q) rent payable in connection with any ground or underlying lease.
It is agreed by Tenant that in addition to Tenant's Proportionate Share of
Operating Expenses, Tenant shall be solely responsible for providing and paying
for janitorial services for the Premises; water and sewer services; electrical
services; air conditioning and heating services (including electricity
therefor); and plumbing services; as those items relate to the Premises.
Landlord will establish at its sole cost and expense separate meters for, or if
meters cannot be installed, will separately and equitably calculate the charges
for, the utilities supplied to the Premises.
8.02 Tenant's Proportionate Share. Commencing with respect to the 1994
Comparison Year (as defined below), in addition to the Base Rent payable
pursuant to Article 6, Tenant shall pay, as additional rent, Tenant's
Proportionate Share of the increase in total Operating Expenses in each
Comparison Year over the total Operating Expenses incurred by Landlord during
the Base Year. For purposes of this Lease (including any extensions), the Base
Year shall be calendar year 1993. Each succeeding year shall be a Comparison
Year.
Tenant's Proportionate Share will be determined in accordance with paragraph 2
above.
Landlord shall give to Tenant on or before the first day of June, 1994 and on or
before the first day of June of each year thereafter during the term of this
Lease, an itemized statement of the increase in rent payable by Tenant hereunder
for the preceding Comparison Year, but failure by Landlord to give such
statement by said date shall not constitute a waiver by Landlord of its right to
require an increase in rent.
For calendar year 1994, Landlord shall deliver to Tenant, no later than June 1,
1994, an estimate of the Operating Expense increase over the Base Year which
will be due for 1994. Said estimated increased amount shall be divided into
equal installments to be paid each month remaining in the calendar year
<PAGE>
1994, commencing with the month following Tenant's receipt of Landlord's
estimate, provided that payments for 1994 shall not be due for any month prior
to the month following the date which is twelve (12) months from the
Commencement Date. For example, if Landlord's estimate is delivered in February,
1994, and the Commencement Date is April 1, 1993, the estimated annual increase
shall be divided into eight equal installments and paid each month, May through
December, 1994.
For years after 1994, upon receipt of the statement for the preceding Comparison
Year, Tenant shall pay a lump sum equal to the total amount of increase in
Operating Expenses over the Base Year, less amounts previously paid on account
thereof as estimated increases. In addition, the amount of any such increase
shall be used as the basis for an estimate of the increase due for the current
year, and that amount shall be divided into equal installments to be paid each
month remaining in the calendar year, commencing with the month following
Tenant's receipt of Landlord's estimate. For example, if Landlord's estimate is
delivered in February, the estimated annual increase shall be divided into ten
equal installments and paid each month, March through December.
If in any Comparison Year the Tenant's share of Operating Expenses are less than
the preceding year, then upon receipt of Landlord's statement, any overpayment
made by Tenant on the monthly installment basis provided above shall be credited
towards the next monthly rent falling due and the estimated monthly installments
of Operating Expenses to be paid shall be adjusted to reflect such lower
Operating Expenses for the most recent Comparison Year.
Tenant, at reasonable times and upon reasonable notice, shall have the right to
inspect Landlord's books and records pertaining to the Building and the
determination of Operating Expenses.
Even though the term has expired and Tenant has vacated the Premises, when the
final determination is made of Tenant's share of Operating Expenses for the year
in which this Lease terminates, Tenant shall immediately pay any increase due
over the estimated expenses paid and conversely any overpayment made in the
event said expenses decrease shall be immediately rebated by Landlord to Tenant.
The statements furnished to Tenant by Landlord, which shall contain such
supporting documentation as Tenant may reasonably request, shall constitute a
final determination as between Landlord and Tenant of Operating Expenses for the
periods represented thereby, unless Tenant, within 60 days after they are
furnished, shall give a notice to Landlord that it disputes their accuracy or
their appropriateness, which notice shall specify the particular respects in
which the statement is inaccurate or inappropriate. Any such dispute shall be
resolved (a) by arbitration in the Seattle, Washington area by 3 arbitrators,
each of whom shall have at least 10 years' experience in the supervision of the
operation and management of projects in Seattle, Washington, like the project in
which the Premises are located and (b) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. Pending the
<PAGE>
resolution of such dispute, Tenant shall continue to pay additional rent to
Landlord in the same amounts as before Tenant received the statement that is the
subject of such dispute. Within 30 days after the resolution of such dispute,
Tenant shall pay to Landlord any deficiency in additional rent found by the
arbitrators to be owing to Landlord by Tenant.
The Base Rent payable by Tenant shall in no event be less than the Base Rent
specified in Article 6 even if Operating Expenses incurred by Landlord in any
Comparison Year are less than those incurred in the Base Year.
9. BUILDING SERVICES AND MAINTENANCE
9.01 Office Services. Landlord will provide normal and customary basic
janitorial services to the common areas. Tenant shall provide janitorial
services for the Premises.
9.02 Landlord's Utility, Maintenance and Repair Obligations. Landlord will
endeavor to manage and maintain the Building as quality office buildings are
managed and maintained in Seattle, Washington. Landlord has the obligation to
maintain the Building and the equipment Tenant is not responsible for located
therein and all common areas thereof, subject to the Tenant's obligation to pay
additional rent pursuant to Article 8. Landlord shall have the responsibility
for repairs of the structural components and roof of the Building.
Landlord shall have no liability to Tenant for any damage, interference or
inconvenience with the Tenant's use of the Premises as a result of repair work
by Landlord, except for any personal injury occasioned by the negligent acts or
omissions or willful misconduct by Landlord or its employees, agents or
contractors, or except for damage to Tenant's personal property occasioned by
the gross negligence or willful misconduct of Landlord or its employees or
agents. Landlord shall have no duty to repair Tenant's property or equipment.
Tenant is not entitled to any reduction of rent for any failure to furnish any
utilities, and Landlord is not liable under any circumstances for injury or
damage to persons or property, however occurring, in connection with or
incidental to such a failure except as occasioned by the negligence or willful
misconduct of Landlord or its employees, agents or contractors. If heat-
generating machines or equipment used in the Premises affect the temperature
otherwise maintained by the air-conditioning system, Landlord reserves the
right to install supplementary air-conditioning units in the Premises and the
costs of installation, operating and maintenance of those units shall be paid by
Tenant to Landlord upon demand.
Tenant will not connect its machinery, equipment or devices with electric
current except through electrical outlets in the Premises installed as part of
Tenant's Final Plans. Tenant may obtain water or electric current in excess of
that furnished or supplied pursuant to the Final Plans with the prior written
consent of Landlord, which consent will not be unreasonably withheld. The cost
of any meters and of installation, maintenance and repair of any such additional
electrical or water systems required by Tenant in excess of that furnished
pursuant to the Tenant's Final Plans shall be paid for by Tenant promptly upon
demand, at the rates charged for the services by
<PAGE>
the local public utility furnishing them. If a separate meter is not installed
the excess cost for water and electric current to the Premises will be
established by an estimate made by a utility company or electrical engineer.
9.03 Tenant's Utility, Maintenance and Repair Obligations. Tenant
will pay for the utilities serving the Premises, including sewer and water,
electricity, and air conditioning and heating. Landlord will not be responsible
for the furnishing of any of the above utilities to the Premises.
Tenant, at Tenant's sole cost and expense, shall at all times maintain the
Premises in good and sanitary order, condition and repair, including, but not
limited to, the interior surfaces of the ceilings, walls and floors, all doors,
interior windows, all plumbing pipes, electrical wiring, switches, and fixtures.
Tenant will supply and pay for its own janitorial services.
Tenant shall be responsible for the maintenance of the plumbing systems in the
Premises, as well as those elements of the EVAC system located in and serving
the Premises. As part of Tenant's tenant improvements, Tenant is installing
certain equipment shafts and ducts which serve the Premises and will penetrate
the roof areas of the Building. Tenant shall be solely responsible for the
maintenance and operation of these items of equipment and modifications to the
Building.
10. CONDITION OF PREMISES
By occupying the Premises, Tenant accepts them and acknowledges that they comply
fully with Landlord's covenants and obligations under this Lease subject to
completion of any items noted in writing by Landlord and Tenant upon inspection
of the Premises noted prior to Tenant's initial occupancy. Tenant acknowledges
that neither Landlord, nor any agent, employee or representative of Landlord,
has made any representation or warranty with respect to the Building or Premises
or with respect to the suitability or fitness of the Building or Premises for
the conduct of Tenant's business or for any other use. On termination of the
Lease, Tenant shall surrender the Premises broom clean and in as good condition
as received, ordinary wear and tear excepted, and if Tenant fails to do so
Landlord may restore the Premises to the condition just described, after giving
Tenant ten (10) days prior written notice thereof, at Tenant's expense. Tenant
shall repair all damage to the Building or to the Premises caused by the
installation or removal of Tenant's property or resulting from negligence or
tortious conduct of Tenant, its employees, contractors, agents, licensees and
invitees.
11. TENANT'S IMPROVEMENTS
11.01 Landlord's Work. The Landlord will provide, at Landlord's expense,
shell space improvements to the Premises in addition to Landlord's Tenant
Improvement Allowance. The shell space improvements to be provided by Landlord
are described on Exhibit D to this Lease ("Landlord's Work").
11.02 Tenant's Work. The Premises will be completed by Tenant, at Tenant's
sole expense (except for the Tenant Improvement Allowance provided by Landlord)
in accordance with
<PAGE>
the plans and specifications set forth on Exhibit C to this Lease ("Tenant's
Plans and Specifications").
11.03 Initial Tenant Improvement Allowance. Landlord agrees to
reimburse Tenant for tenant improvement expenses in the amount of Twenty Dollars
($20.00) per rentable square foot of the Premises. The exact amount of the
allowance is subject to determination of the exact amount of rentable square
feet in the Premises in accordance with Article 2 above.
The tenant improvement reimbursements will be paid to Tenant as follows:
(a) No reimbursement payments shall be made prior to the date the Master
Use Permit is obtained (but payments may reimburse expenditures made prior to
that date);
(b) Payments shall be made no more frequently than monthly;
(c) Payment by Landlord will only be required upon delivery to Landlord of
the following documents:
(i) Contractor's draw requests;
(ii) Invoices for the payment being requested describing in detail the
work performed and the amounts due.
(d) Payments in an amount equal to one-half the invoiced amounts will be
made to Tenant within ten (10) days of receipt of the materials required by this
paragraph 11.03
(e) Within thirty (30) days of payment by Landlord, Tenant shall forward
Landlord evidence that Tenant has made Tenant's portion of each invoiced
payment, and lien releases from all contractors and subcontractors performing
work on the Premises through the date of payment;
It is a material element of this Lease that Tenant agrees to expend at least One
Million Five Hundred Thousand Dollars ($1,500,000) (in addition to the tenant
improvement payment made by Landlord) on real property tenant improvements to
the Premises.
