SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter Ended: May 27, 1995 Commission File No: 0-10824 GENOME THERAPEUTICS CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2297484 (State or other jurisdiction (I.R.S. identification no.) of incorporation or organization) 100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154 (Address of principal executive offices) (Zip code) Registrant's telephone number: (617) 893-5007 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK ______12,844,637________ $.10 PAR VALUE Outstanding July 7, 1995 SERIES B RESTRICTED STOCK __________57,512________ $.10 PAR VALUE Outstanding July 7, 1995 - -------------------------------------------------------------------- Genome Therapeutics Corp. and Subsidiaries Index to Financial Information (Unaudited) and Other Information Page Part I Financial Information (Unaudited) : Consolidated Condensed Balance Sheets as of 3 May 27, 1995 and August 31, 1994 Consolidated Condensed Statements of Operations 4 for the 13 and 39 week periods ended May 27, 1995 and May 28, 1994 Consolidated Statements of Cash Flows for the 5 39-week periods ended May 27, 1995 and May 28, 1994 Notes to Consolidated Condensed Financial 6 Statements for the 39-week periods ended May 27, 1995 and May 28, 1994 Management's Discussion and Analysis of Financial Conditions and Results of Operations 7-9 Part II Other Information: Other Information 10 Signature 11 Page 2 - --------------------------------------------------------------------- GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) May 27, August 31, 1995 1994 Assets: Current Assets: Cash and Cash Equivalents $1,599,131 $1,208,836 Short-term Investments 2,829,154 3,008,344 Receivables: Trade and Other (net of allowances for doubtful accounts) 274,073 391,151 Unbilled Costs 276,435 229,045 Prepaid Expenses 107,656 17,836 Other Current Assets 3,800 4,550 Total Current Assets 5,090,249 4,859,762 Equipment and Leasehold Improvements, at cost: Laboratory and Scientific Equipment 1,230,710 752,482 Leasehold Improvements 1,570,930 1,446,236 Office Equipment and Furniture 791,499 532,656 Unfinished Plant and Equipment 251,763 173,186 3,844,902 2,904,560 Less Accumulated Depreciation 2,344,600 2,120,146 1,500,302 784,414 Restricted Cash 605,540 0 Other Assets 281,507 266,506 Total Assets $7,477,598 $5,910,682 Liabilities and Shareholders' Equity: Current Liabilities: Accounts Payable $381,775 $450,854 Accrued Expenses 809,359 838,595 Deferred Contract Revenue 9,537 37,991 Current Maturities of Capital 331,653 193,388 Lease Obligations Total Current Liabilities 1,532,324 1,520,828 Deferred Compensation 172,974 153,507 Capital Lease Obligations, net of Current Maturities 779,613 165,299 Shareholders' Equity 4,992,687 4,071,048 Total Liabilities and Shareholders' Equity $7,477,598 $5,910,682 See notes to consolidated condensed financial statements. Page 3 - ---------------------------------------------------------------------- GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Thirteen Weeks Ended Thirty-nine Weeks Ended May 27, May 28, May 27, May 28, 1995 1994 1995 1994 Revenues: Operating Revenues $1,935,942 $1,539,064 $5,362,510 $4,676,579 Interest Income 71,863 38,458 157,619 98,732 Royalties 11,853 34,750 82,973 113,584 Total Revenues 2,019,658 1,612,272 5,603,102 4,888,895 Costs and Expenses: Cost of Revenues 1,696,476 1,266,336 4,685,240 3,861,200 Research and Development 231,506 84,630 769,404 177,159 General and Administrative 559,648 546,035 1,522,657 1,638,293 Total Costs and Expenses 2,487,630 1,897,001 6,977,301 5,676,652 Net Loss ($467,972) ($284,729) ($1,374,199) ($787,757) Net Loss per Common Share ($0.04) ($0.03) ($0.11) ($0.07) Weighted Average Number of Common Shares Outstanding 12,470,154 11,170,694 12,009,349 10,894,207 See notes to consolidated condensed financial statements. Page 4 - --------------------------------------------------------------------------- GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Thirty-nine Weeks Ended May 27, May 28, 1995 1994 Cash Flows from Operating Activities: Net Loss ($1,374,199) ($787,757) Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities: Depreciation and Amortization 239,496 151,060 Deferred Compensation 19,467 19,759 Provision for Accounts Receivable 0 62,680 Changes in Assets and Liabilities: (Increase) Decrease in Current Assets: Receivables 69,688 165,208 Prepaid Expenses (89,820) (5,648) Other Current Assets 750 (1,983) Increase (Decrease) in Current Liabilities: Accounts Payable 97,061 (64,901) Accrued Expenses (29,236) (173,522) Deferred Contract Revenue (28,454) (85,280) Total Adjustments 278,952 67,373 Net Cash Used for Operating Activities (1,095,247) (720,384) Cash Flows from Investing Activities: Purchases of Securities Held-to-Maturity (4,820,810) (3,006,341) Proceeds from Securities Held-to-Maturity 5,000,000 3,000,000 Increase in Restricted Cash (605,540) 0 Purchases of Equipment and Leasehold Improvements (113,309) (17,329) Increase in Other Assets (26,102) (99,399) Purchase of Long-term Investment 0 (50,000) Net Cash Used for Investing Activities (565,761) (173,069) Cash Flows from Financing Activites: Proceeds from Issuance of Common Stock and Warrants 2,030,477 1,453,388 Proceeds from Exercise of Stock Options 265,361 135,182 Principal Payments under Capital Lease Obligations (244,535) (134,597) Net Cash Provided by Financing Activities 2,051,303 1,453,973 Net Increase in Cash and Cash Equivalents 390,295 560,520 Cash and Cash Equivalents at Beginning of Period 1,208,836 1,892,932 Cash and Cash Equivalents at End of Period $1,599,131 $2,453,452 Supplemental Disclosure of Cash Flow Information: Interest Paid during Period $39,373 $15,566 Supplemental Schedule of Non-cash Investing Activities: Property and Equipment Acquired under Capital Leases $830,974 $40,449 See notes to consolidated condensed financial statements. Page 5 - ---------------------------------------------------------------------------- Notes to Consolidated Condensed Financial Statements (Unaudited) - ----------------------------------------------------------- 1.The unaudited consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of interim results. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results of operations for the thirteen (13) and thirty-nine (39) week periods ended May 27, 1995 are not necessarily indicative of the results to be expected for the full fiscal year. 2.For all periods presented, net loss per common share is based upon the weighted average number of shares outstanding during the period, since inclusion of common equivalent shares would be anti-dilutive. 3.Cash equivalents are short term highly liquid investments with original maturities of less than three (3) months. The Company's cash equivalents primarily consisted of money market funds at August 31, 1994 and May 27,1995. The Company accounts for its short-term investments under Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Accordingly, short-term investments, which consist of commercial paper and medium- term notes, are classified as held to maturity and recorded at amortized cost. Page 6 - --------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity The Company's treasury, including restricted cash, for the third quarter increased by $1,843,738 from $3,190,087 at the end of the second quarter to $5,033,825 at the end of the third quarter. The Company raised approximately $2,295,000 through the private placement of 850,000 shares of common stock and the issuance of 154,552 shares of common stock resulting from the exercise of stock options. The Company believes that these funds are adequate to meet its short-term operational and capital needs. However, the Company needs to continue to supplement its capital in order to pursue its therapeutic strategy. During the current quarter, the Company pledged both cash and marketable securities totaling $606,000 as collateral under capital lease financing arrangements. These funds were reclassified in the financial statements as restricted cash. Results of Operations For the thirteen week period ended May 27, 1995, total revenues increased approximately $408,000 or 25% when compared to the same period last year from $1,612,000 in fiscal 1994 to $2,020,000 in fiscal 1995 and increased $51,000 or 3% from $1,969,000 when compared to the prior quarter. For the thirty-nine (39) week period ended May 27,1995, total revenues increased $714,000 or 15% when compared to the same period last year from $4,889,000 in fiscal 1994 to $5,603,000 in fiscal 1995. For the thirteen (13) week period ended May 27, 1995, operating revenues increased approximately $397,000 or 26% when compared to the same period last year reflecting primarily an increase in newly funded government research programs. Operating revenues remained relatively constant when compared to the prior quarter. Operating revenue for the thirty-nine (39) week period ended May 