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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000 COMMISSION FILE NO. 0-21794
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GENZYME TRANSGENICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-3186494
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
175 CROSSING BOULEVARD, SUITE 410 01702
FRAMINGHAM, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(508) 620-9700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
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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 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 20, 2000: $478,815,576
Number of shares of the Registrant's Common Stock outstanding as of
March 20, 2000: 28,487,880
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 24, 2000 are incorporated by reference into
Part III of this Form 10-K.
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ITEM 1. BUSINESS
OVERVIEW
Genzyme Transgenics Corporation ("GTC" or the "Company") is a leader in the
application of transgenic technology to the development and production of
recombinant proteins for therapeutic and other biomedical uses. To date, GTC has
produced more than 60 such proteins, 45 through collaborations with various
commercial and academic organizations and 15 independently. More than half of
the transgenic proteins actively under development by the Company are monoclonal
antibodies/Ig fusion proteins. For its lead compound, Antithrombin III
("ATIII"), the Company has completed one of two identical Phase III clinical
studies for the treatment of heparin resistance in patients undergoing
cardiopulmonary bypass ("CPB") procedures. GTC also owns and operates a leading
preclinical contract research organization ("CRO"), Primedica Corporation
("Primedica"), which provides services such as preclinical efficacy and safety
testing, IN VITRO testing and formulation development to pharmaceutical,
biotechnology, medical device and other companies.
GTC produces recombinant proteins by inserting into the genetic material of
an animal embryo a specific DNA sequence that directs the production of a
desired protein in the milk of transgenic offspring. The Company believes that
transgenic production offers substantial economic and technological advantages
in comparison to traditional protein production systems, such as cell culture
and microbial systems. These advantages include reduced capital expenditures,
greater flexibility in timing capital investment and lower direct production
cost per unit. In the case of certain complex proteins, including Ig fusion
proteins, transgenic production may represent the only technologically and
economically feasible method of commercial production. For proteins currently
derived from pooled human plasma, transgenic production provides an alternative
source with reduced risk of transmission of human viruses and other known
adventitious agents. Of the 60 transgenic proteins produced to date, GTC has
expressed 40 proteins at levels of one gram per liter or higher in mice, 11 of
which have also been expressed in goats at levels greater than one gram per
liter. These expression levels are substantially higher than those typically
achieved for comparable proteins in traditional protein production systems.
The Company's primary focus is on using transgenic technology to produce
monoclonal antibodies. These therapeutics are likely to be required in
relatively large and repeated doses for chronic diseases such as rheumatoid
arthritis, other autoimmune diseases and cancer. The economic and technological
advantages of transgenic technology make it well suited to produce the large
amount of proteins anticipated for therapeutic use of monoclonal antibodies. By
mid-1999, 14 monoclonal antibodies had been approved for use in the United
States, nine for use as human therapeutics and five for diagnostic uses. The
estimated 1999 revenues for the six highest selling therapeutic antibodies
ReoPro-Registered Trademark-, Rituxan-Registered Trademark-,
Synagis-Registered Trademark-, Herceptin-Registered Trademark-,
Remicade-Registered Trademark- and Zenapax-Registered Trademark- are
$1.3 billion. More than 30 monoclonal antibody candidates are now in clinical
trials and over 200 are reported to be in preclinical development. The Company
believes that in many cases the yearly requirement for production of these
potential therapeutics will exceed 100 kilograms and may approach 300 to 1,000
kilograms. Transgenic production may provide the only commercially viable means
to meet the large projected volume requirements of these therapeutics.
The Company has several partnerships with pharmaceutical and other
biotechnology companies to develop monoclonal antibodies/Ig fusion proteins
transgenically. GTC's corporate partners include Bristol-Myers Squibb, Elan,
Centocor, Alexion and BASF Knoll. To date, the Company has formed more than a
dozen collaboration agreements which generally provide for transgenic production
of limited quantities of targeted proteins in exchange for development fees and
milestone payments and, in some cases, anticipate the payment of royalties on
product sales upon commercialization. Following demonstration of comparability
of the transgenic product to a version of the product produced in cell culture,
the Company intends to negotiate commercialization agreements that are designed
to allow the Company to participate in the success of the product through
equity, royalties and supply commitments. The Company has been granted
1
several patents covering the production of monoclonal and assembled antibodies
in the milk of transgenic mammals, which it believes establishes a strong
proprietary position in the field.
Proteins traditionally sourced from human plasma provide other opportunities
for high volume transgenic protein production. The Company is developing a
transgenic version of ATIII, a protein normally found in human serum, in a joint
venture with Genzyme Corporation ("Genzyme"). When bound to other blood proteins
that function to regulate clotting, ATIII acts as an anticoagulant. Worldwide
sales of plasma derived ATIII to treat hereditary and acquired ATIII deficiency
are approximately $230 million. The Company believes transgenic ATIII may
represent a more attractive product than plasma sourced ATIII in light of safety
considerations, the limited volume of ATIII available from plasma and the
impracticality of producing sufficient quantities of recombinant ATIII by cell
culture methods. The Company has developed a goat herd producing a transgenic
version of ATIII, which is now in clinical evaluation in two identical, double
blinded Phase III clinical trials. The first of these studies was completed in
late 1999, and the primary clinical endpoint was met. Patient enrollment in the
second study is expected to be completed in the first quarter of 2000. These
clinical trials have targeted treatment of heparin resistant heart disease
patients undergoing cardiopulmonary bypass surgeries, with a strategy of seeking
approvals for broader indications after receipt of initial marketing approval.
Another plasma protein under development by GTC is Human Serum Albumin
("HSA"), which is being developed with Fresenius AG. The therapeutic use of HSA
is indicated in situations of blood loss and decreased blood albumin levels
which can occur during shock, serious burns, pre- and post-operative conditions,
congestive heart failure and gastric, liver and intestinal malfunctions. HSA is
currently produced by human plasma fractionation, with current worldwide sales
of approximately $1 billion. During 1999, the Company achieved several
milestones under this collaboration, including demonstration of expression of
HSA in the milk of transgenic cattle at a concentration that is consistent with
making it a commercially viable product. The Company is also developing
transgenic production processes for other proteins, including a malaria
merozoite surface protein ("MSP-1") for use in a malaria vaccine.
GTC's other business, Primedica, is focused on enabling its clients to meet
regulatory testing and other product development needs quickly and effectively
by offering a fully integrated line of preclinical CRO services. Primedica's
laboratories provide high value, scientifically differentiated services to
clients, including preclinical efficacy testing, experimental surgery,
photobiology and reproductive toxicology testing as well as formulation
development. Primedica uses its technological capabilities to introduce new
services that improve the ability of its customers to develop their products
successfully. Primedica's comprehensive programs link its preclinical and
manufacturing support services to reduce the time and expense of bringing new
therapeutics or other products to market.
TRANSGENIC BUSINESS
OVERVIEW
A growing number of recombinant proteins are being developed by
pharmaceutical and biotechnology companies for therapeutic and diagnostic
applications. Many of these proteins have proven difficult or expensive to
produce in the quantities required using traditional protein production systems,
such as bacteria, yeast or mammalian cell cultures. Moreover, bacteria and yeast
systems cannot produce many complex proteins. While mammalian cell cultures can
produce most of these complex proteins, these cells are generally more difficult
and expensive to grow and often produce lower volumes of protein, or the
proteins may not be secreted by the cells into the culture medium, thereby
complicating recovery and purification. Proteins produced by the Company through
transgenic technology have been expressed at concentrations substantially higher
than those typically achieved using traditional production methods.
Transgenic technology uses IN VITRO microinjection or other techniques to
introduce a genetically engineered segment of exogenous DNA (an "expression
vector") into the genetic material of a fertilized egg or early stage animal
embryo. Two types of genetic instructions are incorporated into the expression
2
vector: the coding sequence and the promoter sequence. Coding sequences instruct
the cells of the animal to express a specified protein. Promoter sequences
direct the expression of proteins at appropriate times and by specific tissues
or cell types. GTC utilizes promoter sequences that direct the expression of
specific proteins in the mammary gland during lactation. After microinjection of
the exogenous DNA, the modified embryo is then transferred to a recipient
female. Transgenes are successfully integrated into the genetic makeup of only a
small percentage of the embryos that are microinjected; therefore multiple
microinjection candidates are required. If successful, the resulting animal,
when mature and lactating, will express the desired protein. Once established in
the first generation of transgenic animals, the transgene is transmitted like
other genetic traits to future generations through traditional breeding with
either non-transgenic or other transgenic animals. To date, the Company has
produced such proteins principally using goats, which offer an attractive
combination of large milk volumes, relatively short generational time periods
and ease of handling and milking.
GTC believes that for certain proteins required in extremely large amounts,
such as HSA, transgenic cows might be required. Due to the long gestation and
maturation periods of large dairy animals, microinjection is an inefficient
method to produce transgenic cows. Therefore, the Company believes that cloning
may accelerate transgenic biopharmaceutical development because cloning offers a
method of producing a large number of transgenic animals in one generation. GTC
has signed an exclusive, worldwide licensing agreement with Advanced Cell
Technologies, Inc. ("ACT") allowing GTC to utilize ACT's patented technology for
the development of biopharmaceuticals in the milk of all cloned transgenic
mammals. The Company believes ACT's proprietary technology, when coupled with
GTC's transgenic technology, will provide additional patentable approaches to
efficiently create cloned transgenic animals. To date, the Company has cloned
ten cows.
ADVANTAGES OF TRANSGENIC TECHNOLOGY
The Company believes that its current and future partners will elect to
employ transgenic technology for the production of recombinant proteins in cases
where transgenic technology offers economic and technological advantages over
other production systems. These advantages, any one of which may be critical to
the decision to proceed with a particular development project, include:
- LOWER CAPITAL INVESTMENT. Creating a herd and providing appropriate dairy
facilities can be accomplished with substantially less cost than building
a cell culture bioreactor facility.
- IMPROVED RISK MANAGEMENT OF CAPITAL INVESTMENT. Transgenic herd production
offers capacity flexibility and relatively short lead times for scale up.
As a result, in contrast to the need for early commitment to bioreactor
production capacity, the Company's partners can delay those commitments
(and the corresponding capital investment) to later stages of the
development project when they may have more definitive product and market
information.