11.04 First Extension Term Refurbishment Allowance. In the event that
Tenant exercises its option to extend the terms of this Lease for the first
extension term provided in Article 4, Landlord shall pay to Tenant a
refurbishment allowance of up to One Hundred Thousand Dollars ($100,000) for use
in refurbishing the Premises. Said refurbishment payment will only be made for
refurbishment expenditures incurred and paid within twelve (12) months of the
commencement date of the extended term of this Lease, and only upon delivery to
Landlord of lien releases from all contractors and subcontractors performing
work on the Premises and delivery to Landlord of Tenant's accounting records and
invoices covering the payment for labor and materials utilized in the
refurbishment of the Premises.
<PAGE>
11.05 Expansion Space Tenant Improvement Allowance. In the event that
Tenant, during the initial term or any extended term of this Lease rents
additional space in the Building beyond the 25,300 rentable square feet
initially comprising the Premises, Landlord agrees to pay to Tenant a tenant
improvement allowance of Twenty--Five Cents ($0.25) per rentable square foot
(Twenty--Four Cents ($0.24) for improvements and One Cent ($0.01) for additional
interior glazing) of such additional space for each month remaining in the term,
including the term of any extension term for which Tenant has already exercised
its option, at the time Tenant occupies the additional space, provided, however,
Landlord's maximum obligation for all space occupied by Tenant shall be Twenty
Dollars ($20.00) per rentable square foot. Said allowance is to be used for the
construction and refurbishment of said expansion space and for glazing
improvements similar to those made at the time of the initial occupancy of the
Premises.
11.06 Reimbursement of Glazing Expenses. In the event that Tenant
exercises any of its options to extend the Lease term, Landlord shall, within
thirty (30) days after the commencement of such renewal term, reimburse Tenant
for glazing costs incurred by Tenant in connection with any expansion options
exercised during the initial term, or the previous renewal term (as the case may
be) of the Lease. The reimbursement amount shall be based upon the difference
between the actual cost of glazing at the time of expansion and the expansion
allowance that Tenant received in connection with the expansion space under
paragraph 11.OS.
11.07 Amortization of Tenant Improvements. For purposes of this Lease, and
wherever reference is made herein to "amortization of tenant improvements" or
"unamortized portion of tenant improvements" said terms or similar phrase shall
have the meaning described in this paragraph. Only Tenant's tenant improvement
expenditures made by Tenant for the initial improvement of the initial Premises
and any expansion space to be occupied by Tenant shall become amortizable
expenses for purposes of this Lease. Tenant shall deliver an accounting of
Tenant's tenant improvement costs to Landlord within thirty (30) days of the
Commencement Date or date of expenditure, and said costs are subject to review
by Landlord for compliance with Tenant's approved tenant improvement plans and
specifications within sixty (60) days thereafter.
Only the cost of real property improvements shall be utilized in any
amortization, personal property of the Tenant shall not be included. All
improvements shall be amortized over the eleven (11) year period commencing with
the Commencement Date for all purposes under this Lease, even though the
improvement expenditures are made prior or subsequent to the Commencement Date.
11.08 Tenant's Construction and Approvals. Tenant shall proceed with its
construction of Tenant's improvements in accordance with Exhibit E attached
hereto ("Tenant's Construction and Approvals").
12. ALTERATIONS AND ADDITIONS
Tenant shall not, without Landlord's prior written consent, which will not
unreasonably be withheld or delayed, make any
<PAGE>
Premises, except for nonstructural alterations to be made at one time not
exceeding a cumulative five thousand dollars ($5,000.00) in cost. Any
alterations, improvements or additions made without the prior approval of
Landlord, shall be removed at Tenant's cost at any time upon the request of
Landlord. Tenant's proposed alterations, improvements or additions must be
presented to Landlord in written detailed plans. Consent by Landlord is
conditioned upon Tenant's compliance with the provisions of Exhibit E, Paragraph
4, subparagraph (a) through (j), unless waived in writing by Landlord. In any
event, Tenant shall acquire all required permits from appropriate governmental
agencies, and comply with all conditions thereof. All alterations, improvements
and additions on the Premises shall become the property of Landlord and shall be
surrendered with the Premises at the expiration of the term, with the exception
of Tenant's trade fixtures and equipment which shall remain the property of
Tenant. Tenant shall, at its sole cost and expense, repair any damage to the
Premises where removal of Tenant's machinery or equipment causes damage to the
Premises.
13. LIENS
Tenant shall pay, when due, all claims for labor or materials furnished or
alleged to have been furnished to or for Tenant at or for use in the Premises,
which claims are or may be secured by any mechanics' or materialmen's lien
against the Premises or any interest therein. Tenant shall give Landlord not
less than ten (10) days' notice prior to the commencement of any work in the
Premises, and Landlord may post notices of non-responsibility in or on the
Premises as provided by law. If Tenant, in good faith, contests the validity of
any lien, claim or demand, Tenant shall, at its sole expense, defend itself and
Landlord and shall satisfy any adverse judgment before its enforcement against
Landlord or the Premises. In such event, if Landlord requires, Tenant shall
furnish to Landlord a lien and completion bond or a surety bond reasonably
satisfactory to Landlord in an amount equal to 1 1/2 times the estimated costs
of all the work or equal to the contested lien, claim or demand, respectively,
to insure Landlord against any liability for mechanics' liens and to ensure
completion of the work and indemnifying Landlord against reasonable attorney's
fees and costs in participating in the action if Landlord decides it is in its
best interest to do so.
14. ASSIGNMENT SUBLETTING OR SUBSTITUTION OF TENANTS
14.01 Assignment or Subletting by Tenant.
(a) Tenant shall not assign, transfer, mortgage, pledge, hypothecate or
encumber this Lease or any interest therein and shall not sublet the Premises or
any part thereof, or allow occupation or use thereof by any other party or
entity (a "Transfer"), without the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed. In the event Tenant
should desire to Transfer this Lease or any interest therein, Tenant shall
notify Landlord in writing (hereinafter referred to as the "Transfer Notice") of
the terms of the proposed Transfer and the identity of the proposed transferee
at least forty--five (45) days in advance of the date
<PAGE>
then have a period of fifteen (15) business days following receipt of the
Transfer Notice within which to notify Tenant in writing that Landlord elects to
do one of the following:
(i) Terminate this Lease as to the space so affected as of the date
so specified by Tenant in the Transfer Notice and make payment to (or receive
payment from) the Tenant of the unamortized portion of the Tenant improvement
payments made by Tenant, (offset by the unamortized portion of the Tenant
Improvement Allowance paid by Landlord), in which event Tenant shall be relieved
of all further obligations hereunder as to such space from and after such date,
provided, however, that Tenant shall have the right to withdraw its Transfer
Notice for a period of five (5) days following receipt of Landlord's notice of
termination; or
(ii) Permit Tenant to transfer the Lease or interest therein to the
proposed transferee on the terms set forth in the Transfer Notice.
Notwithstanding the provisions of Paragraph 14.01(a)(i) immediately above,
Tenant shall have the right to sublease up to ten thousand (10,000) rentable
square feet of the Tenant's premises and Landlord shall not have the right to
terminate pursuant to Paragraph 14.0l(a)(i) as to any of said 10,000 square
feet. All other provisions of Paragraph 14.01, including specifically Landlord's
right to approve the subtenant, shall govern any subletting by Tenant.
(b) If Tenant proposes to sublease less than all of the Premises, an
election by Landlord under subparagraph (a)(i) above to terminate this Lease
with respect to such space shall not affect the force or validity of the Lease
with respect to the remainder of the Premises, provided that the Rent payable
hereunder shall be adjusted on a pro rata basis in accordance with the reduction
in the rentable area of the Premises. If Landlord shall fail to notify Tenant in
writing of its election under subparagraph (a) within the fifteen business (15)
day period, Landlord shall be deemed to have waived the option described in
subparagraph (a)(i), but prior written approval by Landlord of the transferee
shall be required. Landlord agrees to approve or disapprove the proposed
transferee within fifteen business (15) days of receipt of complete financial
statements and business history information including the name and legal
composition of the proposed transferee and the nature of the business it
proposes to carry on in the Premises.
(c) If Tenant sublets or assigns during the amortization period established
in Paragraph 11.07, Tenant shall be entitled to any rent or other consideration
in excess of the Base Rent and Tenant's Share of Operating Costs payable under
this Lease as reimbursement for the unamortized portion of Tenant's Tenant
improvement expenses in connection with the Premises. After the amortization
period established in Paragraph 11.07, or following the reimbursement to Tenant
of its total Tenant improvement expenses, (whichever comes earlier), Landlord
shall be entitled to all sublease rent or other consideration in excess of the
Base Rent and Tenant's Share of Operating Costs payable under this Lease to
Landlord.
<PAGE>
(d) The consent of Landlord to any Transfer shall not release Tenant from
any of Tenant's obligations hereunder or discharge any liability of Tenant under
this Lease, nor shall said consent be deemed to be a consent to any subsequent
similar or dissimilar Transfer. Any such Transfer, without such consent shall be
void and shall constitute, at the option of Landlord, a material default
hereunder. The acceptance of rent by Landlord from any other person or entity
shall not be deemed to be a waiver by Landlord of any provision of this Lease or
to be a consent to any Transfer thereof.
(e) For purposes of this Article 14, sales, transfers or assignments, in
any single transaction, of a controlling interest in the stock of Tenant shall
constitute a Transfer hereunder.
(f) The voluntary or other surrender of this Lease or of the Premises by
Tenant or a mutual cancellation of this Lease shall not work a merger, and at
the option of Landlord any existing subleases may be terminated or be deemed
assigned to Landlord in which event the tenants under such subleases shall
become tenants of Landlord.
(g) Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with its review and consideration of any proposed Transfer, including
without limitation, reasonable attorney's fees and costs and credit report
costs.
Notwithstanding anything in this Lease to the contrary, Landlord hereby consents
to an assignment of this Lease, or a sublease of all or part of the Premises, to
the parent of Tenant or to a wholly-owned subsidiary of Tenant or of such
parent, or to any corporation into or with which Tenant may be merged or
consolidated, or to any joint venture or partnership Tenant may enter into in
connection with the business to be operated on the Premises; provided that, in
the case of a merger or consolidation, the net worth of the resulting
corporation is at least equal to the greater of (a) the net worth of Tenant on
the date hereof or (b) the net worth of Tenant immediately prior to such merger
or consolidation; provided, further, any such assignment of lease shall contain
an assumption of all of the terms, covenants and conditions of this Lease to be
performed, and any subtenant shall agree to perform all applicable provisions of
this Lease to be performed by Tenant. Tenant agrees that no such assignment or
subletting shall be effective unless and until Tenant gives Landlord written
notice thereof, together with a true copy of the assignment or of the sublease.
14.02 Assignment by Landlord. Landlord may assign, encumber or dispose of
all or any part of its interest in the Building, Premises or this Lease without
affecting this Lease or Tenant's obligations. Tenant agrees to accept and
attorney to such transferee, provided that any transferee(s) shall accept in
writing all Landlord's responsibilities and obligations under this Lease.
