-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D+22jguED9XysT6Z0jkNvtpSSG1UF6dWR2iMvg2PSKsGNUsNpDeQmvDeDigclY4g ZIGpr7cKjxi5hKjeF8daBQ== 0001032210-00-001056.txt : 20000516 0001032210-00-001056.hdr.sgml : 20000516 ACCESSION NUMBER: 0001032210-00-001056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARGETED GENETICS CORP /WA/ CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23930 FILM NUMBER: 632895 BUSINESS ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066237612 MAIL ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to Commission File Number:0-23930 ------- TARGETED GENETICS CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Washington 91-1549568 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1100 Olive Way, Suite 100, Seattle, Washington 98101 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) (206) 623-7612 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 36,403,885 ---------------------------- ---------- (Class) (Outstanding at May 1, 2000) TARGETED GENETICS CORPORATION Quarterly Report on Form 10-Q For the quarter ended March 31, 2000 TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Balance Sheets - March 31, 2000 and 3 December 31, 1999 b) Condensed Statements of Operations for the three 4 months ended March 31, 2000 and 1999 c) Condensed Statements of Cash Flows for the three months 5 ended March 31, 2000 and 1999 d) Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II OTHER INFORMATION Item 1. Legal Proceedings * Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 17
* No information is provided due to inapplicability of the item. 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements TARGETED GENETICS CORPORATION CONDENSED BALANCE SHEETS
March 31, December 31, 2000 1999 ------------- ------------- ASSETS (Unaudited) - ------ Current assets: Cash and cash equivalents $ 29,335,839 $ 4,100,798 Securities available for sale 3,045,806 3,052,471 Accounts receivable 1,975,054 1,837,212 Prepaid expenses and other 231,389 269,864 ------------- ------------- Total current assets 34,588,088 9,260,345 Property, plant and equipment, net 3,920,842 4,021,466 Other assets 379,829 410,667 ------------- ------------- $ 38,888,759 $ 13,692,478 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 1,851,272 $ 2,278,338 Accrued payroll and other liabilities 815,761 1,181,555 Deferred revenue 385,000 0 Current portion of long-term obligations 1,100,492 1,160,174 ------------- ------------- Total current liabilities 4,152,525 4,620,067 Long-term obligations 2,146,833 2,106,897 Shareholders' equity: Preferred stock, 6,000,000 shares authorized Series A preferred stock, $.01 par value; 400,000 shares authorized, none outstanding - - Series B convertible exchangeable preferred stock, $.001 par value; 12,015 shares authorized, issued and outstanding at March 31, 2000 and at December 31, 1999 12,607,041 12,390,513 Common stock $.01 par value, 80,000,000 shares authorized, 36,393,548 and 34,019,175 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively 126,804,664 98,122,922 Accumulated deficit (106,811,070) (103,532,432) Accumulated other comprehensive loss (11,234) (15,489) ------------- ------------- Total shareholders' equity 32,589,401 6,965,514 ------------- ------------- $ 38,888,759 $ 13,692,478 ============= =============
The accompanying notes are an integral part of this statement. 3 TARGETED GENETICS CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, -------------------------- 2000 1999 ----------- ----------- Revenue: Collaborative agreements $ 1,762,697 $ 1,204,725 Collaborative agreements with affiliates 412,261 - ----------- ----------- Total revenue 2,174,958 1,204,725 Operating expenses: Research and development 3,717,756 3,177,960 General and administrative 1,106,951 786,465 ----------- ----------- Total operating expenses 4,824,707 3,964,425 ----------- ----------- Loss from operations (2,649,749) (2,759,700) Equity in loss of joint venture (563,994) - Investment income 215,754 126,774 Interest expense (64,121) (51,320) ----------- ----------- Net loss (3,062,110) (2,684,246) Accretion of dividend on preferred stock (216,528) - ----------- ----------- Net loss applicable to common stock $(3,278,638) $(2,684,246) =========== =========== Basic and diluted net loss per share $(0.09) $(0.09) =========== =========== Shares used in computation of basic and diluted net loss per share 34,823,371 30,655,477 =========== =========== The accompanying notes are an integral part of this statement. 