- PREDICTABILITY OF PRODUCTION. In contrast to cell culture production
systems, transgenic production systems exhibit greater predictability of
yield at large volume production. This offers GTC's partners greater
assurance of the ability to produce product quantities sufficient for
advanced clinical trials and product launch.
- LOWER COST OF GOODS. Economic factors unique to transgenic production
lower the ultimate cost of goods in most cases. High protein expression
levels in transgenic animals and efficiency in purification result in the
cost of transgenically produced products, in most cases, being
substantially lower than that of a cell culture derived product. As
further improvements are made in the downstream purification process, GTC
anticipates that the cost of the transgenically produced product will
decline even further.
- TECHNOLOGICAL ENABLEMENT. Transgenic technology offers the ability to
produce certain biotherapeutics which cannot be made in a commercially
feasible manner in any other system. The
3
suitability of transgenic production for high-volume proteins requiring
more than 100 kilograms per year is widely acknowledged. In addition, GTC
has achieved the same consistent expression rates with complex molecules,
which may not be producible in cell cultures at all. This accomplishment,
in conjunction with the favorable economics of herd development, means
that for some complex proteins with low-volume demand, transgenics may be
as viable a production system as it is for other proteins that require
1,000 kilograms or more annually.
TRANSGENIC DEVELOPMENT PROCESS
GTC's development of a typical transgenic protein is designed to proceed in
a logical sequence of three major steps:
- FIRST STEP. Using the DNA provided by the partner, GTC develops founder
goats transgenic for a particular protein. The Company employs a standard
DNA microinjection process to produce a transgenic goat. The first animals
are born five months after microinjection.
- SECOND STEP. GTC and the partner collaborate on the development of a pilot
downstream process to purify the protein, after which GTC provides
preclinical and clinical samples. After GTC provides protein samples from
transgenic milk to the partner for initial purification and
characterization, GTC and the partner begin a collaborative effort to
establish a commercially robust purification process for the protein. This
enables substantial amounts of material to be delivered for preclinical
studies and initial human clinical studies. Next, GTC initiates an initial
scale up of the transgenic herd making 6 to 10 animals that are capable of
producing sufficient product for use in expanded clinical studies.
- THIRD STEP. GTC provides initial quantities of product while working with
the partner to develop cost and timing estimates for commercialization.
Based on these estimates, the partner will make capital commitments to
enable GTC to provide sufficient facility capacities specifically for the
partner's product including one or several barns for housing and scaling
up the herd, facilities for collection of milk and initial processing.
Simultaneously, GTC will begin scaling up the production herd to breed a
sufficient number of animals to meet forecasted production requirements.
GTC anticipates that its future commercial supply agreements will provide
for the transfer of intermediate bulk to the customer or designated
processor for further processing to finished product.
DEVELOPMENT PROGRAMS
GTC's strategy is to commercially produce proteins using transgenic
technology primarily by entering into collaboration agreements with
biotechnology and pharmaceutical companies. To date, the Company has formed more
than a dozen collaboration agreements which generally provide for transgenic
production of limited quantities of targeted proteins in exchange for
development fees and milestone payments and, in some cases, anticipate the
payment of royalties on product sales upon commercialization. Following
demonstration of comparability of the transgenic product, the Company intends to
negotiate commercialization agreements that are designed to allow the Company to
participate in the success of the product through milestone payments, royalties
and supply commitments.
The products covered by these partnerships encompass a broad range of
indications and are currently in various stages of development. Many of GTC's
collaborators are marketing or engaging in clinical trials with product sourced
through traditional protein production systems and are considering transitioning
to a transgenically produced product. In most of these collaborations, GTC
benefits from the partner's preclinical development experience in working with a
particular protein, and in cases where a recombinant or plasma-derived product
is in clinical trials or on the market, the Company believes the regulatory
approval process for the transgenic product will be facilitated by the partner's
experience with the initial product.
4
MONOCLONAL ANTIBODIES
Monoclonal antibodies represent one of the biotechnology industry's greatest
successes. Medical researchers have now developed a better understanding of the
critical variables for specificity and binding of the antibody, targets likely
to affect disease progression and clinical conditions amenable to treatment with
systemic biologic intervention. As a result, the last several years have
witnessed the clinical success, regulatory approval and commercial launch of
several breakthrough monoclonal antibody therapies, including
ReoPro-Registered Trademark- for use in various acute cardiac conditions,
Rituxan-Registered Trademark- for B-cell non-Hodgkin's lymphoma,
Synagis-Registered Trademark- for treatment of viral respiratory disease in
premature babies, Herceptin-Registered Trademark- for breast cancer,
Remicade-Registered Trademark- for use in Crohn's disease and rheumatoid
arthritis and Zenapax-Registered Trademark- for acute transplant rejection.
These clinical successes, the availability of technologies for making fully
human molecules and drug discovery technologies that identify potential antibody
targets, will continue to drive the development of new antibody-based
therapeutics.
Therapeutic antibodies are typically administered in larger doses than other
protein therapeutics and in repeated doses to treat chronic illnesses. Their
continued success is driving the need for commercially feasible production
methods yielding significantly higher quantities than currently available using
traditional protein production methods. While the annual worldwide requirement
of a typical recombinant protein may approach 10 kilograms, the Company believes
that many antibodies will require supplies in excess of 100 kilograms annually.
Current cell culture methods (the only traditional method available for
producing monoclonal antibodies) generally cannot produce the requisite high
volumes needed for antibody therapeutics, are not economically feasible and
require significant capital investment. The Company believes that the high
expression levels which can be achieved using transgenic technology will enable
the pharmaceutical industry to meet these market demands.
GTC is actively participating in the field of monoclonal antibodies through
a number of collaborations. The Company is developing a transgenic version of
Remicade-Registered Trademark- in a collaboration with Centocor. Also, GTC is
developing transgenic versions of eight additional monoclonal antibodies/Ig
fusion molecules, the cell culture versions of which are currently in clinical
trials, including D2E7 and MAK195 for BASF, CTLA4Ig and an unnamed Ig fusion
molecule for Bristol-Myers Squibb, Antegren for Elan, BR96 for Seattle Genetics,
PRO542 for Progenics and a therapeutic recombinant protein for Alexion. The
indications for these products include arthritis, HIV/AIDS, cancer and
autoimmune diseases. The status of the cell culture and transgenic versions of
these products is shown in the chart below. In these partnerships, the Company
provides material for the partners' clinical trials, while the partners retain
the risk and expense of conducting the trials.
5
The following chart contains a summary of the Company's most active
monoclonal antibody/Ig fusion protein development programs:
DEVELOPMENT STAGE
PRODUCT OF CELL CULTURE DEVELOPMENT STAGE OF
NAME PRODUCT TYPE INDICATION PRODUCT TRANSGENIC PRODUCT
- - ------- ---------------------- --------------------- ------------------ ------------------------
Remicade-Registered Trademark-; Monoclonal antibody Crohn's Disease; Marketed Preclinical; Transgenic
Rheumatoid Arthritis goats in development
D2E7 Fully human monoclonal Rheumatoid Arthritis Phase II clinicals Preclinical; Transgenic
antibody goats in development
Antegren-Registered Trademark-; Humanized monoclonal Neurological Phase II clinicals Preclinical; Transgenic
antibody Disorders goats in development
CTLA4Ig Immunoglobulin fusion/ Rheumatoid Arthritis Phase II clinicals Preclinical; Transgenic
soluble receptor goats in development
Undisclosed Immunoglobulin fusion Organ Transplant Phase II clinicals Preclinical; Transgenic
protein Rejection; Autoimmune goats in development
Disorders
Undisclosed Monoclonal antibody Undisclosed Undisclosed Preclinical; Transgenic
goats in development
PRO542 CD4/Immunoglobulin HIV/AIDS Phase II clinicals Preclinical; Transgenic
fusion antibody mice in development
Undisclosed Monoclonal antibodies Undisclosed Research Research/partnership for
and therapeutic development of
proteins therapeutic drug targets
PRODUCT
NAME PARTNER
- - ------- ---------------
Remicade-Registered T Centocor
D2E7 BASF/Knoll
Antegren-Registered T Elan
Pharmaceuticals
CTLA4Ig Bristol-Myers
Squibb
Undisclosed Bristol-Myers
Squibb
Undisclosed Alexion
PRO542 Progenics
Undisclosed Millennium
Pharmaceuticals
PLASMA DERIVED PROTEINS
ANTITHROMBIN III. ATIII is a protein normally found in human serum, that
when bound to heparin, acts as an anticoagulant. Decreased levels of ATIII are
found in individuals who have either a hereditary or an acquired deficiency of
ATIII. The hereditary deficiency has an incidence rate of 1 in 2,000 to 1 in
20,000. Individuals with hereditary ATIII deficiency have an increased tendency
toward blood clots (thromboses) and are treated with ATIII replacement therapy
during periods when they are at high risk for clots, such as during surgery.
Acquired ATIII deficiency may occur if there is a decrease in the amount of
ATIII produced, an increase in the rate of ATIII consumption or an abnormal loss
of ATIII from the circulation. Examples of conditions in which acquired ATIII
deficiency may occur are acute liver failure, disseminated intravascular
coagulation, sepsis and septic shock, burns, multiple organ failure, bone marrow
or organ transplantation and hemodialysis.
GTC believes transgenic ATIII may represent a more attractive therapeutic
than the current plasma derived product in light of the risks of viral
transmission from pooled plasma products in general, the limited volume of ATIII
currently available from plasma and the impracticality of producing sufficient
quantities of ATIII in cell culture systems. The Company also believes that a
lower cost, higher volume alternative to plasma derived ATIII may further expand
the therapeutic use of ATIII.
The Company filed an Investigational New Drug application ("IND") with the
FDA and is evaluating use of transgenic ATIII as a potential treatment for ATIII
deficiency that occurs in certain patients with heart disease. Patients
undergoing cardiopulmonary bypass ("CPB") surgery require anticoagulation with
heparin to prevent clotting, which can occur when blood comes into contact with
the tubing of the heart-lung machine performing the heart's function during
surgery. Patients with heparin resistance generally do not respond adequately to
these heparin treatments. Treatments of these patients with fresh frozen plasma
is one option to restore heparin sensitivity and achieve adequate
anticoagulation to permit initiation of CPB. ATIII deficiency is a key factor in
heparin resistance because heparin requires ATIII for effective anticoagulation.