15. INSURANCE AND INDEMNIFICATION
15.01 Liability Insurance. Tenant shall at Tenant's expense obtain and keep in
force during the term of this Lease
<PAGE>
a policy of commercial/general liability insurance for bodily injury and
property damage liability arising out of Tenant's (or Tenant's agents, invitees,
employees or servants) use and occupancy of the Building, the Premises and all
areas appurtenant thereto. The insurance shall be in amounts reasonable under
the circumstances and shall have limits of at least five hundred thousand
dollars ($500,000) for property damage and for death or injury to one person,
and at least five million dollars ($5,000,000) for any one occurrence. The
policy shall insure risks covered by standard liability policies. The limits of
insurance shall not limit the liability of Tenant. If Tenant fails to procure
and maintain this insurance, Landlord may, but is not required to, procure and
maintain it at Tenant's expense.
15.02 Property Insurance. Landlord shall procure and maintain at all times
during the term of the Lease a policy of insurance covering loss or damage to
the Premises in the amount of the full replacement value thereof (exclusive of
Tenant's trade fixtures, and equipment and business personal property, but
inclusive of the value of all Tenant Improvements that become a part of the
Building) providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage, and loss of rental
income, including, if required by a lender, coverage against such other hazards
that are then commonly insured against for similar properties. Such insurance
shall provide for payment of loss thereunder to Landlord and/or the holder of
any mortgages or deeds of trust or real estate contracts on the Premises or the
Building. The cost of such insurance shall be paid by Tenant as part of its
Proportionate Share of Operating Expenses.
15.03 Insurance Policies. Insurance required by this Article shall be in
companies duly qualified in Washington and reasonably acceptable to Landlord.
Tenant shall deliver to Landlord copies of any policies of insurance or binder
certificates Tenant obtains showing amount of coverage and loss payable clauses
satisfactory to Landlord. No policy shall be cancellable or subject to any
modification except after ten (10) days' prior written notice to Landlord.
Tenant shall furnish Landlord with evidence of policy renewals at least ten (10)
days prior to the expiration of each policy if available, or Landlord may order
the insurance at Tenant's expense. Tenant shall not do or permit anything which
invalidates the insurance policies referred to in this Article. Tenant shall
upon Landlord's demand reimburse Landlord for any additional premiums paid by
Landlord attributable to any act or omission of Tenant causing an increase in
the cost of insurance.
15.04 Waiver of Subrogation. Tenant and Landlord each waive all rights of.
recovery against the other, or against the employees, agents and representatives
of the other, for loss or damage to the waiving party or its property or the
property of others under its control to the extent that the loss or damage is
insured against under any insurance policy in force at the time of the loss or
damage.
15.05 Indemnity. Tenant shall indemnify and hold Landlord harmless from all
claims for loss, damage or injury
<PAGE>
including all costs, reasonable attorneys' fees, expenses and liabilities
incurred in the defense of any claim or action) to any person or property
arising out of Tenant's use and occupancy of the Premises or at the Premises or
arising from the conduct of Tenant's business or related activities except to
the extent caused by the negligence or willful misconduct of Landlord or its
agents, employees or contractors. Tenant shall further indemnify and hold
Landlord harmless from all claims for loss or damage arising from any negligence
of Tenant, or any of its agents, contractors or employees (including all costs,
reasonable attorneys' fees, expenses and liabilities incurred in the defense of
any claim or action).
Landlord shall defend and indemnify Tenant and save it harmless from and against
any and all liability, damages, costs and expenses, including but not limited to
reasonable attorneys' fees, arising from any act, omission or negligence of
Landlord, or the officers, contractors, licensees, agents, servants, employees,
guests or invitees of Landlord, in or about the Premises or the Building or
appurtenances thereto.
15.06 Exemption of Landlord from Liability. Unless caused by the
negligence or willful misconduct of Landlord, Landlord's agents or employees, or
contractors, Landlord is not liable for injury to Tenant's business or any loss
of income or for injury or damage to the person or property of Tenant, or
Tenant's principals, employees, invitees or any other person in or about the
Premises, where the damage or injury is caused by or results from fire, steam,
electricity, gas, water or rain, or from defects of pipes, sprinklers, wires,
appliance, plumbing, air--conditioning, lighting fixtures, or failure of
utilities. Landlord is not liable for any damages arising from any act or
neglect of any other tenant of the Building.
16. PERSONAL PROPERTY TAXES
Tenant shall pay prior to delinquency all taxes assessed against and levied upon
Tenant's trade fixtures, furnishings, equipment, and all other personal property
at the Premises. When possible, Tenant shall cause its fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property. If any of Tenant's personal property is assessed with
the Premises or Building as real property, Tenant shall pay Landlord the taxes
attributable to Tenant's property within ten (10) days after receipt of a
written statement setting forth those taxes.
17. DAMAGE OR DESTRUCTION OF PREMISES
17.01 Partial Damage--Insured. If the Premises are partially damaged by a
casualty covered by the insurance policy that Landlord is required to maintain
under this Lease, Landlord shall at its expense repair the damage, but not
Tenant's fixtures, equipment or tenant improvements unless they are part of the
Premises, provided Landlord shall receive all insurance proceeds covering such
loss. Landlord shall make all repairs as soon as reasonably possible after
receipt of insurance proceeds, but in all events within six months of damage,
and this Lease shall continue in full force.
<PAGE>
Partial damage is herein described as any damage (other than total destruction
of the Premises) which can be repaired within six (6) months.
17.02 Partial Damage--Uninsured. If the Premises are partially damaged,
except by a negligent or willful act of Tenant (in which event Tenant shall make
the repairs, at its expense) by a casualty not covered by the insurance policy
that Landlord is required to maintain under this Lease, Landlord may at its
option either (i) repair the damage as soon as reasonably possible at Landlord's
expense, and this Lease shall continue in full force, or (ii) give written
notice to Tenant with thirty (30) days after the date of the damage of the
intention to cancel and terminate this Lease as of the date of the occurrence of
damage. Tenant may, within ten (10) days after receipt of Landlord's notice,
give written notice to Landlord of Tenant's intention to repair the damage at
Tenant's expense, without reimbursement from Landlord. This Lease will then
continue in full force and Tenant shall make repairs as soon as reasonably
possible. If Tenant does not give its notice after Landlord elects termination,
this Lease shall be canceled and terminated as of the date of the occurrence of
damage.
17.03 Damage Near End of Term. If the Premises are partially destroyed or
damaged during the last six months of the term of this Lease, Landlord or Tenant
may at its option cancel and terminate this Lease as of the date of occurrence
of damage by giving written notice to the other of that election within thirty
(30) days after the date of occurrence of damage.
17.04 Total Destruction. If the Premises are totally destroyed from any
cause whether or not covered by insurance (including any total destruction
required' by any authorized public authority), this Lease shall automatically
terminate as of the date of total destruction.
17.05 Abatement of Rent: Tenant's Remedies. The Base Rent payable under
Articles 6 and 8 for the period from the date of the casualty until repairs are
completed shall be abated in proportion to the degree of impairment of Tenant's
use of the Premises. Except for abatement of rent, Tenant shall have no claim
against Landlord for any damage suffered for any partial damage, destruction, or
repair of the Premises unless caused by the negligence or willful misconduct of
Landlord or Landlord's agents, employees or contractors. If Landlord does not
commence repairs within forty--five (45) days after its obligation to repair
accrues under this Article, Tenant may at its option cancel this Lease by giving
Landlord written notice at any time prior to the commencement of repairs. This
Lease will terminate as of the date of that notice.
18. CONDEMNATION
If the Premises or any portion thereof are taken under the power of eminent
domain, or sold under the threat of its exercise (a "condemnation"), this Lease
shall terminate as to the part taken as of the date the condemning authority
takes title or possession, whichever is earlier. If more than ten percent (10%)
of the floor area of the Premises, or more than twenty-
<PAGE>
five percent (25%) of the land area of the property which is not occupied by any
improvements, is taken by condemnation, or if by condemnation a material change
in the character of the Premises prevents their continued use in substantially
the same manner as before the condemnation, Tenant may, at its option, terminate
this Lease as of the date the condemning authority takes possession. Tenant must
exercise its option in writing within ten (10) days after the condemning
authority takes possession. If Tenant does not terminate this Lease, it shall
remain in full force as to the remaining Premises, except that the Base Rent,
and Tenant's Proportionate Share, shall be reduced in the proportion that the
floor area taken bears to the total original floor area of the Premises. Any
award for taking all or any part of the Premises by condemnation, or any payment
made under threat of condemnation, is the property of Landlord, whether the
award is made as compensation for diminution in value of the leasehold, for the
taking of the fee, or as severance damages. Tenant is entitled to any award for
loss of or damage to its trade fixtures, removable personal property, and for
the cost of the unamortized portion of Tenant's improvements. If this Lease is
not terminated after condemnation, Landlord shall, to the extent of severance
damages received by it, repair any damage to the Premises caused by the
condemnation, except to the extent that Tenant was reimbursed therefor by the
condemning authority. Nothing in this Lease shall prevent Tenant from pursuing
its own damage claim against the condemning authority.
19. DEFAULTS: REMEDIES
19.01 Defaults. Each of the following is a material default and breach of
this Lease by Tenant:
(a) Vacating or abandoning the Premises for more than thirty (30)
consecutive days;
(b) Failure to make any required rent or other payment as and when due if
such failure continues for a period of five (5) business days after
written notice thereof from Landlord;
(c) Failure to comply with any of the covenants or provisions of this
Lease, other than those described in subparagraph (b), if the failure
continues for a period of thirty (30) days after written notice from
the Landlord. If the nature of Tenant's default reasonably requires
more than thirty (30) days for its cure, Tenant will not be in default
if it commences to cure with the thirty (30) day period and thereafter
diligently pursues its completion.
(d) Tenant's making any general assignment or arrangement for the benefit
of creditors; the filing by or against Tenant of a petition to have it
adjudged a bankrupt or a petition for reorganization or arrangement
under any bankruptcy law (unless, any petition filed against Tenant is
dismissed within sixty (60) days); the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets at
the Premises or its interest in this Lease, if possession is not
restored to Tenant within sixty
<PAGE>
(60) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets at the Premises or its interest
in this Lease, if that seizure is not discharged within sixty (60)
days.
(e) Discovery by Landlord that any financial statement given to Landlord
by Tenant, or by any assignee, subtenant, successor in interest of
Tenant, or any guarantor of its obligations was materially false at
the time given.
19.02 Remedies. If any material default or breach by Tenant occurs,
Landlord may at any time thereafter without notice or demand do any or all
of the following:
(a) Terminate Tenant's right to possession of the Premises by any lawful
means, and this Lease shall terminate; Landlord may reenter and take
possession of and remove all persons or property, and Tenant shall
immediately surrender possession of the Premises to Landlord. Landlord
may recover from Tenant all damages incurred by Landlord for Tenant's
default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
and reasonable renovation and alteration of the Premises.