4 TARGETED GENETICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, ------------------------- 2000 1999 ----------- ----------- Operating activities: - --------------------- Net loss $(3,278,638) $(2,684,246) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of joint venture 563,994 - Depreciation and amortization 352,875 395,569 Changes in operating assets and liabilities: Decrease in accounts payable and accrued liabilities (835,102) (607,071) Increase in deferred revenue 385,000 - Increase in accounts receivable (137,842) (163,434) Decrease in other assets 51,913 208,499 Other - (1,838) ----------- ----------- Net cash used in operating activities (2,897,800) (2,852,521) Investing activities: - --------------------- Investment in unconsolidated joint venture (563,994) - Purchases of property, plant and equipment (362,825) (471,103) Sales of securities available for sale 10,920 2,338,261 Purchases of securities available for sale - (504,378) ----------- ----------- Net cash provided by (used in) investing activities (915,899) 1,362,780 Financing activities: - --------------------- Net proceeds from sale of capital stock 28,681,742 21,333 Proceeds from leasehold improvement and equipment financing 456,182 466,197 Payments under capital leases and installment loans (305,712) (299,282) Accretion on preferred stock 216,528 - ----------- ----------- Net cash provided by financing activities 29,048,740 188,248 ----------- ----------- Net increase (decrease) in cash and cash equivalents 25,235,041 (1,301,493) Cash and cash equivalents, beginning of period 4,100,798 1,870,841 ----------- ----------- Cash and cash equivalents, end of period $29,335,839 $ 569,348 =========== =========== Supplemental disclosure of noncash investing and financing activities: Equipment financed through capital lease $ 45,599 $ 54,558 Interest paid on capital lease and installment loans 44,543 48,050
The accompanying notes are an integral part of this statement. 5 TARGETED GENETICS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation - ------------------------------ The condensed financial statements included in this quarterly report have been prepared by Targeted Genetics Corporation without audit, according to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (which consist solely of normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three months ended March 31, 2000, are not necessarily indicative of the results to be expected for the full year. Note 2. Revenue Recognition - ---------------------------- In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB101"), which provides the SEC's views on applying generally accepted accounting principles to revenue recognition issues. In response to SAB 101, we expect that we will change from our method for recording up-front license fee revenue upon receipt to a more preferable method of deferring this revenue over the term of the related collaborative agreements. We currently estimate that the impact of this change will be a cumulative charge, as of January 1, 2000, of approximately $2.9 million to reverse previously recognized up-front license fee related to the November 1998 Celltech cystic fibrosis collaboration and defer this revenue prospectively over the remaining term of the collaboration agreement. We expect the impact in the remaining quarters of 2000 will be a $417,000 increase in quarterly collaborative research revenue. We anticipate that we will implement this change in the second quarter of 2000. Note 3. Sale of Common Stock - ----------------------------- On March 1, 2000, we completed the sale of 2,164,285 shares of our common stock to investors for an aggregate offering price of $30.3 million. Note 4. Emerald Gene Systems - ----------------------------- In July 1999, Targeted Genetics Corporation and Elan Corporation, plc ("Elan") formed Emerald Gene Systems, Ltd. ("Emerald"), a joint venture to develop enhanced gene delivery 6 technology and products utilizing our gene therapy expertise and Elan's drug delivery expertise. Emerald's unaudited results for the quarter ended March 31, 2000 were as follows: EMERALD GENE SYSTEMS, LTD. CONDENSED BALANCE SHEETS March 31, December 31, 2000 1999 --------- ------------ ASSETS - ------ Current assets: Cash and equivelants $ 26,847 $ - Prepaid expenses 2,415 2,250 ------------ ------------ Total current assets 29,262 2,250 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 24,771 $ 6,350 Due to shareholders and related parties 246,939 738,346 ------------ ------------ Total current liabilities 271,710 744,696 ------------ ------------ Shareholders' equity: Share capital 12,000 12,000 Contributed surplus 16,192,110 14,988,000 Accumulated deficit (16,446,558) (15,742,446) ------------ ------------ Total shareholders' equity (242,448) (742,446) ------------ ------------ $ 29,262 $ 2,250 ============ ============ EMERALD GENE SYSTEMS, LTD. CONDENSED STATEMENT OF LOSS Three months ended March 31, 2000 ------------------ Revenue $ 19 Expenses Research and development 692,728 General and administrative 11,403 ------------------ 704,131 Net loss $(704,112) ================== 7 EMERALD GENE SYSTEMS, LTD. CONDENSED STATEMENTS OF CASH FLOWS Three months ended March 31, 2000 ------------------ Operating activities: - --------------------- Net loss $ (704,112) Adjustments to reconcile net loss to net cash used in operating activities: Changes in operating assets and liabilities: Decrease in accounts payable and