-----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, DKRpL2J9oOYzOOkc6yrNBYgwHHBkLXF4NsuUDRc54LT47B0RmVVYXN5e2V8+WObg lsqlG6SGVAaFKfUetjLzTw== 0001032210-00-000577.txt : 20000324 0001032210-00-000577.hdr.sgml : 20000324 ACCESSION NUMBER: 0001032210-00-000577 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 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-K SEC ACT: SEC FILE NUMBER: 000-23930 FILM NUMBER: 577015 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-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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) Washington 91-1549568 (State of Incorporation) (IRS Employer Identification No.)
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:
Title of Class Number of shares -------------- ---------------- Common Stock, $.01 par value 36,344,346
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. 2 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 3 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:
Program/Product Research Preclinical Phase I Phase II Phase III --------------- -------- ----------- ------- -------- --------- AAV Vectors: Cystic Fibrosis (tgAAV-CF)..... ------------------------ Hemophilia A................... ------------ Rheumatoid Arthritis........... ------------ Cardiovascular Disease......... ------------ HIV Vaccine.................... ------------ Synthetic Vectors: Head and Neck Cancer (tgDCC- E1A).......................... -------------------------------- Ovarian Cancer (tgDCC-E1A)..... ------------------------ Metastatic Cancer ............. ------------
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. 4 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. 5 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. 6 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. 7 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. 8 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. 9 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. 10 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. 11 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 12 . 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. 13 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 14 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 15 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. 16 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.
Name Age Position ------------------------- --- ---------------------------------------- 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
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 17 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. 18 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.
High Low ------ ----- 1999 ---- 4th Quarter................................ $4.88 $1.25 3rd Quarter................................ 2.75 1.50 2nd Quarter................................ 1.81 1.44 1st Quarter................................ 3.06 1.31 1998 ---- 4th Quarter................................ $2.31 $1.31 3rd Quarter................................ 1.75 0.88 2nd Quarter................................ 4.25 1.31 1st Quarter................................ 3.13 0.97
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. 19 ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ------------------------------------------------------------------- 1999(1) 1998 1997 1996 1995 ------------ ----------- ------------ ------------ ------------ 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
- -------- (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 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 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 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 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 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 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 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 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 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 TARGETED GENETICS CORPORATION BALANCE SHEETS
December 31, --------------------------- 1999 1998 ------------- ------------ 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 ============= ============
See accompanying notes to the financial statements. 30 TARGETED GENETICS CORPORATION STATEMENTS OF OPERATIONS
Year Ended December 31, --------------------------------------- 1999 1998 1997 ------------ ----------- ------------ 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 ============ =========== ============
See accompanying notes to the financial statements. 31 TARGETED GENETICS CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Preferred Common Other Total Stock Preferred Stock Common Stock Accumulated Comprehensive Shareholders' Shares Stock Amount Shares Amount Deficit Income Equity --------- ------------ ---------- ------------ -------------- ------------- ------------- 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 ====== ============ ========== ============ ============== ========= ============
See accompanying notes to the financial statements. 32 TARGETED GENETICS CORPORATION STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------ 1999 1998 1997 ------------- ------------ ------------- 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 --
See accompanying notes to the financial statements 33 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 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 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:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ---------- ---------- ------------ 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 ============ ======== ========= ============
Unrealized gains and losses on securities available for sale consisted of the following:
Year Ended December 31, ------------------------------ 1999 1998 1997 --------- -------- --------- 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) ========= ======== =========
5. Property, Plant and Equipment Property, plant and equipment consisted of the following:
December 31, ----------------------- 1999 1998 ----------- ----------- 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 =========== ===========
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 TARGETED GENETICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 6. Long-Term Obligations Long-term obligations consisted of the following:
December 31, --------------------- 1999 1998 ---------- ---------- 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 ========== ==========
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 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 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:
Weighted Average Shares Exercise Price --------- ---------------- 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 =========
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:
Outstanding Exercisable ------------------------------ ------------------ Weighted Weighted Average Weighted Range of Average Remaining Average Exercise Exercise Contractual Exercise Prices Shares Price Life Shares Price -------- --------- -------- ----------- --------- -------- $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 ========= =========
39 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:
1999 1998 1997 ------------- ------------ ------------- 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)
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:
1999 1998 1997 ------- ------- ------- 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
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 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 TARGETED GENETICS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) Future minimum payments under noncancellable leases at December 31, 1999 were as follows:
Operating Capital ---------- ---------- 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 ==========
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:
December 31, ------------------------- 1999 1998 ------------ ------------ 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 ============ ============
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 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: 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) =============
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 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 EMERALD GENE SYSTEMS, LTD. (Incorporated in Bermuda) BALANCE SHEET December 31, 1999 (expressed in United States dollars)
1999 ------------ 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 ============
See accompanying notes. 45 EMERALD GENE SYSTEMS, LTD. (Incorporated in Bermuda) STATEMENT OF LOSS For the 166 Day Period Ended December 31, 1999 (expressed in United States dollars)
1999 ------------- 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) =============
See accompanying notes. 46 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)
Preferred Common Total Preferred Shares Common Shares Contributed Accumulated Shareholders' Shares Amount Shares Amount Surplus Deficit Deficit --------- --------- ------ ------- ------------ ------------- ------------- 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) ===== ======= ===== ======= ============ ============= ============
See accompanying notes. 47 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)
1999 ------------ 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....................... $ -- ============
See accompanying notes. 48 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:
1999 -------- Research and development costs To companies related through common ownership.................. $277,502 To shareholders................................................ 445,818
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: Due to shareholders............................................. $460,844 Due to companies related through common ownership............... 277,502
These balances are unsecured, and interest free with no set terms of repayment. 49 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
1999 ------- 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 =======
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 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 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.