Landlord may also recover reasonable attorney's fees and any real
estate commissions actually paid in connection with any reletting of
the Premises; the worth at the time of award by a court of competent
jurisdiction of the amount by' which the unpaid rent for the balance
of the term after the time of the award exceeds the amount of rent
loss for the same period that Tenant proves could be reasonably
avoided; and any leasing commission applicable to the unexpired term
of this Lease (calculated by amortizing the commission over the
initial term of this Lease).
(b) Maintain Tenant's right to possession, and this Lease shall continue
in force whether or not Tenant has abandoned the Premises. Landlord
shall be entitled to enforce all of its rights and remedies under this
Lease, including the right to recover rent as it becomes due.
(c) Pursue any other remedy available to Landlord under the law.
These remedies are not exclusive.
19.03 Default by Landlord. Landlord is not in default unless it fails to
perform obligations required of it within a reasonable time, and not later than
thirty (30) days after delivery of written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises whose
name and address has been furnished to Tenant in writing, specifying Landlord's
failure to perform its obligations. If Landlord's obligation reasonably requires
more than
<PAGE>
thirty (30) days for performance or cure, Landlord is not in default if it
commences performance or cure within the thirty (30) day period and thereafter
diligently pursues its completion.
19.04 Late Charges. Late payment by Tenant of rent and other sums due will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult to ascertain. The costs include, but are
not limited to, processing and accounting charges, and late charges which may be
imposed on Landlord by the terms of any mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sums due from
Tenant are not received by Landlord or its designee within ten (10) working days
after the amount is due, Tenant shall pay to Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that this late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of a late charge by Landlord is not
a waiver of Tenant's default, nor a waiver of greater charges which may be
incurred by Landlord.
20. ESTOPPEL CERTIFICATES
Tenant shall at any time upon ten (10) days' prior written notice from Landlord
execute, acknowledge and deliver to Landlord a statement in writing (i) stating
the Commencement Date and certifying that this Lease is unmodified and in full
force (or, stating the nature of any modification and certifying that this
Lease, as modified is in full force) and stating the date to which the rent and
other charges are paid in advance, if any, and (ii) acknowledging that there are
not, to Tenant's knowledge, any uncured defaults on the part of Landlord (or
specifying any defaults claimed). This statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver this statement within ten (10) days shall be
conclusive upon Tenant (i) that this Lease is in full force as represented by
Landlord, (ii) that there are no uncured defaults in Landlord's performance, and
(iii) that not more than one month's rent has been paid in advance. Any such
failure may also be considered by Landlord as a material default by Tenant under
this Lease.
If Landlord desires to finance or refinance the Building or part of it, Tenant
agrees to provide reasonable financial information to any lender in order to
facilitate financing or refinancing. These financial statements shall be
remitted directly to the lender and shall be kept confidential by the lender.
21. BROKER
Landlord and Tenant each warrant to the other that it has had no dealings with
any real estate broker or agent in connection with the negotiation of this
Lease, except CB Commercial Real Estate, Inc., which represented Landlord, and
Teutsch Partners, which represented Tenant, and that it knows of no other real
estate broker or agent who is or might be entitled to a commission in connection
with this Lease. If Landlord or Tenant has
<PAGE>
dealt with any other person or real estate agent with respect to leasing or
renting space in the Building, such party shall be solely responsible for the
payment of any fee due said person or firm, and Landlord and Tenant shall each
indemnify and hold the other harmless from and against any liability in respect
thereof. Landlord acknowledges that it shall pay to CB Commercial Real Estate
Inc., as listing broker, a total of six and one--half percent (6.5%) of the
gross lease consideration (base rent only) for years one through five and three
and one--quarter percent (3.25%) of the gross lease consideration (base rent
only) for year 6, and CB Commercial Real Estate, Inc. shall be solely
responsible for and liable to compensate Teutsch Partners (as co--broker) a
total of four percent (4%) of the gross lease consideration (base rent only) for
years one through five and two percent (2%) of the gross lease consideration
(base rent only) for year six. Such payment shall be made one-half on the date
the Lease is fully executed by both Landlord and Tenant and the Master Use
Permit permitting Tenant's use of the Premises has been issued, and one--half on
the date Tenant has occupied the Premises for its business use and has commenced
paying rent.
22. SUBORDINATION
This Lease, at Landlord's option, shall be subordinate to any ground lease,
mortgage, deed of trust, any other hypothecation for security or encumbrance
upon the real property of which the Premises are a part and to any and all
advances made on that security and to all renewals, modifications,
consolidations, replacements and extensions thereof. Despite any subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed and
none of Tenant's other rights under this Lease shall be diminished if Tenant is
not in default under this Lease. If any mortgagee, trustee, or ground lessor
prefers to have this Lease prior to the lien of its mortgage, deed or trust or
ground lease, and gives written notice to Tenant, this Lease shall be prior to
that mortgage, deed of trust, or ground lease, whether this Lease is dated prior
to or subsequent to the date of the mortgage, deed of trust or ground lease or
its recording date.
Tenant will execute any documents required to effectuate subordination or make
this Lease prior to any mortgage, deed of trust or ground lease within ten (10)
days after written request. Notwithstanding the foregoing, Tenant shall not be
required to subordinate this Lease to any mortgage or deed of trust unless the
mortgagee or beneficiary agrees with Tenant, pursuant to a nondisturbance
agreement, that upon a foreclosure (or deed in lieu thereof), and as long as
Tenant is not in default hereunder, such mortgagee or beneficiary will recognize
this Lease and all of Tenant's rights hereunder and will not disturb or
interfere with Tenant's occupancy. Landlord represents that, as of the date of
execution of this Lease, there is no mortgage or deed of trust encumbering the
Building or the Premises.
23. GENERAL PROVISIONS
23.01 Severability. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction will not affect the validity of
any other provision.
<PAGE>
23.02 Time of Essence. Time is of the essence of this Lease.
23.03 Incorporation of Prior Agreements; Amendments. This Lease contains
all agreements of the parties with respect to all matters mentioned in it. No
prior agreement or understanding concerning those matters is effective. This
Lease may be modified only in writing, signed by the parties in interest at the
time of the modification.
23.04 Notices. Any notice given under this Lease shall be in writing and
may be given by personal delivery, facsimile transmission, or by certified mail,
postage prepaid, addressed to Tenant or to Landlord at their addresses in
Article 1. Either party may by notice under this Article change its address for
notice purposes. Notices personally delivered or transmitted by facsimile are
considered received upon delivery. Mailed notices are considered received five
(5) days after deposit in the mail. A copy of all notices given to Landlord
shall be concurrently transmitted to Landlord's lender designated in writing by
Landlord.
23.05 Waiver. Waiver by Landlord of the breach of any provision of this
Lease is not a waiver of any subsequent breach by Tenant of the same or any
other provision. Landlord's consent to or approval of any act does not make the
Landlord's consent to or approval of any subsequent act unnecessary. Acceptance
of rent by Landlord is not a waiver of any preceding breach of any provision of
this Lease, other than Tenant's failure to pay the rent so accepted.
23.06 Recording. Tenant shall not record this Lease without Landlord's
prior written consent, and unauthorized recordation, at the option of Landlord,
constitutes a noncurable default by Tenant. Landlord and Tenant shall, upon
request of the other party, execute, acknowledge and deliver to Landlord a
"short form" memorandum of this Lease suitable for recording.
23.07 Holding Over. Any holding over after the expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall be construed to be a tenancy from month to month on
all the terms, covenants and conditions herein specified so far as applicable,
except that the Base Rent shall be an amount equal to one hundred twenty-five
percent (125%) of the Base Rent otherwise payable by Tenant immediately prior to
such holding over; provided, however, if such holding over is without the
written consent of Landlord, the Base Rent shall be an amount equal to Two
Hundred percent (200%) of the Base Rent otherwise payable by Tenant immediately
prior to such holding over. Acceptance by Landlord of Rent after the expiration
or termination of this Lease shall not constitute a consent by Landlord to any
such tenancy from month to month or result in any other tenancy or any renewal
of the term hereof. The provisions of this paragraph are in addition to, and do
not affect, Landlord's right to re--entry or other rights provided by this Lease
or by law.
23.08 Covenants and Conditions. Each provision of this Lease performable
by Tenant is both a covenant and a condition.
<PAGE>
23.09 Binding Effect. Subject to the provisions restricting assignment or
subletting, this Lease binds and benefits the parties, their personal
representatives, successors and assigns.
23.10 Common Areas/Access/Parking. All elevators, stairways, halls, public
toilet facilities and other areas for the common use of all tenants of the
building shall be open for reasonable use by Tenant and its employees. Tenant
and its employees shall have twenty-four hour access to the Premises. Tenant
shall have the right to lease up to forty--two (42) non-reserved parking spaces
in the Building parking garage. During the initial term of this Lease (years one
through six) such parking spaces shall be provided at Eighty-Five Dollars
($85.00) per month. Thirty (30) days prior to the Commencement Date, Tenant
shall notify Landlord of the initial number of parking spaces Tenant desires to
lease pursuant to this paragraph. After the Commencement Date, additional
parking spaces up to the allotment of 42 will be made available to Tenant (at
the $85.00 per space rate during the initial term) upon thirty (30) days written
request from Tenant. Tenant may reduce the number of spaces it leases upon
thirty (30) days prior written notice to Landlord. Spaces leased by Tenant but
subsequently given up by Tenant may be used by the Landlord and Tenant's right
to lease those spaces in the future is subject to availability and market rates.
For example, if Tenant initially leased 42 spaces and one year later reduces its
spaces rented to 20 spaces, Tenant would only be able to rent additional spaces
beyond 20 if they were not leased to others, and Tenant would have to pay market
rate for those spaces above 20.
If Tenant leases space in the Building in addition to the initial Premises,
Tenant shall be entitled to lease additional parking spaces at the ratio of one
space for each additional Five Hundred Forty-Six (546) rentable square feet
leased. The parking spaces shall be provided at Eighty-Five Dollars ($85.00) per
month per space during the initial term of this Lease. During any extended term
of this Lease the parking spaces shall be leased to Tenant at market value. All
parking rights and uses are subject to this Lease and any reasonable rules and
regulations of Landlord for such parking facilities which may be established or
altered by Landlord at any time or from time to time during the term thereof.
23.11 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of that corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with the duly adopted resolution of its Board of
Directors or in accordance with its Bylaws, and that this Lease is binding upon
that corporation in accordance with its terms.
23.12 Sale of Building. If Landlord's rights in the Building are sold,
Landlord will be relieved of all liability under the covenants and conditions in
this Lease arising out of any act, occurrence or omission after consummation of
the sale upon written assumption of the Lease by the purchaser. The purchaser
shall be deemed, without any further agreement by parties or their successors in
interest, to have assumed and agreed to carry out all of the covenants and
obligations of Landlord under this Lease.