accrued liabilities (472,986) Decrease in other assets (165) ----------- Net cash used in operating activities (1,177,263) Financing activities: - --------------------- Net proceeds from additional equity investment 1,204,110 ----------- Net cash provided by financing activities 1,204,110 ----------- Net increase in cash and cash equivalents 26,847 Cash and cash equivalents, beginning of period - ----------- Cash and cash equivalents, end of period $ 26,847 =========== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements - -------------------------- Some of our statements in this quarterly report on Form 10-Q are forward- looking statements that involve risks and uncertainties. In making these statements, we rely on a number of assumptions and make predictions about the future. Our actual results could differ materially from our expectations for a number of reasons, including the risks described in the section entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price" included below. You should not rely unduly on these forward-looking statements which apply only as of the date of this report. We undertake no duty to publicly announce or report revisions to these statements as new information becomes available that would cause us to change our expectations of the future. 8 Results of Operations - --------------------- Revenue for the quarter ended March 31, 2000 increased to $2.2 million from $1.2 million for the first quarter of 1999, as revenue increased from our Celltech Group plc ("Celltech") cystic fibrosis product development efforts. Our Emerald drug delivery joint venture with Elan also contributed to the revenue increase. Research and development expenses increased to $3.7 million for the quarter ended March 31, 2000 from $3.2 million for the comparable quarter in 1999. This increase is attributable to the hiring of additional research scientists to support our Emerald collaboration, as well as to increased costs associated with our cystic fibrosis, cancer and hemophilia product development efforts. We expect to see continued increases in quarterly costs associated with developing our gene therapy product candidates for cancer and hemophilia and providing research and development services to Emerald. Our costs will also vary depending on the level of clinical trial activity occurring in each quarter. General and administrative expenses for the quarter ended March 31, 2000 increased to $1.1 million from $786,000 for the first quarter of 1999. The increase reflects higher investment in business development, shareholder communications costs, legal costs associated with initiating the International AIDS Vaccine Initiative collaboration and costs of general support to the Celltech and Emerald collaborations. Investment income for the first quarter ended March 31, 2000 increased to $216,000 from $127,000 for the first quarter of 1999. The increase resulted from the investment of the net proceeds from our March 1, 2000 private placement of 2.2 million shares of our common stock. Interest expense for the quarter ending March 31, 2000 increased to $64,000 from $51,000 for 1999 primarily due to higher average principal balances in 2000. Financial Condition - ------------------- As of March 31, 2000, we had $32.4 million in cash, cash equivalents and securities available for sale and $30.4 million in working capital. By comparison, we had $7.2 million in cash, cash equivalents and securities and $4.6 million in working capital at December 31, 1999. The increases in cash and working capital are attributable to our March 1, 2000 private placement of 2.2 million shares of our common stock, which resulted in net proceeds of $28.2 million. These increases were partially offset by operating losses, investments in capital equipment and principal payments on capital lease obligations. We currently fund substantially all of our equipment purchases with capital leases. In conjunction with the Emerald joint venture, Elan agreed to loan us up to $12 million, in the form of convertible debt bearing 12% interest per annum, to fund our share of Emerald's research and development costs. As of March 31, 2000, we have not drawn any proceeds under 9 the loan agreement. We also have a contractual commitment for a $5.0 million equity investment by Elan in July 2000, at our option. Since we began operations, our primary sources of revenue have been from research funding under collaborative agreements, license fees and income earned from investments. These sources have covered less than 20% of our expenses since we started business. Gene therapy products are subject to long development timelines and the risks of failure inherent in the development of products based on innovative technologies. Although our technology appears promising, we do not know whether any commercially viable products will result from our research and development activities. Since we do not anticipate that we will have any product-related revenue for at least the