The Company has adopted a clinical strategy of initially targeting heparin
resistant patients undergoing CPB with the plan of seeking approvals for
transgenic ATIII in broader
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indications after initial marketing approval is obtained. A Phase II clinical
study was completed which confirmed the safety profile of transgenic ATIII at
all doses administered and supported its ability to enhance anticoagulation in
cardiopulmonary bypass surgery patients. The study also demonstrated that
transgenic ATIII at doses of 50 units per kilogram or higher maintained ATIII
activity at 100% or greater for the duration of CPB.
Two identical, double blinded, randomized placebo-controlled Phase III
clinical trials began in the second quarter of 1998. These studies, which
include 52 patients each, were designed to assess the activity of ATIII in
restoring heparin sensitivity among heparin-resistant patients undergoing
cardiac surgery requiring CPB. The first study, conducted at six medical centers
in Germany and the United Kingdom, has been completed, and the primary clinical
endpoint was met. Seventy-nine percent of the patients who received ATIII did
not require administration of fresh frozen plasma before undergoing CPB surgery
in comparison to only eight percent of the placebo group. In addition to
achieving statistical significance on the primary endpoint, the trial also
achieved statistical significance on two out of three secondary endpoints.
Secondary endpoints included maintenance of normal ATIII levels and changes in
two biochemical markers of coagulation: D-dimer and fibrin monomer. Moreover,
the drug was well tolerated by patients. Patient enrollment in the second study,
which is being conducted in the United States and Europe, is expected to be
completed in the first quarter of 2000.
GTC and Genzyme have established the ATIII LLC joint venture for the
marketing and distribution of transgenic ATIII in all territories other than
Asia (which is covered by a joint venture between GTC and Sumitomo Metal
Industries Ltd.). Under the terms of the joint venture agreement, Genzyme will
fund 70% of the development costs of transgenic ATIII up to a maximum of
$33 million. The Company will fund the remaining 30% of these costs. Development
costs in excess of these amounts will be funded equally by the partners. Each of
the Company and Genzyme will also make capital contributions to the ATIII LLC
sufficient to pay 50% each of all new facility costs to be incurred. In addition
to the funding, both partners will contribute manufacturing, marketing and other
resources to the ATIII LLC at cost. Genzyme and GTC each own 50% of the venture,
although Genzyme is obligated to make certain milestone payments to GTC if and
when transgenic ATIII has been approved by the FDA and certain sales levels have
been reached. Profits and losses are shared according to ownership percentages.
The agreement covers all territories other than Asia.
The ATIII LLC has initiated a collaboration with Genzyme Molecular Oncology,
a division of Genzyme, to jointly develop a form of transgenic ATIII for
potential application as an angiogenesis inhibitor in the field of oncology.
This research stage collaboration is based on a discovery by Dr. Judah Folkman
from Children's Hospital, Boston, Massachusetts that certain conformations of
ATIII, referred to as anti-angiogenic ATIII, inhibit angiogenesis IN VITRO and
inhibit tumor growth in mice. Potential anti-angiogenic applications of
transgenic ATIII, outside the field of oncology, may be developed by the ATIII
LLC.
ATIII LLC is developing transgenic ATIII under a royalty-bearing license
from Centeon, a wholly owned subsidiary of Aventis SA and the successor to
Behringwerke AG.
HUMAN SERUM ALBUMIN. HSA is the protein principally responsible for
maintaining oncotic pressure, plasma volume and the balance of fluids in blood.
It is critical to the transport of amino acids, fatty acids and hormones in the
blood stream. The therapeutic use of HSA is indicated in situations of blood
loss and decreased blood albumin levels which can occur during shock, serious
burns, pre- and post-operative conditions, congestive heart failure and gastric,
liver and intestinal malfunctions. HSA is currently produced by human plasma
fractionation, with current worldwide sales of approximately $1 billion.
GTC has expressed transgenic HSA in mice at levels equivalent to or greater
than 35 grams per liter and, in 1999, successfully produced transgenic cattle
expressing this protein in their milk at commercially feasible levels. An
individual cow is expected to produce 80 kilograms of albumin annually. GTC
believes that this level of production should provide the Company with the
ability to produce HSA at costs
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competitive with albumin sourced from human blood, and in the amounts required
to meet market demand. GTC has refined its purification process for transgenic
HSA and developed a detailed economic model for its commercial production. The
Company has entered into an agreement with Fresenius AG of Bad Homburg, Germany,
to further develop and commercialize transgenic HSA.
OTHER DEVELOPMENT PROJECTS
MALARIA VACCINE. GTC's transgenic expression system has the potential to
express the correct, immunogenic protein for use as a malaria vaccine both
economically and on a large scale. Malaria is a disease that has an annual
incidence of more than 300 million people worldwide and results in several
million deaths annually. GTC is working with the National Institutes of Health
(the "NIH") and the Federal Malaria Vaccine Coordinating Committee to express a
malaria protein, which is considered a promising vaccine candidate and to
examine the options for commercializing the vaccine. The Company has entered
into a Collaborative Research and Development Agreement with the NIH and during
1998 achieved high level expression of the candidate vaccine malaria antigen,
MSP-1, in the milk of transgenic mice. Primate immunogenicity studies are
planned for early 2000.
SECOND GENERATION BIOPHARMACEUTICALS. A potential application for
transgenic technology is to identify and develop unique transgenic constructs
which may represent line extensions for recombinant biotherapeutics. Approved
recombinant therapeutics, many of which have established significant markets,
may become vulnerable to competition from novel versions which may be more cost
effective and/or demonstrate improved efficacy, allow more convenient routes of
administration, or have extended clinical applications. In 1998, GTC signed an
initial collaboration agreement with Eli Lilly to evaluate a novel second
generation biotherapeutic for which GTC provided intellectual property and know
how. While good scientific progress has been achieved in the program, Lilly has
elected not to prioritize the project as a development candidate. The project
and the data derived from Lilly's evaluation have reverted to the Company. GTC
is in discussions with other parties to develop this candidate product.
PRIMEDICA CORPORATION CRO SERVICES
GTC acquired its CRO capabilities through the acquisitions of TSI
Corporation in October 1994 and BioDevelopment Laboratories, Inc. in June 1995.
In February 1998, GTC reorganized its CRO businesses under its wholly owned
subsidiary, Primedica, to provide a unified identity and a dedicated structure
for further growth of its CRO business. Primedica conducts its CRO services
through four laboratories: Primedica Worcester (Massachusetts), Primedica
Redfield (Arkansas), Primedica Rockville (Maryland), as well as Primedica Argus
(Pennsylvania). This business currently employs more than 550 people.
Primedica believes that it has a broader set of value-added services than
any of its competitors and is differentiated by its ability to offer
comprehensive development programs. Primedica has the ability to perform
virtually all of the safety, efficacy and quality control testing, as well as to
provide the regulatory affairs expertise necessary to bring a client's early
research-stage product through preclinical testing. Fields in which Primedica
provides contract services include:
- PRODUCT SAFETY TESTING. Primedica conducts safety studies using
toxicological, pathological and specialty endpoints, such as physiologic,
pharmacologic and mechanistic evaluations and is a recognized world leader
in conducting and evaluating reproductive and developmental toxicology
studies.
- METABOLISM AND PHARMACOKINETICS. Primedica's metabolism group evaluates
the distribution and impact of a drug and its metabolites using
sophisticated sampling techniques, metabolite profiling and
identification, tissue distribution studies and other techniques to
determine tissue half-life, clearance rates and potential sites of drug
toxicity after systemic exposure.
8
- COMPREHENSIVE MANUFACTURING SERVICES. Primedica specializes in
biopharmaceutical process development and manufacturing for
small-to-moderate batch sizes. These services include early cell line
development and optimization, production, down stream processing and fill
and finish services.
- DELIVERY AND DEVELOPMENT TECHNOLOGY SERVICES. These services include
targeted and controlled drug delivery, feasibility and preformulation
support, as well as formulation development for various routes of
administration.
Primedica believes the key to sustaining superior performance in this field
will be in providing services in close, collaborative relationship in which
customers are able to receive scientific services from Primedica at levels equal
to or greater than that which they could receive from an in-house department.
Toward this end, Primedica has also made significant investments in people,
technology and programs since GTC's acquisition of the CRO services.
RELATIONSHIP WITH GENZYME
EQUITY POSITION. Genzyme is the largest single stockholder of the Company,
holding 8,476,386 shares of common stock as of March 20, 2000, which represents
approximately 31% of the outstanding GTC common stock, Genzyme also holds four
common stock purchase warrants exercisable for 145,000, 288,000, 55,833 and
29,491 shares of GTC common stock at prices of $2.84, $4.88, $6.30 and $6.30 per
share, respectively, the market price of the common stock at the time the
respective Genzyme warrants were issued. All of the shares held by Genzyme
(including shares issuable on exercise of Genzyme warrants) are entitled to
certain registration rights.
TECHNOLOGY TRANSFER AGREEMENT. Under the Technology Transfer Agreement
dated May 1, 1993, Genzyme transferred substantially all of its transgenic
assets and liabilities to GTC, assigned its relevant contracts and licensed to
the Company technology owned or controlled by it and relating to the production
of recombinant proteins in the milk of transgenic animals (the "Field") and the
purification of proteins produced in that manner. The license is worldwide and
royalty free as to Genzyme, although GTC is obligated to Genzyme's licensors for
any royalties due them. As long as Genzyme owns less than 50% of GTC, Genzyme
may use the transferred technology, or any other technology it subsequently
acquires relating to the Field, for internal purposes only without any royalty
obligation to the Company.
R&D AGREEMENT. Pursuant to a Research and Development Agreement dated
May 1, 1993, Genzyme and GTC agreed to provide research and development services
to the other relating, in the case of GTC, to transgenic production of
recombinant proteins and, in the case of Genzyme, to the purification of such
proteins. Each company receives payments from the other equal to the performing
party's fully allocated cost of such services, which can be no less than 80% of
the annual budgets established by the parties under the agreement on a month to
month basis, plus, in most cases, a fee equal to 10% of such costs. The
agreement expired on December 31, 1998 and the parties are continuing under this
agreement on a month-to-month basis.