<PAGE>
23.13 Attorneys' Fees. In any dispute hereunder, or in any action to
enforce or interpret this Lease, the prevailing party is entitled to recover
reasonable attorneys' fees from the losing party.
23.14 Landlord's Access Landlord and its agents have the right to enter
the Premises at reasonable times and after reasonable notice for the purpose of
inspecting them, showing them to prospective purchasers, lenders, or lessees,
and making necessary or desirable alterations, repairs, improvements or
additions to the Premises or to the Building. Landlord may display ordinary "For
Sale" signs at any place or time except in windows of the Premises while Tenant
occupies the Premises. All of these rights may be exercised without rebate of
rent or liability to Tenant.
23.15 Signs and Auctions. Tenant may not place any sign upon the Premises
without Landlord's prior written consent, except signs conforming to the rules
and regulations of the Building, and the Master Use Permit sign required by the
City of Seattle.
23.16 Quiet Possession. Upon paying the rent and observing and performing
all of its covenants and conditions of this Lease, Tenant shall have quiet
possession of the Premises for the entire term subject to all of the provisions
of this Lease.
23.17 Building Rules and Regulations. Tenant will abide by all reasonable
rules and regulations which Landlord may make from time to time for the
management, safety, care, and cleanliness of the Building and grounds, the
parking of vehicles and the preservation of good order as well as for the
convenience of other occupants and tenants of the Building provided Landlord
gives Tenant reasonable prior written notice thereof. Violation of any rules and
regulations is a material breach of this Lease. A copy of current rules and
regulations is attached to this Lease as Exhibit F, which Tenant hereby
approves. Future rules and regulations which Landlord may from time to time make
will be reasonable and will not deprive Tenant from use of the Premises as
contemplated by the Lease.
23.18 Relationship of Parties. For the purpose of this Lease, the
relationship of the parties hereto is strictly that of landlord and tenant.
Landlord has no interest in the Tenant's enterprise and this Lease cannot be
construed as a joint venture or partnership. Tenant is not an agent or
representative of the Landlord for any purpose.
23.19 Landlord's Representations. Landlord represents to Tenant that
Landlord is vested with a fee title interest in the Building and the parking
spaces located in the Building and has the power and authority to execute this
Lease; that there are no mechanics or materialmen's liens affecting the Building
or the Premises; and that the Building has a B-2 occupancy classification.
23.20 Annual Financial Statements. Tenant shall within thirty (30) days
of Landlord's request, provide Landlord annual financial statements for Tenant.
Said financial statements are to be prepared in accordance with generally
accepted accounting policies and shall include a. signed copy of the current
year's income tax return.
<PAGE>
23.21 Riders. Riders, if any attached area a part of the Lease.
24. SPECIAL PROVISIONS
24.01 Medical and Hazardous Waste and Materials. Tenant shall not dispose
of or otherwise allow the improper or illegal release of any medical waste or
hazardous waste or materials in, on or under the leased Premises, or any
adjacent property, or in any improvements placed on the Leased Premises. Tenant
shall comply at all times with all statutes, regulations and ordinances, and
with all orders, decrees or judgments of governmental authorities or courts
having jurisdiction, relating to the use, collection, treatment, disposal,
storage, control, removal or cleanup of medical waste and hazardous waste or
materials in, on or under the leased Premises or any adjacent property, or
incorporated in any improvements, at Tenant's sole expense.
After notice to Tenant and a reasonable opportunity for Tenant to effect such
compliance, Landlord may, but is not obligated to, enter upon the leased
Premises and take such actions and incur such costs and expenses to effect such
compliance as it reasonably deems advisable to protect its interest in the
leased Premises; provided however, that Landlord shall not be obligated to give
Tenant notice and an opportunity to effect such compliance if (1) such delay
might result in material adverse harm to Landlord or the leased Premises, (2)
Tenant has already had actual knowledge of the situation and a reasonable
opportunity to effect such compliance, or (3) an emergency exists. Whether or
not Tenant has actual knowledge of the release of hazardous waste or materials
on the Premises or any adjacent property as the result of Tenant's use of the
leased Premises, Tenant shall reimburse Landlord for the full amount of all
costs and expenses reasonably incurred by Landlord in connection with such
compliance activities, and such obligation shall continue even after the
termination of this Lease. Tenant shall notify Landlord immediately of any
release of any hazardous waste or materials or improper release of any medical
waste or materials on the leased Premises or in the Building.
Tenant shall indemnify and hold Landlord harmless against any and all losses,
liabilities, suits, obligations, fines, damages, judgments, penalties, claims,
charges, cleanup costs, remedial actions, costs and expenses (including, without
limitation, attorneys' fees and disbursements) which may be imposed on, incurred
or paid by, or asserted against Landlord or the Premises by reason of, or in
connection with (1) any misrepresentation, breach of warranty or other default
by Tenant under this paragraph, or (2) the acts or omissions of Tenant, or any
subtenant or other person for whom Tenant would otherwise be liable, resulting
in the release of any medical waste or hazardous waste or materials or the
violation of any law, rule, regulation or order pertaining to medical waste or
hazardous waste or materials.
Landlord represents and warrants to Tenant that to the best of Landlord's
knowledge Landlord has not received any notification from any governmental
agency indicating that the Premises, the Building or the real property upon
which the Building is located is or may be targeted for a federal or state
superfund
<PAGE>
cleanup and, except as described in the next sentence, Landlord has no knowledge
that the Premises, the Building or the real property upon which the Building is
located is contaminated with any hazardous wastes or materials. Landlord hereby
discloses and Tenant acknowledges that certain areas of the basement contained
small amounts of hydraulic fluid and sludge contaminated with elevated
concentrations of TPH and metals, and said fluid and sludge were removed and
disposed of in accordance with applicable regulations. Landlord has obtained and
supplied to Tenant an environmental assessment report on the Building. Landlord
agrees to indemnify and hold Tenant harmless from and against any and all loss,
damage, claims, penalties, liability, suits, costs and expenses (including,
without limitation, reasonable attorneys' fees) and also including, without
limitation, costs of remedial action or cleanup, suffered or incurred by Tenant
arising out of or related to any release or presence of hazardous wastes or
materials on, under or in the Premises, the Building or the real property upon
which the Building is located, unless such release or presence is due to the
acts or omissions of Tenant, its agents and employees. The term "hazardous
wastes or materials" means any substance, waste or material defined as
hazardous, toxic or dangerous by any federal, state or local statute rule,
ordinance requirement or regulation now or hereafter in effect, and shall
specifically include asbestos-- containing materials, PCBs and petroleum or
hydrocarbon products.
24.02. Right of First Opportunity to Lease. At all times during the term
of this Lease and any renewal terms, Tenant shall have the right of first
opportunity to lease any space which becomes available in the Building. Tenant
shall be informed in writing of space coming available when Landlord learns of
upcoming vacancies in the Building. In addition, prior to accepting an offer to
lease from a prospective tenant ("Third--Party Offer"), Landlord shall deliver
to Tenant notification of the availability of the space Landlord intends to
lease. Tenant shall have seven (7) business days after Landlord delivers such
notification to deliver written notice to Landlord that Tenant will lease the
space offered.
If Tenant fails to deliver said notice, Tenant's right of first opportunity
shall terminate as to that space until it once again becomes available and
Landlord shall be free to enter into a lease of the space to the third party who
made the Third--Party Offer for a period of six (6) months from the date of the
notice to Tenant. If the Landlord does not consummate a lease with the third
party within said six (6) month period, Tenant's right of first opportunity as
to that space shall revive.
If Tenant delivers notice of acceptance to Landlord within the required seven
(7) day period, Tenant shall, commencing with the first day of the month which
is three months from the date the existing tenant vacates the space, lease the
offered space on the same terms and conditions then in effect under this Lease.
The rental rate shall be the rate paid under this Lease plus the amount of
Operating Costs and Expenses paid on a square footage basis at the time of
commencement of the lease on the offered space. Landlord shall provide Tenant
with a Tenant improvement allowance as provided in paragraph 11.05.
<PAGE>
24.03 Limitations in New Leases. During the initial term of this Lease
(years one through six only), any new leases of space in the Building entered
into by Landlord, (including any leases entered into following Tenant's failure
to exercise its right of first opportunity to lease as provided in paragraph
24.02 above), shall be limited to a maximum term of six (6) years and shall give
Landlord the right to terminate such leases effective as of the thirty-seventh
month after the commencement dates of such leases in order to provide Tenant the
opportunity to expand into the space leased to other tenants thirty--six (36)
months after the commencement dates of the leases executed with other tenants.
Landlord shall provide Tenant with nine (9) month's written notice of the
available space, and Tenant shall have twenty (20) days to deliver to Landlord
Tenant's notice of acceptance of the other Tenant's space. If Tenant declines
the space or fails to accept the space, Landlord shall be free to continue the
other tenantts occupancy of the space under the terms of the other tenant's
lease. If Tenant elects to lease the space, Tenant shall, on the first day of
the thirty-seventh month after the term of the third party lease term commenced,
lease the offered space on the same terms and conditions then in effect under
this Lease. The rental rate shall be the rate paid under this Lease plus the
amount of Operating Costs and Expenses paid on a square footage basis at the
time of commencement of the lease on the offered space. Landlord shall provide
Tenant with a Tenant improvement allowance as provided in paragraph 11.05.
24.04 Expansion Space Undertaking. Tenant desires to lease additional
space in the Building currently occupied by a printing company (northeast corner
of ground floor), and restaurant and delicatessen (east side of second floor).
Upon written notice from Tenant that Tenant desires to lease such space,
Landlord agrees to in good faith attempt to negotiate an early cancellation of
the leases of such existing tenants. Landlord shall not be obligated to pay any
relocation costs or early termination costs nor take any action negatively
impacting the Building or Landlord's ability to lease or sell the Building in
connection with any negotiated cancellations. Landlord shall inform Tenant of
any demands for early termination compensation or lease concessions required by
any existing tenant and Tenant shall have the right to pay such compensation or
concession. In the event that any cancellation or relocations costs required by
the existing tenants are not approved by Tenant, Landlord's obligation to
attempt to obtain such early cancellations shall terminate. In the event of
vacation by the existing tenant or tenants, Tenant shall have One Hundred Twenty
(120) days after such vacation to complete its tenant improvements, at which
time Tenant's obligation to pay rent shall commence. The terms and conditions,
including rental rate, tenant improvement allowance, and other terms shall be as
provided in paragraph 24.02 above, Right of First Opportunity to Lease.