next several years, we expect to generate substantial additional losses in the future. We currently estimate that, based on our current planned rate of spending, our existing cash, cash equivalents and securities available for sale, together with the funding expected to be provided by our existing collaborative partners, will be sufficient to meet our operating and capital requirements well into 2002. The assumed levels of revenue and expense underlying our estimates may not be accurate. We may not be successful in establishing any additional collaborative relationships or in maintaining our existing ones. Whether or not our assumptions prove to be accurate and regardless of our partnering success, we expect that we will need to raise substantial additional funds to continue developing and commercializing our products. Recent Accounting Changes - ------------------------- In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB101"), which provides the SEC's views on applying generally accepted accounting principles to revenue recognition issues. In response to SAB 101, we expect that we will change from our method for recording up-front license fee revenue to a more preferable method of deferring this revenue over the term of the related collaborative agreements. We currently estimate that the impact of this change will be a cumulative charge, as of January 1, 2000, of approximately $2.9 million to reverse previously recognized up-front license fee related to the November 1998 Celltech cystic fibrosis collaboration and defer this revenue prospectively over the remaining term of the collaboration agreement. We expect the impact in the remaining quarters of 2000 will be a $417,000 increase in quarterly collaborative research revenue. We anticipate that we will implement this change in the second quarter of 2000. Factors Affecting our Operating Results, our Business and our Stock Price - ------------------------------------------------------------------------- In addition to the other information contained in this annual report, you should read and consider the following risk factors. If any of these risks actually occur, our business, financial condition or operating results could be adversely affected and the trading price of our stock could decline. 10 If we are unable to secure financing on terms acceptable to us for future capital needs, we will be unable to fund continuing operations. Developing and commercializing our potential products will require substantial additional financial resources. Because we cannot expect internally generated cash flow to fund development and commercialization of our products, we will look to outside sources for funding. These sources could involve one or more of the following types of transactions: . technology partnerships; . technology sales; . technology licenses; . issuing debt; or . equity arrangements. If we cannot obtain additional financing when needed or on acceptable terms, we will be unable to fund continuing operations. In addition, if we raise additional funds by issuing equity securities, our shareholders will likely experience significant dilution of their ownership interest. We have a history of losses and may never become profitable, which could result in a decline in the value of our common stock and a loss of your investment. We have generated small amounts of revenue and incurred significant net losses since we began business. As of December 31, 1999, we have incurred cumulative losses totaling $103.5 million. We expect to continue to incur substantial additional losses in the future, due primarily to the following factors: . all of our products are in a testing phase and have not received regulatory approval; and . we will likely spend significant amounts on operating expenses. We may never generate profits, and if we do become profitable, we may be unable to sustain or increase profitability on a quarterly or annual basis. As a result, the trading price of our stock could decline and you could lose all or part of your investment. If our clinical trials are unsuccessful or we do not receive regulatory approval for our products, which are in the early stage of product development, we may be unable to generate sufficient revenues to maintain our business. We do not yet have products in the commercial markets. All of our potential products, including tgAAV-CF, our cystic fibrosis product candidate, and tgDCC-E1A, our cancer product candidate, are in research and development or in early-stage clinical trials. We cannot apply for regulatory approval of our potential products until we have performed additional research and development and testing. Our clinical trials may not demonstrate the safety and efficacy of our 11 potential products, and we may encounter unacceptable side effects or other problems in the clinical trials. Should this occur, we may have to delay or discontinue development of the potential product that causes the problem. After a successful clinical