ATIII LLC. In January 1998, the Company entered into a collaboration
agreement for the development of transgenic ATIII with Genzyme forming the ATIII
LLC joint venture. Under the terms of the agreement, Genzyme will fund 70% of
the development costs of transgenic ATIII up to a maximum of $33 million. The
Company will fund the remaining 30% of these costs. Development costs in excess
of these amounts will be funded equally by the partners. The Company and Genzyme
will also make capital contributions to the ATIII LLC sufficient to pay 50% each
of all new facility costs to be incurred. In addition to the funding, both
partners will contribute manufacturing, marketing and other resources to the
ATIII LLC at cost. Genzyme and GTC each own 50% of the venture, although Genzyme
is obligated to make certain milestone payments to GTC if and when transgenic
ATIII has been approved by the FDA and certain sales levels have been reached.
Profits and losses are shared according to ownership percentages. The agreement
covers all territories other than Asia.
9
SERVICES AGREEMENT. Under a services agreement between GTC and Genzyme, GTC
pays Genzyme a fixed monthly fee for basic laboratory and administrative support
services. The monthly fee is adjusted annually, based on the services to be
provided and changes in Genzyme's cost of providing the services. The services
agreement is self-renewing annually and may be terminated upon 90 days notice by
either party.
CREDIT LINE GUARANTY, TERM LOAN GUARANTY AND LIEN. Genzyme guarantees a
credit line and term loan with a commercial bank up to $24.6 million, expiring
in December 2001. The Company has agreed to reimburse Genzyme for any liability
Genzyme may incur under such guaranty and has granted Genzyme a first lien on
all of the Company's assets to secure such obligation.
OTHER STRATEGIC COLLABORATIONS
LONZA LTD.
In May 1999, GTC entered into a letter of intent with Lonza Ltd. of Basel,
Switzerland to develop a commercial relationship whereby Lonza would provide to
GTC on a project by project basis, downstream purification capabilities
including process development and final product purification, thereby enabling
GTC to provide a complete package of services to its partners. Under the terms
of the letter of intent, once a GTC partner commits to production, Lonza will
provide the capital for purification facilities and equipment on commercial
terms typical for the biopharmaceutical manufacturing industry. GTC is currently
negotiating a definitive master agreement with Lonza which GTC anticipates will
incorporate the key business and financial terms contained in the letter of
intent including equity investments by Lonza in GTC upon the achievement of
certain milestones.
TUFTS UNIVERSITY SCHOOL OF VETERINARY MEDICINE
Pursuant to a cooperation and licensing agreement, Tufts University School
of Veterinary Medicine ("Tufts") has agreed to work exclusively with GTC until
September 2000 in developing commercial applications of transgenic protein
production in milk. Tufts has also granted GTC a perpetual, non-exclusive
license to use certain proprietary microinjection technology and animal
husbandry techniques. Sales of products derived from transgenic goats produced
by Tufts, or from their offspring, are subject to royalties payable to Tufts.
The Company maintains a herd of approximately 100 goats at Tufts' facility in
Massachusetts.
SMIG JV
GTC holds a 22% interest in a joint venture with Sumitomo Metal
Industries Ltd. (the "SMIG JV"). GTC has granted to the SMIG JV an exclusive
license in Asia to use GTC's transgenic technology to make, use and sell
transgenic products, including ATIII, until the later of 2008 or the expiration
of any applicable Japanese patent, subject to various reciprocal royalty
obligations.
PATENTS AND PROPRIETARY RIGHTS
GTC has filed 20 patent applications which cover relevant portions of its
transgenic technology, several of which are covered by cross-licensing
agreements. GTC holds exclusive and nonexclusive licenses from Genzyme to rights
under a number of patent applications on file in the United States and
corresponding foreign patent applications relating to certain aspects of its
technology. GTC has a broad patent issued by the European Patent Office which
covers a DNA construct and its use in the production of proteins in the milk of
non-human, transgenic mammals. Other GTC applications as to specific proteins,
classes of proteins, techniques to enhance expression and purification
technologies remain pending. During 1998, the U.S. Patent and Trademark Office
awarded GTC four patents, one covering the purification of proteins from the
milk of transgenic animals, two more relating to the production of
10
monoclonal and assembled antibodies at commercial levels in the milk of
transgenic mammals and one covering the production of ATIII in the milk of
transgenic goats.
GTC has exclusive and nonexclusive licenses to technologies owned by other
parties, including DNX, Inc. as to microinjection, Stanford University as to
gene transfer and Centeon L.L.C., as the successor to Behringwerke AG, as to
ATIII, as well as promoter cross-licenses in place with PPL Therapeutics PLC
("PPL") and Pharming B.V. ("Pharming"). Certain of the licenses require GTC to
pay royalties on sales of products which may be derived from or produced using
the licensed technology. The licenses generally extend for the life of any
applicable patent.
The Company also relies upon trade secrets, know how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company.
COMPETITION
TRANSGENICS
Many companies, including biotechnology and pharmaceutical companies, are
actively engaged in seeking efficient methods of producing proteins for
therapeutic or diagnostic applications. Two other companies known to GTC are
extensively engaged in the application of transgenic technology for the
production of proteins for therapeutic use in humans: Pharming and PPL.
Pharming, based in the Netherlands, is primarily engaged in the development of
recombinant proteins in the milk of transgenic cows, which are most suitable for
extremely high volume protein production. PPL, based in Scotland, utilizes
primarily sheep for transgenic protein production.
CRO SERVICES
The worldwide markets for CRO services, manufacturing support services and
related development services are highly fragmented, involving several hundred
companies, as well as universities and governmental bodies. Competition in these
markets is based primarily on technological capabilities and reputation for
quality of products and services offered and perceived financial stability. In
certain market segments, price is also a significant competitive factor.
GOVERNMENT REGULATION
TRANSGENICS
The manufacturing and marketing of GTC's potential products and certain
areas of research related to them are subject to regulation by governmental
authorities in the United States, including the FDA, the U.S. Department of
Agriculture (the "USDA") and the Environmental Protection Agency (the "EPA").
Comparable authorities are involved in other countries.
To GTC's knowledge, no protein produced in the milk of a transgenic animal
has been submitted for final regulatory approval. However, the FDA issued its
Points to Consider in August 1995. Points to Consider, which are not regulations
or guidelines, are nonbinding published documents that represent the current
thinking of the FDA on a particular topic. Earlier in 1995, comparable
guidelines were issued by European regulatory authorities. GTC believes that its
programs satisfactorily address the issues raised by these documents and
generally views them as a very positive milestone in the acceptance of the
transgenic form of production. Based on discussions with the FDA and others, GTC
expects that the basic United States regulatory framework for the transgenic
production of recombinant proteins in animals will be similar to that described
in the Points to Consider.
11
The FDA licenses biological products under the authority of the Public
Health Service ("PHS") Act. With respect to therapeutic biological products,
generally, the standard FDA approval process includes preclinical laboratory and
animal testing, submission of an IND to the FDA and completion of appropriate
human clinical trials to establish safety and effectiveness. Prior to passage of
the FDA Modernization Act of 1997 ("FDAMA"), applicants for a license to market
a biological product filed both an establishment license application (an "ELA")
and a product license application (a "PLA"). Since the passage of FDAMA, the FDA
has taken actions to make the licensing process for biological products more
consistent with the process for the approval of new drugs. Accordingly, after
October 20, 2000, all manufacturers seeking a license to market a biological
product in interstate commerce must file a single Biological License Application
(a "BLA"). PLAs and ELAs filed in the interim will be administratively handled
by the FDA as a BLA. If a manufacturer successfully demonstrates that the
biological product meets PHS standards, that is, that the product is safe, pure
and potent and that the facility in which it is manufactured meets standards
designed to ensure that the product continues to be safe, pure and potent, the
manufacturer will receive a biological license to market the product in
interstate commerce. The Company has already submitted an IND for ATIII to the
FDA and it is continuing Phase III clinical trials in the United States and
Europe. GTC expects to submit a BLA for ATIII; however, the approval process for
other proteins may be undertaken either by the Company, by a collaborator for
which the Company is producing proteins, or jointly, depending upon the nature
of the relationship involved.
CRO SERVICES
Primedica and its customers are subject to a variety of regulatory
requirements intended to ensure the quality and integrity of their products and
services. The industry standard for conducting non-clinical testing is embodied
in regulations called Good Laboratory Practices ("GLPs"). GLPs have been adopted
by the EPA and the FDA and a number of foreign regulatory bodies. To help ensure
compliance, the Company maintains a strict quality assurance program at each
site to audit test data and conduct regular inspections of testing procedures
and facilities. Primedica also complies with FDA-established current GMPs.
Primedica also maintains certain licenses and permits issued by federal,
state and local authorities relating to the operation of its current laboratory
and testing facilities, including those required for hazardous waste disposal,
the purchase, use and disposal of radioactive isotopes and the use of animals in
testing and research. These licenses and permits include licenses from the U.S.
Nuclear Regulatory Commission for the purchase, use and disposal of small
amounts of short-lived radioactive isotopes for research purposes. Primedica
also has registered with the Massachusetts Department of Environmental
Protection and the EPA as a Small Quantity Hazardous Waste Generator in
connection with its disposal of certain organic hazardous wastes used in
connection with its molecular biology and biomedical research. These wastes are
disposed of through a licensed hazardous waste transporter. The use and disposal
of chemicals is regulated under the Toxic Substances Control Act and other state
and federal legislation.
Each of Primedica's laboratories is licensed by the USDA and state and local
authorities to house and use laboratory animals for biomedical research
purposes. The ability to continue using animals in testing and research is
dependent on continued compliance with the requirements of such licenses.
Primedica's Argus, Worcester and Rockville laboratories are also registered with
the U.S. Public Health Service to conduct biomedical research on laboratory
animals funded by the NIH and other federal agencies. Primedica's Argus,
Worcester and Redfield laboratories are also licensed by federal and state drug
enforcement agencies to procure and use controlled substances in research
programs involving laboratory animals.
The Company's operations are also subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and waste, including, but not limited to, animal waste and waste
water.
12
RESEARCH AND DEVELOPMENT COSTS
During its fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, GTC spent $15,092,000, $16,641,000 and $17,840,000,
respectively, on research and development. These costs include labor, materials
and supplies and overhead, the cost of operating the transgenics production
facility, as well as certain subcontracted research projects.