24.05 Lease Cancellation. After the fourth year of the initial term of
this Lease Tenant shall have the right to cancel the Lease in the event that
Tenant needs to lease expansion space in the Building, and said space is not
available, under the following terms and conditions:
<PAGE>
1. Tenant must need expansion space in an amount equal to at least fifteen
percent (15%) of the total space then leased by Tenant; and
2. Tenant has in good faith been unable to accept the terms of any
cancellation negotiated by Landlord pursuant to paragraph 24.04 (Expansion
Space Undertaking), or the Building does not contain the amount of
available expansion space required by Tenant (greater than 15% of its then
current occupancy) whether or not then occupied by other Tenants; and
3. (a) Tenant has delivered to Landlord written notice of Tenant's
cancellation of the Lease, which shall be effective not less than nine (9)
months from the date of delivery of the notice; and (b) no less than six
(6) months prior to the effective date of the cancellation notice, Tenant
delivers to Landlord Tenant's non--refundable first cancellation payment in
the amount of $100,000; and
4. No later than fifteen (15) days prior to the effective date of cancellation
a second cancellation payment equal to the unamortized portion of the funds
paid by Landlord for Tenant improvements to the Premises (which shall be
calculated by amortizing the Tenant improvement allowance over the eleven
(11) year period commencing with the Commencement Date) and real estate
commissions paid by Landlord in connection with the Lease (which commission
amount shall be calculated by amortizing the commissions over the initial
term of this Lease).
In the event that the above conditions are met, Tenant's cancellation of the
Lease shall become `effective on the date specified in Tenant's cancellation
notice, which shall be not less than nine months from the date of delivery to
Landlord of Tenant's cancellation notice. In such event, the provisions of this
Lease pertaining to the condition of the Premises and the ownership of tenant
improvements upon expiration or termination of the Lease shall apply.
24.06 Storage Space Landlord shall provide Tenant Three Hundred (300)
rentable square feet of dead storage area in the parking garage at an annual
rental of $6.00 per square foot of dead storage space. In addition Landlord
shall provide an additional 625 rentable square feet of dead storage in the ramp
area adjacent to and above the Premises at no charge for the first lease year,
then $6.00 per square foot per year thereafter. Said space shall not be used in
calculating Tenant's Proportionate Share percentage. The exact square footage of
such storage space will be determined in accordance with the procedure described
in Article 2 above.
IN WITNESS WHEREOF, the parties have executed this Lease at the place and on the
date specified adjacent to their respective signatures below:
<PAGE>
LANDLORD:
METROPOLITAN FEDERAL SAVINGS AND LOAN ASSOCIATION OF SEATTLE
BY /s/ Patrick F. Patrick
Its President/CEO
Date November 20, 1992
TENANT:
TARGETED GENETICS CORPORATION
By /s/ H. Stewart Parker
Its President and CEO
Date November 19, 1992
STATE OF WASHINGTON )
) ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Patrick F. Patrick
is the person who appeared before me and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute the instrument
and acknowledged it as the Pres/CEO of Metropolitan Federal Savings & Loan
Association of Seattle to be the free and voluntary act of such party for the
uses and purposes mentioned in the instrument.
Dated: November 20, 1992
/s/ Jack B. Jacobson
Notary Public
My appointment expires 5/5/93
I certify that I know or have satisfactory evidence that H. Stewart Parker the
person who appeared before me and said person acknowledged that she signed this
instrument, on oath stated that she was authorized to execute the instrument and
acknowledged it as the President and CEO of Targeted
Genetics Corporation to be her free and voluntary act of such party for the uses
and purposes mentioned in the instrument.
Dated November 19, 1992
Laura M Mulholland
Notary Public
My appointment expires 2/9/92
<PAGE>
Exhibit A
LEGAL DESCRIPTION OF
OLIVE WAY BUILDING
Lots 1, 2, 3, 4 and 5 Block 50, Second Addition to the Town of Seattle as laid
off by Heirs of Sarah A. Bell, deceased (commonly known as Heirs of Sarah A.
Bell's 2nd Addition to the City of Seattle), according to plat recorded in
Volume 1 of Plats, page 121, records of King County, in the City of Seattle,
King County, Washington.
<PAGE>
EXHIBIT B
PREMISES DESCRIPTION
PREMISES AREA: 25,300 Rentable Square Feet
LOCATION: First Floor, West Side
<PAGE>
EXHIBIT C
TENANT'S PLANS AND SPECIFICATIONS
The plans and specifications prepared by NBBJ Architects filed
with the City of Seattle Department of Construction and Land
Use for a Master Use Permit on November 9, 1992, and signed by
Scott Wyatt.
<PAGE>
EXHIBIT D
LANDLORD' S WORK
Landlord agrees, at its sole cost and expense, to construct and/or make the
following improvements to the Building:
<PAGE>
Assumptions and Clarifications
Smith Gandy Building
August 7, 1992
Revised September 8, 1992
Revised October 20, 1992
The following assumptions and clarifications are based on jobsite meetings with
the Owner, and sketches by NBBJ, pages SK-1 through SK-3.
Description
01000 General Conditions assumes a project duration of 6 weeks,
01002 Building permits and Fees are included in this proposal by an allowance
of $3,000.00.
02110 Demolition includes the following:
a) Remove garage office
b) Remove portion of stairwell landing
c) Remove 25 if of corridor partition
d) Remove corridor/lobby flooring
e) Dumpsters
f) MFSL will reimburse tenants' Contractor if, for economic advantage
perform demolition
03000 Concrete includes the following:
a) Excavating for the elevator pit
b) New concrete walls and floor
c) 6 deep by 16" diameter lined cylinder hole
d) An allowance of 2 man-days to rework entry concrete
03045 Concrete Cutting includes sawcutting first floor arid garage slabs
for the elevator shaft.
05110 Structural Steel is included by an allowance of $2,200.00 to support
first floor slab at elevator shaft opening.
08250 Doors and Frames include 2 ea 3'0" x 7'0" paint grade solid core
doors and frames.
08700 Finish Hardware includes the following;
a) 2 ea latchsets
b) Replace 8 ea aluminium entry door pulls (allowance $75.00
ea)
<PAGE>
08750 Window Tinting includes the following:
a) 3M Scotchtint solar control window film on all exterior panes
b) Film to be spliced horizontally 50"" up from sill
c) Film to be chosen from 3M styles PI8AR, RE2ONEARL or RE35NEARL
or LE 50AMARL
08800 Glass and glazing includes the following:
a) All glass panels, including 1/4" single pane of glass in
aluminum frames approximately 1-1/2" in from existing window to
aid in sound control
b) Frames to be vented at top and bottom to help control
condensation
c) Replace 2 ea broken exterior panes
09250 Gypsum Drywall includes the following:
a) Approximately 25 if of new corridor partition
b) New corridor drywall ceiling at relocated partition
c) Elevator shaft wall and pump room
d) Entry lid with cove soffit and furred walls
e) Miscellaneous patch and repair due to demolition
09689 Carpet includes the following:
a) 144 SY over pad in corridor/lobby is included by an installed
allowance of $20.00 per SY
a) An entry mat allowance of $360.00
09900 Painting includes the following:
a) All new corridor, entry soffit and walls, and exposed elevator
shaft drywall surfaces to be finished with one coat PVA primer
and one coat eggshell latex
b) All existing corridor/lobby drywall surfaces to receive two
coats eggshell latex
If for asthetic or functional reasons tenant elects to install a superior window
treatment, landlord agrees to contribute whole amount allocated for above
tinting and glazing to these improvements.
<PAGE>
c) All existing and new corridor and elevator machine room
doors to be finished with one coat oil primer and one coat
semi-gloss enamel
d) Pressure wash entire building exterior
e) Paint aluminium storefront entry (solvent clean, prime with
wash primer, paint 2 coats Aliphatic Urethane)
f) Clean facade above entry doors with Glidden Ultras Klean
#20502.
13480 Acoustical Ceiling includes repairing ceiling in tenant area at
relocated corridor partition.
14200 Elevator includes the following:
a) 1 ea Dover Cimarron 20-H oildraulic passenger elevator.
Elevator is 2,000 lbs. capacity, meeting all A.D.A.
requirements as of this date, at a speed of 100 FPM, and 2
stops with 2 openings in line. Dimensions are 5'8" wide by 4'3"
deep
b) All finishes to be standard hallway doors and frames will have
bake enamel finish, signal fixtures and cab front return and
handrails will be #4 satin finish stainless steel finish, cab
will be standard Dover "DLP-1" 1" model with standard suspended
ceiling, baked enamel finish on cab door and Dover standard
carpet on the floor.
15600 Elevator Relief Venting is included by an allowance of $1,500.00
16100 Electrical includes the following:
a) Permit, including drawing of plans
b) Demolition and general rework
c) Relocate 5 ea conduits and 3 ea panels out of new elevator
shaft locations
d) Wire new elevator, including elevator motor and controls,
pressurization fan, smoke detection and shunt trip for recall,
and mechanical room
e) Lobby relamping by an allowance of $485.00
f) Digital metering for new tenant space - Electrical and Water
g) Elevator pit light fixture and outlet
h) Entry soffit lighting
j) 4 ea lobby wall sconces (material allowance of $250.00 per
fixture)
j) Power and light for exterior signage
16560 Continuous and Final Clean includes an ongoing maintenance of all
affected areas during construction and a general clean prior to tenant
occupancy.
16700 Contengency: A contingency in the amount of $2,500.00 has been included
in this proposal
** No work other than that specifically outlined above has been
included In this proposal.
** No Washington state sales tax has been included in this proposal.
<PAGE>
EXHIBIT 3
TENANT CONSTRUCTION AND APPROVALS
1. Shell Provided by Landlord. Landlord agrees, at its sole cost and
expense, to provide Premises in their existing condition. Landlord agrees to
construct those improvements described on Exhibit D ("Landlord's Work'").
2. Tenant Improvements. Except for Landlord's Work as provided in
paragraph 1 of this Exhibit E and in Exhibit D, Tenant, at its sole cost and
expense, shall perform all work required to complete the Premises to a finished
condition ready for Tenant to conduct its business at the Premises ("Tenant's
Work'"). The design and construction of all Tenant Work shall be provided at
Tenant's sole cost and expense in accordance with the terms and conditions of
this Exhibit. Landlord shall provide Tenant with the Tenant Improvement
Allowance which will be applied to the cost and expense of the Tenant's Work.