trial, we cannot market products in the United States until we receive regulatory approval. If we are unable to gain regulatory approval of our products after successful clinical trials and then commercialize and sell those products, we may be unable to introduce and sell a quantity of products sufficient to maintain our business or secure additional financing to fund our operations. Delays or unexpected costs in obtaining approval of our products or complying with governmental regulatory requirements could decrease our ability to generate revenue and make funding our operations more difficult. The regulatory process in the gene and cell therapy industry is costly, time consuming and subject to unpredictable delays. Accordingly, we cannot predict with any certainty how long it will take or how much it will cost to obtain regulatory approvals for clinical trials or for manufacturing or marketing our potential products. Delays in bringing a potential product to market or unexpected costs in obtaining regulatory approval could decrease our ability to generate revenue and make it more difficult to obtain additional financing necessary to fund our operations. In addition, all manufacturing operations are subject on an ongoing basis to the current Good Manufacturing Practices requirement of the Food and Drug Administration. While we currently anticipate that we will be able to manufacture product that meets this requirement, we may be unable to attain or maintain compliance with current or future Good Manufacturing Practices requirements. If we discover previously unknown problems after we receive regulatory approval of a potential product or fail to comply with applicable regulatory requirements, we may suffer restrictions on our ability to market the product, including mandatory withdrawal of the product from the market. This, or an unexpected increase in the cost of compliance, could decrease our ability to generate revenue. Failure to recruit patients could delay or prevent clinical trials of our potential products, which could cause a delay or inability to introduce products to market and a resulting decrease in our ability to generate revenue. Identifying and qualifying patients to participate in testing our potential products is critical to our near-term success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our products. Delays in recruiting or enrolling patients to test our products could result in increased costs, delays in advancing our product development, delays in proving the usefulness of our technology or termination of the clinical trials altogether. If we are unable to timely introduce potential products to market after successful clinical trials, our ability to generate revenue may decrease and we may be unable to secure additional financing. We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively. 12 Our success depends in part on our ability to protect our proprietary rights. We own or have licenses to patents on a number of genes, processes, practices and techniques critical to our present and potential products. If we fail to obtain and maintain patent protection for our technology, our competitors may market competing products that threaten our market position. The failure of our licensors to obtain and maintain patent protection for technology they license to us could similarly harm our business. Patent positions in the field of biotechnology are highly uncertain and involve complex legal, scientific and factual questions. Our patent applications may not result in issued patents. Even if we secure a patent, the patent may not afford adequate protection against our competitors. We also rely on unpatented proprietary technology. Because this technology does not benefit from the protection of patents, we may be unable to meaningfully protect this proprietary technology from unauthorized use or misappropriation by a third party. Intellectual property claims and litigation could subject us to significant liability for damages and invalidation of our proprietary rights. As the biotechnology industry expands, the risk increases that other companies may claim that our processes and potential products infringe on their patents. Defending these claims would be costly and would likely divert management's attention and resources away from our operations. If we infringe on another company's patented processes or technology, we may have to pay damages or obtain a license in order to continue manufacturing or marketing the affected product or using the affected process. We may be unable to obtain a license on acceptable terms. Our potential tgAAV-CF product uses our proprietary AAV delivery technology to deliver a normal copy of a CFTR gene to which we have rights under a nonexclusive license. The United States Patent and Trademark Office has declared an interference proceeding to determine the priority of invention of this gene. While we do not expect to directly participate in the CFTR gene interference