EMPLOYEES
As of January 2, 2000, GTC employed 683 people, of which 121 are in
transgenics and 562 are in Primedica. Of GTC's total employees, 478 were engaged
in operations, 40 were engaged in research and development and 165 were engaged
in marketing and general administration. Of GTC's employees, approximately 38
have Ph.D. degrees, 1 has an M.D. degree and 13 have D.V.M. degrees. None of
GTC's employees are covered by collective bargaining agreements. GTC believes
its employee relations are satisfactory.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and their respective ages and
positions are as follows:
NAME AGE POSITION
- - ---- -------- ------------------------------------------
James A. Geraghty......................... 45 Chairman of the Board
Sandra Nusinoff Lehrman, M.D.............. 52 President and Chief Executive Officer
John B. Green............................. 46 Vice President, Chief Financial Officer
and Treasurer
Harry M. Meade............................ 53 Vice President, Transgenics Research
Michael W. Young.......................... 48 Vice President, Commercial Development
Peter H. Glick............................ 36 President, Primedica Corporation
Mr. Geraghty was the President and Chief Executive Officer of GTC from the
date of its incorporation in February 1993 until July 1998. Since that time,
Mr. Geraghty has served as President of Genzyme Europe. He has been a director
of GTC since February 1993 and has been Chairman of the Board since
January 1998. Mr. Geraghty joined Genzyme in September 1992, where he was a Vice
President for Corporate Development and the General Manager of the transgenics
business unit until the incorporation of the Company.
Dr. Lehrman has been the President and Chief Executive Officer of GTC since
July 1998. Prior to joining GTC, from 1983 to 1994 Dr. Lehrman held several
positions at Wellcome PLC, the last being International Director, Biotechnology
and Vice President, General Manager of Burroughs Wellcome Mfg., Inc., a
biopharmaceutical production subsidiary. She also served as Vice President, Drug
Development for Triangle Pharmaceuticals, Inc., an antiviral development company
until July 1996 and President of CytoTherapeutics, Inc., a biotechnology
company, before joining GTC.
Mr. Green has been the Vice President and Chief Financial Officer of GTC
since December 1994 and Treasurer since August 1997. He has also served as Vice
President and Treasurer of TSI, a wholly owned subsidiary of GTC, since
March 1993 and as its Chief Financial Officer since December 1994. Prior to
that, he was Vice President and Assistant Treasurer of TSI from December 1989.
Dr. Meade has been Vice President, Transgenics Research for GTC since
August 1994 and has served as Research Director of GTC since May 1993. Prior to
joining GTC, Dr. Meade was a Scientific Fellow at Genzyme, where he was
responsible for directing the transgenic molecular biology program. From 1981 to
March 1990, when he joined Genzyme, Dr. Meade was a Senior Scientist at
Biogen, Inc., a biotechnology company, where he worked on the technology
relating to the production of proteins in milk and was an inventor on the first
issued patent covering this process.
13
Mr. Young has served as Vice President, Commercial Development since
November 1995 when he joined GTC. Prior to joining GTC, Mr. Young was Vice
President of Business Development for PerSeptive Biosystems from 1993 and Vice
President of Marketing of Verax Corporation from 1986 to 1993.
Mr. Glick has been President of Primedica Corporation, a wholly-owned
subsidiary of GTC, since February 1998 and served as Vice President, Marketing
and Corporate Development of GTC from June 1995 to February 1998. Prior to that
he was Vice President, Corporate Development of GTC from October 1994 and of TSI
from June 1993. From January 1994 to January 1996, he also served as President
of Primedica's Rockville Laboratories subsidiary. From November 1991 to
May 1993, he was Director, Corporate Development of TSI. Prior to joining TSI,
he was a strategy consultant at Bain & Company.
ITEM 2. PROPERTIES
GTC's headquarters for the transgenics business is located in 12,468 square
feet of office space in Framingham, Massachusetts under a lease which expires in
March 2006. GTC's research facility for the transgenics business is located in
approximately 2,923 square feet of laboratory and office space leased from
Genzyme in Framingham, Massachusetts. This lease expired in May 1998, at which
time the lease automatically renewed, and continues to renew annually, on a
year-to-year basis until terminated by either party on 90 days' notice. (See
"Item 1--Business--Relationship with Genzyme.")
GTC owns a 383-acre facility in central Massachusetts. This facility
contains 106,793 square feet of production, laboratory and administrative space
dedicated to its transgenic segment. The facility also currently houses more
than 1,500 goats. GTC believes its and Genzyme's current facilities are adequate
for significant further development of commercial transgenic products. GTC also
currently utilizes animal housing, care and treatment facilities operated by
Tufts in Massachusetts.
Primedica also owns or leases sites for each of its testing laboratories.
The Company's Worcester laboratories occupy two facilities in Worcester,
Massachusetts, the largest of which is an approximately 110,000 square foot
preclinical testing facility, leased through March 2005. In addition, Primedica
owns an adjacent building that consists of 45,000 square feet, of which 35,400
square feet of space has been renovated for preclinical testing. The remaining
9,600 square feet is unrenovated shell space, which is available for future
expansion.
In addition, Primedica owns and occupies a 68,000 square-foot preclinical
testing facility in Redfield, Arkansas; leases a 55,000 square-foot facility in
Horsham, Pennsylvania consisting of a 38,000 square foot preclinical testing
facility and 16,000 square feet of unrenovated expansion space, under a lease
which expires in June 2002, and occupies a 27,000 square-foot laboratory and
office facility in Rockville, Maryland, under a lease expiring in
December 2000. Following consolidation of its Massachusetts facilities into a
single facility in Worcester, Primedica leases three unoccupied facilities in
Massachusetts, a 10,500 square-foot laboratory facility in Cambridge,
Massachusetts under a lease that expires in October 2002, 5,000 square feet of
office space located in Milford, Massachusetts under a lease expiring in
October 2001 and 6,477 square feet of office space located in Waltham,
Massachusetts under a lease expiring in December 2003. Primedica is actively
attempting to sublease these facilities.
ITEM 3. LEGAL PROCEEDINGS
GTC is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1999, no matter was submitted to a
vote of the security holders of the Company.
14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GTC's common stock commenced trading on July 9, 1993 on the Nasdaq National
Market System under the symbol GZTC. Quarterly high and low sales prices for the
stock as reported by the Nasdaq National Market System are shown below.
HIGH LOW
---------- -----------
1998:
1st Quarter............................................... 13 1/2 9
2nd Quarter............................................... 12 1/4 7 11/16
3rd Quarter............................................... 8 4
4th Quarter............................................... 7 1/4 2 1/16
1999:
1st Quarter............................................... 6 3/8 3 3/4
2nd Quarter............................................... 5 5/8 3 1/8
3rd Quarter............................................... 8 1/2 4 1/2
4th Quarter............................................... 13 1/8 5 5/8
On March 20, 2000, there were approximately 710 shareholders of GTC of
record.
The Company has never paid a cash dividend on its common stock and currently
expects that future earnings will be retained for use in its business.
In November 1999, the Company completed a $6.6 million private placement of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") to
Genzyme. The proceeds from this placement were used to redeem $6.6 million of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"). In connection with the issuance of Series B Preferred Stock, the
Company issued warrants to purchase 85,324 shares of the Company's common stock
at $6.30 per share to Genzyme. In February 2000, the Company issued a Notice of
Redemption to Genzyme for all outstanding shares of the Company's Series B
Preferred Stock. Prior to redemption, Genzyme converted the Series B Preferred
Stock into 1,048,021 shares of common stock on February 8, 2000. The Company
believes that the issuance of the Series B Preferred Stock, the related warrant
and the shares of common stock issued upon conversion of the Series B Preferred
Stock qualified as transactions by an issuer not involving a public offering
within the meaning of Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), based on the fact there was one holder.
In March 2000, the Company issued a warrant call notice for outstanding
warrants to purchase 450,000 shares of common stock that had been issued in
connection with the Series A Preferred Stock. Each warrant had an exercise price
of $15.1563 per share. As of March 31, 2000, all the warrants were exercised
with proceeds to the Company of $6.8 million. The Company believes that the
issuance of the common stock upon exercise of the warrants qualified as a
transaction by an issuer not involving a public offering within the meaning of
Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of January 2, 2000 and
January 3, 1999 and for each of the three fiscal years in the period ended
January 2, 2000 are derived from the Company's consolidated financial statements
included elsewhere in this Report, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected financial data
set forth below as of December 28, 1997, December 29, 1996 and December 31,
1995, and for the years ended December 29, 1996 and December 31, 1995 are
derived from audited consolidated financial statements not included in this
Report.
This data should be read in conjunction with the Company's consolidated
financial statements and related notes thereto under Item 8 of this Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report.
15
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31,
2000 1999 1997 1996 1995
----------- ----------- ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Services............................................. $ 54,959 $ 50,816 $ 43,417 $ 38,496 $ 26,399
Sponsored research and development................... 13,825 11,596 19,521 8,338 6,022
----------- ----------- ----------- ----------- -----------
68,784 62,412 62,938 46,834 32,421
Costs and expenses:
Services............................................. 46,602 43,668 36,989 33,356 24,250
Research and development............................. 15,092 16,641 17,840 8,684 6,394
Selling, general and administrative.................. 18,872 16,184 15,650 11,691 8,919
Facility consolidation costs......................... 1,245 -- -- -- --
Equity in loss of joint ventures..................... 3,797 4,285 811 356 713
----------- ----------- ----------- ----------- -----------
85,608 80,778 71,290 54,087 40,276
----------- ----------- ----------- ----------- -----------
Loss from continuing operations........................ (16,824) (18,366) (8,352) (7,253) (7,855)
Other income and (expenses):
Interest income...................................... 65 280 136 85 32
Interest expense..................................... (2,166) (1,379) (1,129) (1,138) (1,007)
Other income......................................... 484 100 50 587 780
----------- ----------- ----------- ----------- -----------
Loss from continuing operations before income taxes.... (18,441) (19,365) (9,295) (7,719) (8,050)
Provision (benefit) for income taxes................. 320 225 48 27 (2,346)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations........................ $ (18,761) $ (19,590) $ (9,343) $ (7,746) $ (5,704)
Discontinued operations
Income from discontinued clinical operations (less
applicable taxes of $239).......................... -- -- -- -- 412
Gain on disposal of clinical operations (less
applicable income taxes of $3,401)................. -- -- -- -- 1,159
----------- ----------- ----------- ----------- -----------
Net loss............................................... $ (18,761) $ (19,590) $ (9,343) $ (7,746) $ (4,133)
Dividends to preferred shareholders.................... (1,497) (1,156) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss available to common shareholders.............. $ (20,258) $ (20,746) $ (9,343) $ (7,746) $ (4,133)
=========== =========== =========== =========== ===========
Net loss available to common shareholders per weighted
average number of common shares (basic and diluted):
From continuing operations........................... $ (1.02) $ (1.15) $ (0.54) $ (0.52) $ (0.48)
=========== =========== =========== =========== ===========
Net loss............................................. $ (1.02) $ (1.15) $ (0.54) $ (0.52) $ (0.35)
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding (basic
and diluted)......................................... 19,876,904 17,978,677 17,253,292 14,801,725 11,788,542
AS OF
-----------------------------------------------------------------------------------
PRO FORMA(1)
JANUARY 2,
2000 JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31,
(UNAUDITED) 2000 1999 1997 1996 1995
------------ ---------- ---------- ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 67,202 $ 7,782 $11,740 $ 6,383 $ 8,894 $ 5,825
Working capital (deficit)................. 61,303 (13,867) (4,319) (8,423) (116) (7,011)
Total assets.............................. 143,732 84,312 83,337 70,980 66,704 58,042
Long-term liabilities..................... 14,676 14,676 10,397 10,779 6,742 7,179
Stockholders' equity...................... 101,335 26,165 36,204 27,378 35,204 27,288
- - ------------------------------
There were no cash dividends paid for any period presented.