3. Plans and Specifications.
(a) Preliminary Plans. Within fifteen (15) business days (a "`business
day" being a day other than a Saturday, Sunday or public holiday) after the date
that Landlord and Tenant execute this Lease ("Plan Submittal Date"), Tenant
shall deliver to Landlord for its approval two (2) copies of preliminary plans
and specifications prepared by an architect or gualified space planner
("Tenant's Architect") approved in advance by Landlord for Tenant's Work
("Preliminary Plans"). Preliminary Plans shall be signed by Tenant and include:
architectural floor. plans dimensioned with partition layout, identification and
location of plumbing and mechanical systems and any floor or ceiling
penetrations. Within seven (7) days after receipt of the Preliminary Plans,
Landlord shall approve the same or deliver to Tenant, Landlord's specific
objections thereto, together with Landlord's proposed solution to each
objection. If Landlord fails to either approve or object to the Preliminary
Plans within the seven (7) day period, Landlord shall be deemed to have approved
the Preliminary Plans. If Landlord objects to the Preliminary Plans within such
seven (7) day period, Tenant shall revise and resubmit the Preliminary Plans for
Landlord's approval within seven (7) days after receiving notice of Landlord's
objection; and this process shall continue until the Preliminary Plans are
approved by Landlord. If the Preliminary Plans are not submitted by the Plan
Submittal Date, or if the Preliminary Plans are not approved by Landlord by the
twenty--fifth (25) business day after the Plan Submittal Date, Tenant may
terminate this Lease by written notice to Landlord, and this Lease shall cease
and terminate on the date specified in the notice.
(b) Plans for Engineering. Within ten (10) business days after
Landlord's approval of Preliminary Plans, Tenant's Architect shall submit two
(2) sets of Engineering drawings based upon approved Preliminary Plans and the
following information (collectively referred to as "Engineering Plans"), for
Landlord's engineers to review for compatibility with the Building's systems:
<PAGE>
(l) Identification or the location of all electrical and telephone
outlets (with dimensions), dedicated circuits, or power outlets greater than 120
volts.
(2) Reflected ceiling plan indicating all light fixtures and power
requirements, plus HVAC system interior and exterior locations and ductwork
distribution including supply and return air grilles.
(3) Manufacturer's brochures for all fixtures and related
equipment.
(c) Final Plans. Within four (4) weeks after the Engineering Plans
have been approved by Landlord, Tenant shall deliver to Landlord two (2) copies
of final plans and specifications ("Final Plans") prepared by Tenant's Architect
based on the approved Preliminary Plans and Plans for Engineering. Tenant shall
obtain approval of the Final Plans from all appropriate government agencies, and
after they have been approved, a copy shall be initialed and dated by the
Landlord and Tenant.
(d) Quality. All Tenant Improvements described in the Preliminary
Plans and in the Final Plans must be of a quality and appearance which is not
less than the standard for a first class building.
(e) Plan Changes. If Tenant wishes to make any change to the approved
Final Plans, such request shall be made to Landlord in writing, and shall be
accompanied by all plans and specifications necessary to show and explain the
changes from the approved Final Plans. No material change in the approved Final
Plans shall be made without the prior written consent of Landlord which consent
will not be unreasonably withheld.
(f) Effect of Landlord's Approval. Approval of Tenant's Preliminary
Plans, Final Plans and Specifications shall not constitute the assumption of any
responsibility by Landlord for the accuracy or sufficiency of such plans and
specifications and Tenant shall be solely responsible for the content and
correctness of such plans and specifications.
(g) Drawing Standard. All drawings shall be on standard 30" x 42"
sheets at 1/8" scale.
4. Construction of Tenant Improvements. Tenant shall construct or cause
to be constructed the tenant improvements comprising Tenant's Work ("Tenant
Improvements") in accordance with the approved Final Plans and with each of the
following requirements:
(a) Tenant shall submit to Landlord the name of Tenant's proposed
contractor, a copy of the construction contract between Tenant and its
contractor, and a certificate of public liability and property damage insurance
in an amount no less than one million dollars carried by Tenant's contractor
naming Landlord as an additional insured at least five (5) business days before
the date Tenant wishes to commence construction of Tenant Improvements. The
contractor's policy of insurance shall contain an endorsement providing that the
insurance cannot be cancelled or modified unless Landlord has
<PAGE>
EXHIBIT F
RULES AND REGULATIONS
1. Signs and Windows
(a) No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed, or printed or affixed on or to the outside or inside of
the Building without prior written consent of Landlord, and it may remove any
unauthorized sign, placard, picture, advertisement, name or notice without
notice to and at the expense of Tenant.
(b) All approved signs, or lettering shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
(c) Tenant shall not place or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside the Premises. Landlord may, at Landlord's expense, furnish and install a
building standard window covering at all exterior windows. Tenant shall not
without prior written consent of Landlord sunscreen any window.
2. Passageways. The sidewalks, halls, passages, exits, entrances,
elevators and stairways shall not be obstructed by any Tenant or used by them
for any purpose other than for ingress and egress from their respective
Premises.
3. Public Facilities. The toilet rooms, urinals, wash bowls, and other
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind shall be thrown therein. The
expense of any stoppage or damage resulting from the violation of this rule
shall be borne by the tenant who, or whose employees or invitees, caused it.
4. Care of the Premises. Tenant shall not overload the floor of the
Premises or in any way deface the Premises or any part thereof.
5. Wiring. Landlord will direct electricians as to where and how
telephone and telegraph wires are to be introduced. No boring or cutting of
wires will be allowed without the consent of Landlord. The location of
telephones, all boxes and other office equipment affixed to the Premises is
subject to Landlord's approval.
6. Violations. Landlord reserves the right to exclude or expel from the
Building any person who, in its judgment, is intoxicated or under the influence
of liquor or drugs, or who violates any of the rules and regulations of the
Building.
7. Vending. No vending machines or machines of any kind shall be installed,
- --
maintained or operated upon the Premises without the written consent of
Landlord.
<PAGE>
8. Building Name. Landlord has the right, exercisable without liability to
tenants, to change the name of the Building. In the event the street address is
changed at the request of Landlord, Landlord shall reimburse Tenant for Tenant"s
reasonable expenses in changing Tenant's stationary, signs and promotional
materials to show the new address.
9. Solicitation. Tenant shall not disturb, solicit, or canvass any
occupant of the Building and shall cooperate to prevent these occurrences.
10. Building Operations. Landlord has the right to control, open and
operate the public portions of the Building, and the public facilities, and
heating and air--conditioning, as well as facilities furnished for the common
use of the tenants, in the manner it deems best for the benefit of the tenants
generally.
11. Premises Locked. All entrance doors in the Premises shall be left
locked when the Premises are not in use, and all doors opening to public
corridors shall be kept closed except for normal ingress and egress from the
Premises.
12. Approval/Consent. If Tenant is required to obtain Landlord's consent
or approval under these Rules and Regulations such consent or approval
shall not be unreasonably withheld or delayed.
<PAGE>
FIRST AMENDMENT TO OLIVE WAY BUILDING LEASE
Targeted Genetics and Metropolitan Federal
This First Amendment to Olive Way Building Lease is executed by and between
Targeted Genetics, Inc., a Washington corporation ("Tenant") and Metropolitan
Federal Savings and Loan Association of Seattle, a federally chartered savings
and loan association ("Landlord") and is effective upon its execution by
Landlord and Tenant.
REPRESENTATIONS
A. Landlord and Tenant are parties to that Olive Way Building Lease for
the lease of portions of the Olive Way Building located at 1100 Olive Way,
Seattle, Washington and dated November 20, 1992 (hereinafter referred to as the
"Lease").
B. Landlord and Tenant have agreed to certain modifications and
clarifications to the Lease and wish to memorialize their understandings in this
First Amendment to Olive Way Lease.
AGREEMENT
Based upon the above representations and for and in consideration of the mutual
promises contained herein, the parties agree as follows:
1. Confirmation of Rentable Square Footage. Landlord and Tenant hereby
agree that pursuant to paragraph 2 of the Lease, the total rentable square
footage occupied by Tenant in the premises was 25,008 at the commencement of the
Lease term. Landlord and Tenant agree that as a result of the expansion space
outlined below, the total rentable square footage leased by Tenant in the
premises as of November 1, 1994 is 28,901 and Tenant's Proportional Share shall
be increased accordingly.
2. Confirmation of Rentable Storage Space. Landlord and Tenant agree that
pursuant to Paragraph 24.06 of the Lease, the Tenant occupies 625 rentable
square feet of dead storage space in the ramp area above the leased Premises at
a rental rate of $6.00 per square foot. Rental of the 625 square feet of the
storage space entitles Tenant to unlimited use of the balance of the storage
space located in the ramp area above the leased Premises at no additional rent.
The parties hereby also confirm that Tenant occupies a total of 812 rentable
square feet of storage space in the parking garage area at a rental rate of
$6.00 per square foot.
3. Expansion Space - Exhibit "A". Effective November 1, 1994, Tenant
agrees to lease 2,202 rentable square feet of additional space located in the
southeast corner of the Olive Way Building. The location of this additional
space is shown on the drawing attached hereto as
<PAGE>
Exhibit "A" and incorporated herein by this reference. Said additional space
shall be added to the Premises for all purposes under the Lease as of November
1, 1994.
Rent for this expansion space shall be as provided in Paragraph 6 of the Lease,
with the Base Rent for this space currently being $11.25 pursuant to Paragraph
6.01. Rent for this expansion space commenced November 1, 1994.
Tenant shall accept the additional space as is in its present condition with no
Landlord's Work required. Pursuant to Paragraph 11.05 of the Lease, Landlord
shall pay to Tenant, an Expansion Space Tenant Improvement Allowance of
$29,176.50 upon the execution of this First Amendment to Lease. Said amount was
determined by the following formula: 25 cents per square foot X 2202 square feet
X 53 months remaining in the lease term = $29,176.50.
4. Expansion Space - Exhibit "B". Effective November 1, 1994, Tenant
agrees to lease 1,691 rentable square feet of additional space located in the
east side plaza level of the Olive Way Building. The location of this additional
space is shown on the drawing attached hereto as Exhibit "B" and incorporated
herein by this reference. Said additional space shall be added to the Premises
for all purposes under the Lease (except the payment of rent and utilities) as
of November 1, 1994.
Rent for this expansion space shall be as provided in Paragraph 6 of the Lease,
with the Base Rent for this space being $12.75 as of May 1, 1995 pursuant to
Paragraph 6.01. Utility charges for this space shall commence on January 1, 1995
and rent for this expansion space shall not commence until May 1,1995.
Landlord shall have the right until January 1, 1995 to remove any existing
fixtures and equipment located in the space.
Tenant shall accept the additional space as is in its present condition with no
Landlord's Work required. Pursuant to Paragraph 11.05 of the Lease, Landlord
shall pay to Tenant, the Expansion Space Tenant Improvement Allowance upon
Tenant's occupancy of the space.
5. Expansion Space - Exhibit "C". Effective July 1, 1995, Tenant agrees
to lease 1,483 rentable square feet of additional space located in the northeast
corner of the ground floor of the Olive Way Building. The location of this
additional space is shown on the drawing attached hereto as Exhibit "C" and
incorporated herein by this reference. Said additional space shall be added to
the Premises for all purposes under the Lease as of July 1, 1994. The effective
date is approximately 120 days from the date the space will become available to
Tenant for construction of tenant's improvements. The availability date and the
subsequent effective date may be delayed by Landlord up to sixty (60) days in
the event Landlord is unable to obtain the space on time.