proceedings, we have an interest in the outcome. If the eventual outcome does not favor our licensor, we would have to secure a license to the CFTR gene from the prevailing party to continue with development of tgAAV-CF. The costs of licensing the CFTR gene could be substantial and could include royalties greater than those we currently pay. If we cannot secure this license on acceptable terms and on a timely basis, we may be unable to develop or deliver our potential tgAAV-CF product, which could result in decreased ability to generate revenue and difficulty in obtaining additional financing to fund our operations. If we or our business partners are unable to successfully market and distribute our products, our business will fail. We have no experience in sales and marketing. To market any products that may result from our development programs, we will need to develop marketing and sales capabilities, either on our own or with others. We intend to enter into collaborations with corporate partners to utilize the mature marketing and distribution capabilities of our partners. While we believe that these collaborative partners will be motivated to market and distribute our potential products, our current and potential future partners may not commit sufficient resources to commercializing our 13 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. 14 Our limited manufacturing capability may limit our ability to successfully introduce our potential products. We currently do not have the capacity to manufacture large-scale clinical or commercial quantities of our potential products. To do so, we will need to expand our current facilities and staff or supplement them through the use of contract providers. We may be unable to obtain or develop the necessary manufacturing capabilities. If we cannot, we will be unable to introduce sufficient product to sustain our business. Our use of hazardous materials to develop our products exposes us to liability risks and the risk of regulatory limitation of our use of these materials, either of which could reduce our ability to generate revenue and make it more difficult to fund our operations. Our research and development activities involve the controlled use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials comply with applicable laws and regulations, we cannot eliminate the risk of accidental contamination or injury from hazardous materials. If a hazardous material accident occurred, we would be liable for any resulting damages. This liability could exceed our financial resources. Additionally, hazardous materials are subject to regulatory oversight. Accidents unrelated to our operations could cause federal, state or local regulatory agencies to restrict our access to hazardous materials needed in our research and development efforts. If our access to these materials is limited, we could experience delays in our research and development programs. Paying damages or experiencing delays caused by restricted access could reduce our ability to generate revenues and make it more difficult to fund our operations. The costs of product liability claims and product recalls could exceed the amount of our insurance, which could significantly harm our results of operations or our reputation and result in a decline in the value of our stock. Our business activities expose us to the risk of liability claims or product recalls and any adverse publicity that might result from a liability claim against us. We currently have only limited amounts of product liability insurance, and the amounts of claims against us may exceed our insurance coverage. Product liability insurance is expensive and may not continue to be available on acceptable terms. A product liability claim not covered by insurance or in excess of our insurance or a product recall could significantly harm our financial results or our reputation. Either of these could result in a decrease in our stock price, and you could lose all or part of your investment. Market fluctuations or volatility could cause the market price of our common stock to decline. In recent years the stock market in general and the market for biotechnology-related companies in particular have experienced extreme price and volume fluctuations, often unrelated to the operating performance of the affected companies. Our common stock has experienced, 15 and is likely to continue to experience, these fluctuations in price, regardless of our performance. These fluctuations could the market price of our common stock to decline. Item 3. Qualitative and Quantitative Disclosure About Market Risk This item discusses our exposure to market risk related to changes in interest rates and to our credit risk. We limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. Additionally, our equity price risk is limited to the risk inherent in our ownership of 80.1% of Emerald. See Part II, Item 7A "Qualitative and Quantitative Disclosure About Market Risk" in our Annual Report filed on Form 