(1) Pro Forma adjustment reflects the issuance of 4,025,000 shares of common
stock at $20.00 per share less offering expenses as well as the full pay
down of the Company's revolving bank line of credit in the amount of
$15,750,000.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED JANUARY 2, 2000 AS COMPARED TO YEAR ENDED JANUARY 3, 1999
Total revenues for 1999 were $68.8 million, compared with $62.4 million in
1998, an increase of $6.4 million or 10%. Service revenues increased to
$55 million in 1999 from $50.8 million in 1998, an increase of $4.2 million or
8%. The increase in service revenue is due to increased study activity. Research
and development revenues increased to $13.8 million in 1999 from $11.6 million
in 1998, an increase of $2.2 million or 19%. The increase in research and
development revenue is due to new transgenics programs in 1999 as well as
milestones earned during 1999 in association with the progress on previously
existing transgenics programs.
Cost of services in 1999 were $46.6 million compared to $43.7 million in
1998, an increase of 7%, due, primarily, to increased service volumes. Sponsored
research and development expenses increased to $11.4 million in 1999 from
$10.5 million in 1998, an increase of $900,000 or 9%. The increase was due to
increased activity in sponsored research programs. Internal research and
development expenses decreased to $3.7 million in 1999 from $6.2 million in
1998, a decrease of $2.5 million or 40%. The decrease is due primarily to a
shifting of resources to sponsored research and development as well as a
reallocation of resources from the cancer vaccine program.
Gross profit, defined as revenues less service costs and research and
development costs, in 1999 amounted to $7.1 million versus $2.1 million in 1998.
The increase is due to improved service gross profit, improved sponsored
research and development gross profit and a decrease in internal research costs.
Gross profit on services for 1999 was $8.4 million, a gross margin of 15%,
versus $7.1 million, a gross margin of 14% in 1998. The increase in services
gross margin is due to improved efficiencies. Gross profit on sponsored research
and development for 1999 was $2.4 million, a gross margin of 18%, versus
$1.1 million, a gross margin of 10% in 1998. The increase in sponsored research
and development gross margin is due to increased milestones earned in 1999 which
have a higher margin associated with them.
Selling, general and administrative ("S,G&A") expenses increased to
$18.9 million in 1999 from $16.2 million in 1998, an increase of $2.7 million or
17%. The increase is due to increased marketing efforts in Primedica and to the
addition of administrative personnel required to support the growth in
transgenic business. There were also increases of approximately $500,000 of
transaction costs for uncompleted merger and acquisition activities and $450,000
of additional patent and legal expenditures.
Interest income decreased to $65,000 in 1999, from $280,000 in 1998, due to
lower funds available for investment. Interest expense increased to
$2.2 million in 1999, from $1.4 million in 1998. Of the 1999 total,
approximately $900,000 represents interest incurred by the testing service
operations, $300,000 represents interest for the financing of the transgenic
production facility, $600,000 represents interest incurred under the Company's
bank line of credit and $400,000 represents amortization of deferred financing
costs.
The Company recognized $484,000 of non-operating income in 1999 compared to
$100,000 in 1998. The 1999 amount represents the receipt of an insurance
settlement. The 1998 amount represents an earnout payment in connection with the
sale in 1995 of the TSI Center for Diagnostic Products Inc. ("CDP").
The Company recognized $3.8 million of joint venture losses incurred on the
joint venture ("ATIII LLC") between the Company and Genzyme Corporation
("Genzyme") in 1999 as compared to $4.3 million of joint venture losses incurred
on ATIII LLC in 1998. The decrease is due to a reduction in the percentage share
of the losses in 1999.
During the third quarter of 1999, the Company recorded a charge in the
amount of $1.2 million representing costs associated with the consolidation of
Primedica's Massachusetts operations into a single facility. Costs consisted of
facility closing costs of $740,000 and severance and employee related costs of
17
$505,000. The facility closing costs include net write-offs of leasehold
improvements of $415,000 and rental and lease termination costs to be paid in
the amount of $325,000. The Company reversed severance of $132,000 and facility
closing costs of $62,000 due to changed circumstances in the fourth quarter.
Additionally, the Company recorded, directly to expense, $194,000 of costs paid
in the fourth quarter relating to moving expenses and recruitment of new
personnel. These rental and lease termination costs are expected to be paid
through December of 2003. Severance costs were related to the elimination of 20
positions which included 12 laboratory positions and 8 general and
administrative positions. As of January 2, 2000, $121,000 of the severance and
employee related costs have been paid with a remaining balance of $252,000 to be
paid out during 2000. The consolidation is expected to increase the Company's
higher margin service capacity while, at the same time, reducing operating
expenses beginning in 2000.
YEAR ENDED JANUARY 3, 1999 AS COMPARED TO YEAR ENDED DECEMBER 28, 1997
Total revenues for 1998 were $62.4 million, compared with $62.9 million in
1997, a decrease of $500,000, or 1%. Service revenues increased to
$50.8 million in 1998 from 43.4 million in 1997, an increase of $7.4 million, or
17%. Research and development revenues decreased to $11.6 million in 1998 from
$19.5 million in 1997, a decrease of $7.9 million, or 41%. The decrease reflects
the impact on revenue of the establishment, in January 1998, of the ATIII LLC
for the development of transgenic Antithrombin III ("AT-III") with Genzyme. Had
the AT-III program been structured on the same basis during 1998 as during 1997,
research and development revenues for 1998 would have increased by approximately
$713,000, or 4%.
Cost of services in 1998 were $43.7 million compared to $37 million in 1997,
an increase of 18%, due, primarily, to increased service volumes. Sponsored
research and development expenses decreased to $10.5 million in 1998 from
$12.6 million in 1997, a decrease of $2.1million, or 17%. The decrease was due
to the impact of the formation of ATIII LLC. In 1997, the full cost of the
AT-III development program, including subcontractor costs, was reflected by the
Company as sponsored research and development expense and, to the extent that
the program was funded, as sponsored research and development revenue. With the
formation of ATIII LLC in 1998, all funding and subcontractor costs were being
recorded directly by the ATIII LLC. Costs incurred by the Company for the AT-III
development program were being funded by ATIII LLC and, therefore, only these
costs were being recorded equally as sponsored research and development revenue
and sponsored research and development expense. Had the AT-III development
program been structured on the same basis during 1998 as during 1997, the
sponsored research and development expenses would have increased by
approximately $6.6 million over the 1997 rate. Internal research and development
expenses increased to $6.2 million in 1998 from $5.3 million in 1997, an
increase of $900,000 or 17%. The increase is due to increased work on the cancer
vaccine program and increased activity on internal research programs.
Gross profit, defined as revenues less service costs and research and
development costs, in 1998 amounted to $2.1 million versus $8.1 million in 1997.
The decrease is primarily due to $4.4 million of transgenic milestones from the
joint venture with Sumitomo Metals Industries, LTD (the "SMIG JV") recorded in
1997 in connection with the AT-III program, as well as a $1.5 million milestone
from Bristol-Myers Squibb in 1997. Additionally, an increase of $900,000 in
internal research and development was offset by an increase of $700,000 in
services gross profit. Gross profit on services for 1998 was $7.1 million, a
gross margin of 14%, versus $6.4 million, a gross margin of 15% in 1997. The
decrease in gross margin is due to increased revenue recognized on contracts not
signed until the first quarter of 1997 but for which costs had previously been
incurred and recognized, partially offset by improved utilization in 1998 due to
increased revenues.
S,G&A expenses increased to $16.2 million in 1998 from $15.7 million in
1997, an increase of $500,000 or 3%. The increase was due to the increased
marketing effort and additional costs associated with the name change for
Primedica as well as the addition of administrative personnel required to
support the growth in transgenic research and development programs.
18
Interest income increased to $280,000 in 1998, from $136,000 in 1997, due to
an increase in funds available for investment as a result of proceeds received
from the preferred stock offering in the first quarter of 1998 and the sale of
common stock in a registered direct offering in the second quarter of 1998.
Interest expense increased to $1.4 million in 1998, from $1.1 million in 1997.
Of the 1998 total, $1.1 million represents interest incurred by the testing
service operations, $101,000 represents interest for the financing of the
transgenic production facility and $134,000 represents interest incurred under
the revolving line of credit with Genzyme ("Genzyme Credit Line") (see Item 8
and Note 5 to the consolidated financial statements appearing in this report).
The Company recognized $100,000 of non-operating income in 1998 compared to
$50,000 in 1997. The 1998 amount represents an earnout payment in connection
with the sale in 1995 of CDP.
The Company recognized $4.3 million of joint venture losses incurred on
ATIII LLC during 1998. In 1997, the Company incurred $811,000 of losses on the
SMIG JV (see Item 8 Note 11 to the consolidated financial statements appearing
in this report).