Rent for this expansion space shall be as provided in Paragraph 6 of the Lease,
with the Base Rent for this space being $12.75 as of July 1, 1995 pursuant to
Paragraph 6.01
<PAGE>
Tenant shall accept the additional space as is in its present condition with no
Landlord's Work required. Pursuant to Paragraph 11.05 of the Lease, Landlord
shall pay to Tenant, the Expansion Space Tenant Improvement Allowance upon
Tenant's occupancy of the space.
6. No Further Modifications. All terms and conditions of the Lease remain in
full force and effect except as modified by this First Amendment to Olive Way
Building Lease.
The parties have executed this First Amendment to Olive Way Building Lease on
the dates shown by their respective signatures below:
LANDLORD:
Metropolitan Federal Savings and Loan Association of Seattle
By: /s/ Jack B. Jacobson, Date Signed: 12/8/94
Jack B. Jacobson, Vice-President
TENANT:
Targeted Genetics, Inc.
By:_/s/ H. Stewart Parker Date Signed 12/10/94
H. Stewart Parker, President & CEO
STATE OF WASHINGTON)
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Jack B. Jacobson is
the person who appeared before me and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Vice-President of Metropolitan Federal
Savings and Loan Association of Seattle to be the free and voluntary act of
such party for the uses and purposes mentioned in the instrument.
DATED:12/8/94
Robyn G. Reynolds
Notary Public
My appointment expires: 7/20/94
STATE OF WASHINGTON)
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that H. Stewart Parker is
the person who appeared before me and said person acknowledged that she signed
this instrument, on oath stated that she was authorized to execute the
instrument and acknowledged it as the President and CEO of Targeted Genetics,
Inc. to be the free and voluntary act of such party for the uses and purposes
mentioned in the instrument.
DATED:12/10/94
Jon M. Case
Notary Public
My appointment expires: 10/29/97
<PAGE>
EXHIBIT A
(DRAWING OF FIRST FLOOR)
<PAGE>
EXHIBIT B
(DRAWING OF FIRST FLOOR)
<PAGE>
EXHIBIT C
(DRAWING OF GARAGE FLOORPLAN)
<PAGE>
SECOND AMENDMENT TO LEASE AGREEMENT
(Targeted Genetics)
This Second Amendment to Lease Agreement (the "Amendment") is entered into as of
6/12/96 between Ironwood Apartments, Inc., successor in interest to Metropolitan
Federal Saving and Loan Association of Seattle, as Landlord, and Targeted
Genetics, Inc., a Washington corporation, as Tenant, whose address for purposes
hereof is 1100 Olive Way, Seattle, Washington 98101.
REPRESENTATIONS
A. Landlord and Tenant, entered into that certain Olive Way Building
Lease for the lease of portions of the Olive Way Building located at
1100 Olive Way, Seattle, Washington and dated November 20, 1992
(hereinafter referred to as the "Lease");
B . Landlord and Tenant entered into that certain First Amendment to Olive
Way Lease dated December 10, 1994 (hereinafter referred to as the
"First Amendment");
C . Landlord and Tenant have agreed to certain modifications and
clarifications to the Lease and First Amendment and wish to
memorialize their understanding in this Second Amendment to Olive Way
Lease.
AGREEMENT
NOW, THEREFORE, for the foregoing purposes and in consideration of Ten
Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
Expansion Space - Exhibit "A" Effective May 1, 1996, Tenant agrees to
lease 3,090 square feet of additional space located in the northwest
corner of the ground floor of the Olive Way Building. The location of
this additional space is shown on the drawing attached hereto as
Exhibit "A" and incorporated herein by this reference. Said additional
space shall be added to the Premises for all purposes under the Lease
as of May 1, 1996.
Rent for the expansion space shall be as provided in Paragraph 6 of
the Lease, with Base Rent for this space being $13.25 per square foot
as of May 1, 1996 pursuant to Paragraph 6.01 .
Tenant shall accept the additional space as is in its present
condition with no Landlord's Work required . Pursuant to Paragraph
11.05 of the Lease, Landlord shall pay to Tenant, the Expansion Space
Tenant Improvement Allowance upon Tenant's occupancy of the space.
<PAGE>
2. Ratification. Except as expressly set forth in this Second
Amendment, the
Lease and each provision thereof, as amended, is hereby ratified and
affirmed in its entirety .
3. No Further Modification. All terms and conditions of the Lease
remain in full force and effect except as modified by this agreement
by this Second Amendment to Olive Way Building Lease. This Second
Amendment shall be construed and interpreted according to the laws of
the State of Washington.
IN WITNESS WHEREOF, this Second Amendment is executed by Landlord and
Tenant as of the date first set forth above .
LANDLORD:
IRONWOOD APARTMENTS, Inc.
By: /s/ John Stone
Its: President
Date: 6/12/96
TENANT:
TARGETED GENETICS, INC.
By: /s/ James A. Johnson
Its: Vice President, Finance
Date: May 22, 1996
<PAGE>
EXHIBIT "A"
(PARKING DIAGRAM)
<PAGE>
TENANT NOTARY
PARTNERSHIP
STATE OF )
)ss
COUNTY OF )
On this day personally appeared before me ______________________________
to me known to be the individual(s) described in and who executed the within
and foregoing instruments as _________________________ of and acknowledged that
they signed the same as their free and voluntary act and deed on behalf of said
___________________ for the uses and purposes therein mentioned.
GIVEN under my hand and official seal this ____ day of
________________________, 19__.
_____________________________________Notary
Public in
and for the State of _________________
residing at _________
__________________________________
CORPORATION
STATE OF )
COUNTY OF )
On this 22nd day of May 1996 before me, the undersigned, a Notary Public
in and for the State of Washington, duly commissioned and sworn, personally
appeared James A. Johnson, to me known to be the Vice President, Finance of
Targeted Genetics Corporation, the corporation that executed the foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein mentioned
and on oath stated that they were authorized to execute the said instrument and
that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal hereto affixed the day and year first
above written.
/s/ Jon M. Case, Notary Public in and for the State of Washington, residing at
Seattle Washington
<PAGE>
LANDLORD NOTARY
PARNTERSHIP
STATE OF )
)
COUNTY OF )
On this day personally appeared before me _____________________________ to
me known to be the individual(s) described in and who executed the within and
foregoing instruments as ______________________ of and acknowledged that they
signed the same as their free and voluntary act and deed on behalf of said for
the uses and purposes therein mentioned.
GIVEN under my hand and official seal this day
of____________
________ 19
Notary Public in and for the State of
residing at
CORPORATION
STATE OF )
)
COUNTY OF )
7/1
On this 12th day of June 1996, before me the undersigned a Notary Public and for
the State of Washington duly commissioned and sworn, personally John Stone to me
known to be the President of Ironwood Apartmnets, Inc., the corporation that
executed the foregoing instrument, and acknowledged the said instrument to be
the free and voluntary act and deed of said corporation, for the uses and
purposes therein mentioned and on oath stated that they were authorized to
execute the said instrument and that the seal affixed is the corporate seal of
said corporation.
WITNESS my hand and official seal hereto affixed the day and
year first above written.
/s/ Durinda M. Howard
Notary Public in and for the State of Washington residing at Spokane,
Washington.
<PAGE>
THIRD AMENDMENT TO LEASE AGREEMENT
This THIRD AMENDMENT TO LEASE AGREEMENT (this "Amendment") is entered into
as of October 1998 by and between Ironwood Apartments, Inc., as successor to
Metropolitan Federal Savings and Loan Association ("Landlord") and Targeted
Genetics Corporation (`Tenant").
Landlord and Tenant are parties to that certain Olive Way Building Lease
dated November 20, 1992, as modified by that certain First Amendment to Olive
Way Building Lease dated December 10, 1994 and that certain Second Amendment to
Lease Agreement executed on June 12, 1996 and May 22, 1996 (as modified, the
"Lease").
Section 4.02 of the Lease grants to Tenant three options to extend the
Lease term for 5 years each. Tenant has exercised the first of these three
options, leaving two remaining. The purpose of this Amendment to modify the
Lease to reflect exercise of that option.
Landlord and Tenant do hereby amend the Lease as follows:
1. EXTENSION. The term of the Lease is hereby extended for an additional 60
months to April 1, 2004. The rent for the extended term is set forth in Section
6.02 of the Lease.
2. NO OTHER AMENDMENTS. Except as modified by this Amendment and by the
Amendments referenced above, the Lease remains in full force and effect and has
not been modified or amended.
DATED:October 30,1998.
LANDLORD:
IRONWOOD APARTMENTS, INC.,
a Washington Corporation
By:/s/ John Stone
John Stone, President
TENANT:
TARGETED GENETICS CORPORATION
By: /s/ James A. Johnson
Its Vice President, Finance
<PAGE>
STATE OF WASHINGTON )
)ss
COUNTY OF SPOKANE )
I certify that I know or have satisfactory evidence that John Stone is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the President of Ironwood Apartments, Inc. to
be the free and voluntary act of such party for the uses and purposes mentioned
in this instrument.
Dated: October 30, 1998
/s/ Durinda M Howard
(Signature of Notary Public)
DURINDA M HOWARD
(PRINTED NAME OF NOTARY PUBLIC)
My Appointment Expires 2/27/99
STATE OF WASHINGTON )
)ss
COUNTY OF KING )
I certify that I know or have satisfactory evidence that James Johnson
is the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Vice President of Targeted Genetics to be
the free and voluntary act of such party for the uses and purposes mentioned in
this instrument.
Dated: 11/27/98
/s/ Gary Michael
(Signature of Notary Public)
GARY MICHAEL
(PRINTED NAME OF NOTARY PUBLIC)
My Appointment Expires 12/8/98
<PAGE>
EXHIBIT 21.1
Subsidiary of Targeted Genetics Corporation
The Company has one subsidiary as of December 31, 1999 as follows:
Name of Subsidiary Jurisdiction of Organization
Emerald Gene Systems Bermuda
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-83064, 333-03889, 333-28151, 333-58907, and 333-78523 and Form
S-3 Nos. 333-51625 and 333-86509) pertaining to Targeted Genetics Corporation's
1992 Restated Stock Option Plan, Stock Option Plan for Nonemployee Directors,
and 1999 Stock Option Plan, of our report dated March 1, 2000, with respect to
the financial statements of Targeted Genetics Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
Ernst & Young LLP
Seattle, Washington
March 21, 2000
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-83064, 333-03889, 333-28151, 333-58907, and 333-78523 and Form
S-3 Nos. 333-51625 and 333-86509) pertaining to Targeted Genetics Corporation's
1992 Restated Stock Option Plan, Stock Option Plan for Nonemployee Directors,
and 1999 Stock Option Plan, of our report dated February 29, 2000, with respect
to the financial statements of Emerald Gene Systems, Ltd. which are included in
Targeted Genetics Corporation's Annual Report (Form 10-K) for the 166 day period
ended December 31, 1999.
Ernst & Young
Chartered Accountants
Hamilton, Bermuda
March 21, 2000
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