10-K for a more detailed description of these risks. Interest Rate Sensitivity - ------------------------- Short-Term Investments As of March 31, 2000, our short-term investments totalled $3.0 million (about 9%) of our $32.4 million cash, cash equivalents and short-term investment balance. These short-term investments consist of highly liquid investments with current maturities of between 2 and 5 months. Because we expect to hold these investments until maturity, we do not expect the realized value of these investments to be affected to any significant degree by the effect of a sudden change in market interest rates. None of our short-term investments are held for trading purposes. We do not own derivative financial instruments. Long-Term Obligations As of March 31, 2000, we had outstanding long-term obligations, primarily related to capital equipment leases, leasehold improvements and our loan agreement with Celltech of $3.7 million, at fixed interest rates of up to 14.55%. Because the interest rates on our long-term obligations are fixed, changes in interest rates would not have a material impact on our financial position. Increases in interest rates could, however, increase the interest expense associated with any future borrowings. We do not hedge against interest rate increases. Credit Risk - ----------- As of March 31, 2000, we had a concentration of accounts receivable with one of our collaborators. 16 PART II OTHER INFORMATION Item 2. Changes in Securities On March 1, 2000, the company issued 2,164,285 shares of common stock to investors at an aggregate offering price of $30.3 million. This transaction did not involve a public offering and therefore was exempt from registration under section 4(2) and Regulation D of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (a) Reference is made to the Index to Exhibits included herein. (b) We did not file any current reports on Form 8-K during the quarter ended March 31, 2000 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TARGETED GENETICS CORPORATION ----------------------------- (Registrant) Date: May 12, 2000 /s/ H. STEWART PARKER -------------------- ---------------------------------------- H. Stewart Parker, President and Chief Executive Officer (Principal Executive Officer) Date: May 12, 2000 /s/ JAMES A. JOHNSON -------------------- ---------------------------------------- James A. Johnson, Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 17 Targeted Genetics Corporation INDEX TO EXHIBITS
Exhibit No. Description Note 3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (D) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (D) 3.3 Articles of Amendment of the Company, filed with the State of Washington on July (K) 21, 1999 (Exhibit 1.8) 4.1 Rights Agreement, dated as of October 17, 1996, between the Company and (C) ChaseMellon Shareholder Services (Exhibit 2.1) 4.2 Registration Rights Agreement, dated as of July 21, 1999, by and among the Company (K) and Elan International Services, Ltd. (Exhibit 1.2) 4.3 First Amendment of Rights Agreement, dated July 21, 1999, between the Company and (K) ChaseMellon Shareholder Services (Exhibit 1.9) 4.4 Warrant Agreements to purchase 2,000,000 shares of common stock of the Company, (J) issued to Alkermes, Inc. on June 9, 1999. (Exhibit 10.38) 10.1 Form of Indemnification Agreement between the registrant and its officers and (L) directors 10.2 Form of Senior Management Employment Agreement between the registrant and its (D) executive officers (Exhibit 10.2) 10.3 Gene Transfer Technology License Agreement, dated as of February 18, 1992, (L) between Immunex Corporation and the Company* 10.4 PHS Patent License Agreement Non-Exclusive, dated as of July 13, 1993, between (L) National Institutes of Health Centers for Disease Control and the Company* 10.5 Patent License Agreement, dated as of December 25, 1993, between The University (L) of Florida Research Foundation, Inc. and the Company* 10.6 Research and Exclusive License Agreement, dated as of January 1, 1994, between (E) the Company and the Fred Hutchinson Cancer Research Center* (Exhibit 10.9) 10.7 PHS Patent License Agreement- Exclusive, dated as of March 10, 1994, between (E) National Institutes of Health Centers for Disease Control and the Company* (Exhibit 10.10) 10.8 License Agreement, dated as of March 28, 1994, between the Company and the (E) University of Michigan* (Exhibit 10.13) 10.9 Patent and Technology License Agreement, effective as of March 1, 1994, between (A) the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29) 10.10 First Amended and Restated License Agreement, effective as of October 12, 1995, (A) between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30) 10.11 Amendment to First Amended and Restated License Agreement, dated as of June 19, (B) 1996, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.1) 10.12 Second Amendment to First Amended and Restated License Agreement, dated as of (G) April 17, 1998, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.*