Page(s) in 10-K ---------- 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
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 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)
52 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)
53 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
- -------- * 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 (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 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.
Signature Title Date --------- ----- ---- /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.
EX-10.1 2 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 Page 1 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 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 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 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 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 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 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 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 EX-10.3 3 GENE TRANSFER TECHNOLOGY LICENSE AGREEMENT 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. 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 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 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 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 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 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 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 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 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 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 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 (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 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 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 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 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. 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. APPENDIX B: mammalian expression constructs EX-10.4 4 PHS PATENT LICENSE AGREEMENT-NON-EXCLUSIVE 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. 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". 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; 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. 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. 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 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. 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, 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. 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 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. 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. 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 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 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 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" 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. 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. 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 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. 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 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. EX-10.5 5 PATENT LICENSE AGREEMENT 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 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). 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. 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 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 ___________________ [ * ] = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a grant of confidential treatment. 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. 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. 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: (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. (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. 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. 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. 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. 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 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 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 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. 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 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. 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 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. EX-10.17 6 LICENSE AGREEMENT WITH UNIVERSITY OF N. CAROLINA 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. 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. (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 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 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 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 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 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 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 EX-10.29 7 OLIVE WAY BUILDING LEASE EXHIBIT 10.29 OLIVE WAY BUILDING LEASE METROPOLITAN FEDERAL SAVINGS AND LOAN ASSOCIATION LANDLORD TARGETED GENETICS CORPORATION TENANT TABLE OF CONTENTS
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
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
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 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 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: 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 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), 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 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; (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 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 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 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 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. 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 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 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. (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 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 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. 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- 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 (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 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 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. 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. 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. 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. 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 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. 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: 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: 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 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. EXHIBIT B PREMISES DESCRIPTION PREMISES AREA: 25,300 Rentable Square Feet LOCATION: First Floor, West Side 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. EXHIBIT D LANDLORD' S WORK Landlord agrees, at its sole cost and expense, to construct and/or make the following improvements to the Building: 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) 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. 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. 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: (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 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. 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. 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 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 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 EXHIBIT A (DRAWING OF FIRST FLOOR) EXHIBIT B (DRAWING OF FIRST FLOOR) EXHIBIT C (DRAWING OF GARAGE FLOORPLAN) 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. 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 EXHIBIT "A" (PARKING DIAGRAM) 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 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. 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 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 EX-21.1 8 SUBSIDIARIES 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 EX-23.1 9 CONSENT OF ERNST & YOUNG LLP 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 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 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 4,100,798 3,052,471 1,837,212 0 0 9,260,345 11,089,339 (7,067,873) 13,692,478 4,620,067 0 0 12,015,000 98,122,922 (103,547,921) 13,692,478 0 6,847,993 0 21,084,502 12,985,212 0 234,653 0 0 0 0 0 0 (27,030,648) (.84) (.84)
EX-27.2 11 EMERALD GENE SYSTEMS FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JUL-19-1999 DEC-31-1999 0 0 0 0 0 2,250 0 0 2,250 744,696 0 0 12,000 0 (754,446) 2,250 0 0 0 15,742,446 0 0 0 0 0 0 0 0 0 (15,742,446) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----