NEW ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair values. Changes in fair values of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. The
Company has not yet completed its evaluation of the impact of the adoption of
this new standard; however, it is not expected to have a material impact on the
Company's financial position or results of operations in the near term.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB
100"). This SAB expresses the views of the Staff regarding the accounting for
the disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. SAB 100 has been applied in recording the
charges associated with the Company's facility consolidation costs.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles in the United States, to revenue
recognition in financial statements. The Company's revenue recognition policy is
in compliance with SAB 101.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, the Company completed a secondary public offering of
approximately 4 million shares of common stock, including the exercise of an
overallotment. Net proceeds to the Company, after expenses, were $75.1 million.
Subsequent to the completion of the secondary public offering, the Company paid
down its revolving credit lines in the amount of $15.8 million. Following this
pay down, $15.8 million was available under these credit lines (see Item 8 and
Note 12 to the consolidated financial statements appearing in this report). In
conjunction with the offering, the Company issued a Notice of Redemption to
Genzyme for all outstanding shares of the Company's Series B Convertible
Preferred Stock (the "Series B Preferred Stock"). Prior to effecting this
redemption, Genzyme converted the Series B Preferred Stock into 1,048,021 shares
of common stock. The Company paid a cash dividend of $157,000 in conjunction
with the conversion. As a result of the offering, the $6.3 million Genzyme
Credit Line was eliminated.
19
On a pro forma basis, adjusted for the impact of the offering and the full
pay-down of $15.8 million in revolving credit lines, the Company had a cash
balance of $67.2 million and working capital of $61.3 million. In addition, the
full $15.8 million of credit line was available, $793,000 under a term note was
available and $350,000 under a line for the expansion of various Massachusetts
facilities was available. The Company expects that the funds available from
these sources as well as the proceeds from the secondary public offering
completed in February 2000, will be sufficient to fund the Company through the
foreseeable future.
The Company had cash and cash equivalents of $7.8 million at January 2,
2000. During 1999, the Company had a $4 million net decrease in cash. Sources of
funds during the period include net proceeds of $5.4 million from the issuance
of common stock, $1.7 million of proceeds received from employee stock purchase
and stock option plans, $5.5 million of proceeds from issuance of long-term debt
and $4.7 million in borrowings under a commercial bank revolving line of credit.
Cash inflows were offset by $7.9 million of cash used in operations (due
primarily to the net loss of $18.8 million, of which $11.7 million represented
non-cash charges), $6.4 million invested in capital equipment for further
expansion of the transgenic production facility and the expansion of the
laboratory facilities, $3.7 million invested in ATIII LLC and $2.5 million used
to pay down long-term debt.
The Company has a working capital deficit of $13.9 million at January 2,
2000 compared to a deficit of $4.3 million at January 3, 1999. As of January 2,
2000, the Company had approximately no availability under a line of credit with
a commercial bank, $6.3 million available under the Genzyme Credit Line and
$793,000 available on a term note.
In January 2000, the Company obtained a commitment for a $3 million
equipment lease line from a commercial leasing company.
In November 1999, the Company completed a $6.6 million private placement of
Series B Preferred Stock to Genzyme. The proceeds from this placement were used
to redeem Series A Convertible Preferred Stock (the "Series A Preferred Stock")
(see Item 8 and Note 5 to the consolidated financial statements appearing in
this report).
In December 1999, the Company completed a privately negotiated sale of
685,545 shares of common stock at $8.00 per share under a previously filed shelf
registration to two purchasers raising approximately $5.5 million in new equity.
Management's current expectations regarding the sufficiency of the Company's
cash resources are forward-looking statements, and the Company's cash
requirements may vary materially from such expectations. Such forward-looking
statements are dependent on several factors, including the results of the
Company's testing services business, the ability of the Company to enter into
any transgenic research and development collaborations in the future and the
terms of such collaborations, the results of research and development and
preclinical and clinical testing, competitive and technological advances and
regulatory requirements. If the Company experiences increased losses, the
Company may have to seek additional financing through collaborative arrangements
or from public or private sales of its securities, including equity securities.
There can be no assurance that additional funding will be available on terms
acceptable to the Company, if at all. If additional financing cannot be obtained
on acceptable terms, to continue its operations the Company could be forced to
delay, scale back or eliminate certain of its research and development programs
or to enter into license agreements with third parties for the commercialization
of technologies or products that the Company would otherwise undertake itself.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain financial instruments at January 2, 2000, including
a guaranty, two revolving lines of credit, a letter of credit and various loans
outstanding which are sensitive to changes in interest rates. The Company has a
guaranty by Genzyme Corporation, obtained in December 1998, of the
20
Company's credit facility with a commercial bank, whose carrying value of
$969,000 approximates fair value. Also, the Company has revolving lines of
credit with a commercial bank and with Genzyme Corporation totaling
$23.8 million, which accrue interest at a variable rate. At January 2, 2000,
$15.8 million is outstanding under the lines and the weighted average interest
rate is 5.07%. As part of the revolving credit facility at a commercial bank,
the Company has been issued a $1.5 million standby letter of credit in support
of a major facility lease, of which none has been drawn down at January 2, 2000.
Additionally, the Company has various loans outstanding. These instruments are
not leveraged and are held for purposes other than trading.
For the various loans outstanding, the table below presents the principal
cash flows that exist by maturity date and the related average interest rate.
2000 2001 2002 2003 2004 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Fixed rate debt ($ in 000's).................. 602 982 484 530 580 2,117 5,295
Average interest rate on fixed rate debt...... 7.7% 7.4% 7.4% 7.3% 6.9% 8.9%
Variable rate debt ($ in 000's)............... 649 5,658 -- -- -- -- 6,307
The interest rate of the variable debt was 6.75% at January 2, 2000. At
January 2, 2000, the fair value of these loans approximates carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
FINANCIAL STATEMENTS
Response to this item is submitted as a separate section of this report
immediately following Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is set forth in part under the captions "ELECTION OF
DIRECTORS" and "SECTION 16 (a) BENEFICIAL REPORTING COMPLIANCE" in the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on
May 24, 2000 (the "Proxy Statement") which are incorporated herein by reference,
and the remainder of such information is set forth under the caption "EXECUTIVE
OFFICERS OF THE REGISTRANT" in Part I, Item 1A hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SHARE OWNERSHIP" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "EXECUTIVE EMPLOYMENT
AGREEMENTS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Proxy Statement is incorporated herein by reference. See also, Notes 2, 6
and 10 to the Consolidated Financial Statements included herewith.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The Company's Financial Statements and the ATIII LLC Financial
Statements appear as a separate section of this report immediately
following Item 14.
All other schedules have been omitted because the required information is
not applicable or not present in amounts sufficient to required
submission of the schedule, or because the information required is in the
consolidated financial statements or the notes thereto.
The Exhibits to this report are listed below under Part IV, Item 14(c)
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
January 2, 2000.
(c) Exhibits
The exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
FORM 10-K-ITEMS 8, 14(a)(1), (a)(2), and (d)
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
List Of Financial Statements And Financial Statement Schedules
The following consolidated financial statements of Genzyme Transgenics
Corporation and subsidiaries are included in Item 8:
Report of PricewaterhouseCoopers LLP--Independent Accountants
Consolidated Balance Sheets--January 2, 2000 and January 3, 1999
Consolidated Statements of Operations--For the fiscal years ended
January 2, 2000, January 3, 1999 and December 28, 1997
Consolidated Statements of Stockholders' Equity--For the fiscal years
ended January 2, 2000, January 3, 1999 and December 28, 1997
Consolidated Statements of Cash Flows--For the fiscal years ended
January 2, 2000, January 3, 1999 and December 28, 1997
Notes to Consolidated Financial Statements
The following financial statements of ATIII LLC are included in Item 4(d):
Report of PricewaterhouseCoopers LLP--Independent Accountants
Balance Sheets--December 31, 1999 and December 31, 1998
Statements of Operations--For the fiscal years ended December 31, 1999
and December 31, 1998 and for the cumulative period from inception
(January 1, 1998) to December 31, 1999
Statements of Cash Flows--For the fiscal years ended December 31, 1999
and December 31, 1998 and for the cumulative period from inception
(January 1, 1998) to December 31, 1999
Statements of Changes in Venturer's Capital--For the cumulative period
from inception (January 1, 1998) to December 31, 1999
Notes to Financial Statements
All other schedules for which provision is made in the applicable regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Genzyme Transgenics Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Genzyme
Transgenics Corporation and its subsidiaries (the "Company") at January 2, 2000
and January 3, 1999, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended January 2, 2000, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000, except as
to the information in the third
paragraph of Note 12 for which
the date is April 3, 2000
23
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
PRO FORMA (NOTE 12)
JANUARY 2,
2000 JANUARY 2, JANUARY 3,
(UNAUDITED) 2000 1999
------------------- ---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 67,202 $ 7,782 $ 11,740
Accounts receivable, net of allowance of $888 and $487 at
January 2, 2000 and January 3, 1999, respectively....... 11,335 11,335 12,334
Unbilled contract revenue, net of allowance of $75 and $0
at January 2, 2000 and January 3, 1999, respectively
(including $420 and $771 from related parties at January
2, 2000 and January 3, 1999, respectively).............. 8,516 8,516 6,847
Other current assets...................................... 1,971 1,971 1,496
-------- -------- --------
Total current assets.................................... 89,024 29,604 32,417
Net property, plant, and equipment.......................... 34,302 34,302 30,486
Costs in excess of net assets acquired, net................. 17,260 17,260 18,404
Other assets................................................ 3,146 3,146 2,030
-------- -------- --------
$143,732 $ 84,312 $ 83,337
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,977 $ 2,977 $ 2,811
Accounts payable--Genzyme Corporation..................... 559 559 1,487
Payable to ATIII LLC...................................... 2,151 2,151 2,418
Revolving line of credit.................................. -- 15,750 11,096
Accrued expenses.......................................... 9,667 9,667 8,403
Deferred contract revenue................................. 9,218 9,218 8,317
Current portion of long-term debt and capital leases...... 3,149 3,149 2,204
-------- -------- --------
Total current liabilities............................... 27,721 43,471 36,736