18 10.13 Revised License Agreement, effective as of October 1, 1996, between the (D) University of Pittsburgh of the Commonwealth System of Higher Education and the Company* (Exhibit 10.21) 10.14 License Agreement, dated as of March 15, 1997, between the Burnham Institute and (E) the Company* (Exhibit 10.23) 10.15 Exclusive Sublicensing Agreement, dated June 9, 1999, between the Company and (J) Alkermes, Inc. (Exhibit 10.36) 10.16 Common Stock Purchase Agreement, dated June 9, 1999, between the Company and (K) Alkermes, Inc. (Exhibit 10.37) 10.17 License Agreement, dated as of August 31, 1999, between the Company and the (L) University of North Carolina Research Center** 10.18 Master Agreement, dated as of November 23, 1998, between the Company and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.1) 10.19 License and Collaboration Agreement, dated as of November 23, 1998, between the (H) Company and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2) 10.20 Supply Agreement, dated as of November 23, 1998, between the Company and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.3) 10.21 Common Stock Purchase Agreement, dated as of November 23, 1998, between the (H) Company, Medeva Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.4) 10.22 Credit Agreement, dated as of November 23, 1998, between the Company, Medeva (H) Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.5) 10.23 Securities Purchase Agreement, dated as of July 21, 1999, between the Company, (K) Elan Corporation and Elan International Services, Ltd., a wholly owned subsidiary of Elan Corporation (Exhibit 1.1) 10.24 Funding Agreement, dated as of July 21, 1999, among the Company, Elan (K) International Services, Ltd., and Elan Corporation, plc (Exhibit 1.3) 10.25 Subscription, Joint Development and Operating Agreement, dated as of July 21, (K) 1999, among Elan Corporation, plc, Elan International Services, Ltd., the Company and Targeted Genetics Newco, Ltd.* (Exhibit 1.4) 10.26 Convertible Promissory Note, dated July 21, 1999, issued by the Company to Elan (K) International Services, Ltd. (Exhibit 1.5) 10.27 License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and (K) the Company* (Exhibit 1.6) 10.28 License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and (K) Elan Pharmaceutical Technologies, a division of Elan Corporation, plc* (Exhibit 1.7) 10.29 Olive Way Building Lease, dated as of November 20, 1993, as amended between the (L) Company and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) 10.30 Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC (D) and the Company (Exhibit 10.26) 10.31 1992 Restated Stock Option Plan (Exhibit 99.1) (F) 10.32 Stock Option Plan for Nonemployee Directors (Exhibit 10.34) (E) 10.33 1999 Stock Option Plan (Exhibit 99.1) (I) 27.1 Financial Data Schedule
___________ *Portions of these exhibits have been omitted based on a grant of confidential treatment from the Securities and Exchange Commission. The omitted portions of these exhibits have been filed separately with the SEC. 19 **Portions of these exhibits have been omitted based on a request of confidential treatment filed with the Securities and Exchange Commission. The omitted portions of these exhibits have been filed separately with the SEC. (A) Incorporated by reference to the designated exhibit included with the Company's Registration Statement on Form S-1 (No. 333-03592) filed on April 16, 1996, as amended. (B) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996, filed on August 12, 1996. (D) Incorporated by reference to the Company's Registration Statement on Form 8-A, filed October 22, 1996. (D) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed on March 12, 1997. (E) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998 (F) Incorporated by reference to the designated exhibit included with the Company's Registration Statement on Form S-8 (No. 333-58907), filed on July 10, 1998. (G) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, filed on March 10, 1999. (H) Incorporated by reference to the designated exhibit included with the Company's Current Report on Form 8-K, filed January 6, 1999. (I) Incorporated by reference to the designated exhibit included with the Company's Registration Statement on Form S-8 (No. 333-78523), filed on May 14, 1999. (J) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ending June 30, 1999, filed on August 5, 1999. (K) Incorporated by reference to the designated exhibit included with the Company's Current Report on Form 8-K, filed August 4, 1999. (L) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 23, 2000. 20 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 29,335,839 3,045,806 1,975,054 0 0 34,588,088 11,324,190 (7,403,348) 33,888,759 4,152,525 0 0 12,607,041 126,804,664 (106,822,304) 38,888,759 2,174,958 2,174,958 0 0 4,824,707 0 (64,121) (3,062,110) (3,062,110) (3,062,110) 0 0 0 (3,278,638) (.09) (.09)
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