27,1995 increased $686,000 or 15% when compared to the same period last year also reflecting an increase in newly funded government research programs. Page 7 - ------------------------------------------------------------------------ For the thirteen (13) week period ended May 27,1995, royalty income decreased by approximately $23,000 when compared to both prior year and prior quarter due to a downward adjustment to reflect actual sales performance by Pfizer, Dow Chemical's licensee of recombinant chymosin. Royalty income from Dow is accrued monthly based on prior year sales and is adjusted once a year to reflect actual sales performance by Pfizer. For the thirty-nine (39) week period ended May 27,1995, royalty income decreased by approximately $31,000 when compared to prior year also reflecting the downward adjustment as noted above. For the thirteen (13) and thirty-nine (39) week periods ended May 27,1995, interest income increased approximately $33,000 and $59,000, respectively, when compared to the same periods last year. These increases reflect a rise in the interest rates as well as an increase in the Company's treasury. Interest income for the thirteen (13) period ended May 27,1995 increased $27,000 when compared to the prior quarter also reflecting an increase in the Company's treasury. Costs and Expenses For the thirteen (13) and thirty-nine (39) week periods ended May 27,1995, cost of revenues, as a percentage of operating revenues, increased approximately 5% when compared to the same periods last year reflecting increased occupancy cost and related depreciation and amortization expenses associated with the expansion of the operations into laboratory space at our Beaver Street facility. Last year, this space was sublet to Dianon Systems, Inc., the purchaser of our diagnostics testing business. As of July 1994, Dianon had relocated its employees out of the sublet space to accommodate growth in the Company's operations. Cost of revenues, as a percentage of operating revenues, remained relatively constant when compared to the prior quarter. For the thirteen (13) and thirty-nine (39) week periods ended May 27,1995, cost of revenues, in absolute dollars, increased approximately 34% and 21%, respectively, when compared with the same periods last year. These increases reflect primarily the substantial increase in operating revenues as well as increased occupancy cost as noted above. Cost of revenues, in absolute dollars, remained relatively constant when compared to the prior quarter. Page 8 - -------------------------------------------------------------------------- For the thirteen (13) and thirty-nine (39) week periods ended May 27,1995, company-funded research and development expenses increased substantially when compared to the same periods last year reflecting primarily the period expenses associated with the Company's project in Helicobacter pylori, the causative agent of stomach ulcers and believed to be responsible for some gastrointestinal cancers. The increase also reflects increased effort on other company- funded research and development projects. For the thirteen (13) week period ended May 27, 1995, company- funded research and development expenses decreased 18% when compared to the prior quarter. For the thirteen (13) week period ended May 27, 1995, general and administrative expenses increased by 3% and 16%, respectively, when compared to both the same period last year and prior quarter reflecting increased business development expenses. For the thirty-nine (39) week period ended May 27,1995, general and administrative expenses decreased approximately 7% when compared to the prior year reflecting primarily a personnel reduction in administrative support including the resignation of Dr. Orrie Friedman as a full-time employee and Chairman of the Board of the Company. As of June 30, 1994, Dr. Friedman terminated his employment with the Company. Page 9 - --------------------------------------------------------------------------- Part II Item 1. Legal Proceedings None Item 2. Changes In Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits: None. b) Reports on Form 8-K None. Page 10 - --------------------------------------------------------------------------- Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized who also serves in the capacity of principal financial officer. Genome Therapeutics Corporation ______________________ Fenel M. Eloi (Principal Financial Officer) Date: July 7, 1995 PAGE 11