Long-term debt and capital leases, net of current
portion................................................. 13,897 13,897 9,561
Deferred lease obligation................................. 779 779 741
Other liabilities......................................... -- -- 95
-------- -------- --------
Total liabilities....................................... 42,397 58,147 47,133
Commitments and Contingencies (Note 3)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized of which
20,000 have been designated Series A convertible at
January 2, 2000 and January 3, 1999 and 12,500 and none
have been designated as Series B convertible at January
2, 2000 and January 3, 1999, respectively
Series A convertible preferred stock; $.01 par value;
none and 20,000 shares were issued and outstanding at
January 2, 2000 and January 3, 1999, respectively..... -- -- --
Series B convertible preferred stock; $.01 par value;
6,602 and no shares were issued and outstanding at
January 2, 2000 and January 3, 1999, respectively
(liquidation preference $6,602), and 6,602 shares on
unaudited pro forma basis............................. -- -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 22,601,296 and 18,384,024 shares issued and
outstanding at January 2, 2000 and January 3, 1999,
respectively, and 26,626,296 on unaudited pro forma
basis................................................... 266 226 184
Dividend on preferred stock............................... (2,653) (2,653) (1,156)
Capital in excess of par value--preferred stock........... 6,647 6,647 18,777
Capital in excess of par value--common stock.............. 163,025 87,895 65,716
Unearned compensation....................................... (284) (284) (437)
Accumulated deficit......................................... (65,625) (65,625) (46,864)
Accumulated other comprehensive loss........................ (41) (41) (16)
-------- -------- --------
Total stockholders' equity.............................. 101,335 26,165 36,204
-------- -------- --------
$143,732 $ 84,312 $ 83,337
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
24
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE FISCAL YEARS ENDED
----------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
----------- ----------- ------------
Revenues:
Services............................................ $ 54,959 $ 50,816 $ 43,417
Sponsored research and development.................. 13,825 11,596 19,521
----------- ----------- -----------
68,784 62,412 62,938
Costs and operating expenses:
Services............................................ 46,602 43,668 36,989
Research and development:
Sponsored......................................... 11,402 10,486 12,558
Internal.......................................... 3,690 6,155 5,282
Selling, general and administrative................. 18,872 16,184 15,650
Facility consolidation costs........................ 1,245 -- --
Equity in loss of joint ventures.................... 3,797 4,285 811
----------- ----------- -----------
85,608 80,778 71,290
----------- ----------- -----------
Loss from operations.................................. (16,824) (18,366) (8,352)
Other income (expense):
Interest income..................................... 65 280 136
Interest expense.................................... (2,166) (1,379) (1,129)
Other income........................................ 484 100 50
----------- ----------- -----------
Loss from operations before income taxes.............. (18,441) (19,365) (9,295)
Provision for income taxes............................ 320 225 48
----------- ----------- -----------
Net loss.............................................. $ (18,761) $ (19,590) $ (9,343)
Dividend to preferred shareholders.................... (1,497) (1,156) --
----------- ----------- -----------
Net loss available to common shareholders............. $ (20,258) $ (20,746) $ (9,343)
=========== =========== ===========
Net loss available per common share (basic and
diluted)............................................ $ (1.02) $ (1.15) $ (0.54)
=========== =========== ===========
Weighted average number of common shares outstanding
(basic and diluted)................................. 19,876,904 17,978,677 17,253,292
=========== =========== ===========
Comprehensive loss:
Net loss............................................ $ (18,761) $ (19,590) $ (9,343)
Other comprehensive income (loss):
Unrealized holding losses on available for sale
securities...................................... (25) (16) --
Reclassification adjustment for foreign currency
translation losses included in net loss......... -- -- 10
----------- ----------- -----------
Total other comprehensive income (loss)............. (25) (16) 10
----------- ----------- -----------
Comprehensive loss.................................... $ (18,786) $ (19,606) $ (9,333)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
25
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CAPITAL IN CAPITAL IN
PREFERRED STOCK COMMON STOCK EXCESS OF EXCESS OF
------------------- ------------------- PAR VALUE PAR VALUE
SHARES AMOUNT SHARES AMOUNT DIVIDEND COMMON STOCK PREFERRED STOCK
-------- -------- -------- -------- -------- ------------- ---------------
Balance, December 29, 1996........ -- $ -- 17,131 $171 $ -- $52,974 $ --
Net loss..........................
Common stock issuance under
Employee Stock Purchase Plan.... 115 1 572
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 37 1 257
Issuance of warrants in connection
with a debt financing........... 130
Translation adjustment............
Proceeds from the exercise of
stock options................... 120 1 545
---- ---- ------- ---- ------- ------- --------
Balance, December 28, 1997........ -- -- 17,403 174 54,478 --
Net loss..........................
Sale of Series A Preferred Stock
to institutional investors, net
of expenses..................... 20 18,922
Issuance of warrants in connection
with the preferred stock
offering........................ (1,156) 1,301 (145)
Sale of common stock in a private
placement, net of expenses...... 603 6 6,440
Common stock issuance under
Employee Stock Purchase Plan.... 229 2 1,149
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 43 1 398
Issuance of warrants in connection
with a debt financing........... 969
Issuance of stock options to
non-employees................... 519
Unrealized loss on investment.....
Proceeds from the exercise of
stock options................... 106 1 462
---- ---- ------- ---- ------- ------- --------
Balance, January 3, 1999.......... 20 -- 18,384 184 (1,156) 65,716 18,777
Net loss..........................
Sale of common stock in a private
placement, net of expenses...... 686 7 5,421
Common stock issuance under
Employee Stock Purchase Plan.... 239 4 992
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 95 1 510
Conversion of Series A Preferred
Stock........................... (14) 2,830 27 13,008 (13,035)
Common stock issuance for ACT
License Agreement............... 217 2 998
Redemption of Series A Preferred
Stock........................... (6) (861) (5,741)
Issuance of Series B Preferred
Stock and related warrants, net
of issuance costs............... 7 (343) 343 6,563
Dividend attributed to beneficial
conversion...................... (210) 210
Dividend accrued on Series B
Preferred Stock................. (83) 83
Unearned compensation............. (37)
Unrealized loss on investment.....
Proceeds from the exercise of
stock options................... 150 1 734
---- ---- ------- ---- ------- ------- --------
Balance, January 2, 2000.......... 7 $ -- 22,601 $226 $(2,653) $87,895 $ 6,647
==== ==== ======= ==== ======= ======= ========
ACCUMULATED
OTHER TOTAL
UNEARNED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION DEFICIT INCOME (LOSS) EQUITY
------------ ----------- ------------- -------------
Balance, December 29, 1996........ -- $(17,931) $(10) $ 35,204
Net loss.......................... (9,343) (9,343)
Common stock issuance under
Employee Stock Purchase Plan.... 573
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 258
Issuance of warrants in connection
with a debt financing........... 130
Translation adjustment............ 10 10
Proceeds from the exercise of
stock options................... 546
----- -------- ---- --------
Balance, December 28, 1997........ -- (27,274) -- 27,378
Net loss.......................... (19,590) (19,590)
Sale of Series A Preferred Stock
to institutional investors, net
of expenses..................... 18,922
Issuance of warrants in connection
with the preferred stock
offering........................ --
Sale of common stock in a private
placement, net of expenses...... 6,446
Common stock issuance under
Employee Stock Purchase Plan.... 1,151
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 399
Issuance of warrants in connection
with a debt financing........... 969
Issuance of stock options to
non-employees................... (437) 82
Unrealized loss on investment..... (16) (16)
Proceeds from the exercise of
stock options................... 463
----- -------- ---- --------
Balance, January 3, 1999.......... (437) (46,864) (16) 36,204
Net loss.......................... (18,761) (18,761)
Sale of common stock in a private
placement, net of expenses...... 5,428
Common stock issuance under
Employee Stock Purchase Plan.... 996
Common stock issuance in
connection with the GTC Savings
and Retirement Plan............. 511
Conversion of Series A Preferred
Stock........................... --
Common stock issuance for ACT
License Agreement............... 1,000
Redemption of Series A Preferred
Stock........................... (6,602)
Issuance of Series B Preferred
Stock and related warrants, net
of issuance costs............... 6,563
Dividend attributed to beneficial
conversion...................... --
Dividend accrued on Series B
Preferred Stock................. --
Unearned compensation............. 153 116
Unrealized loss on investment..... (25) (25)
Proceeds from the exercise of
stock options................... 735
----- -------- ---- --------
Balance, January 2, 2000.......... $(284) $(65,625) $(41) $ 26,165
===== ======== ==== ========
The accompanying notes are an integral part of the consolidated financial
statements.
26
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE FISCAL YEARS ENDED
--------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---------- ---------- ------------
Cash flows for operating activities:
Net loss.................................................. $(18,761) $(19,590) $(9,343)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 6,517 5,002 4,149
Provision (recovery) of accounts receivable
allowances............................................ 717 166 124
Shares to be issued for 401-K employer match............ 584 515 464
Non-employee stock option charge........................ 116 82 --
Loss on disposal of fixed assets........................ -- -- 7
Equity in loss of joint ventures........................ 3,797 4,285 811
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue....... (1,387) (2,844) (2,471)
Other current assets.................................... (500) 502 78
Accounts payable........................................ (1,079) 1,261 1,124
Other accrued expenses.................................. 1,191 387 1,783
Deferred contract revenue............................... 901 2,249 (1,081)
-------- -------- -------
Net cash used in operating activities................... (7,904) (7,985) (4,355)
Cash flows for investing activities:
Purchase of property, plant and equipment................. (6,412) (6,005) (6,175)
Investment in joint ventures.............................. (3,674) (4,358) (528)
Other assets.............................................. (724) (391) --
-------- -------- -------
Net cash used in investing activities................... (10,810) (10,754) (6,703)
Cash flows from financing activities:
Net proceeds from the issuance of common stock............ 5,389 6,446 --
Redemption of Series A convertible preferred stock........ (6,602)
Net proceeds from employee stock purchase plan............ 996 1,151 573
Net proceeds from the exercise of stock options........... 735 463 546
Net proceeds from the issuance of Series B convertible
preferred stock and related warrants.................... 6,602 18,922 --
Proceeds from long-term debt.............................. 5,535 2,162 5,302
Repayment of long-term debt............................... (2,496) (4,063) (3,597)
Net borrowings under revolving line of credit............. 4,654 5,096 --
Investment and advances by Genzyme Corporation............ -- (6,000) 6,000
Deferred financing costs.................................. -- -- (170)
Other long-term liabilities............................... (57) (81) (117)
-------- -------- -------
Net cash provided by financing activities............... 14,756 24,096 8,537
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (3,958) 5,357 (2,521)
Effect of exchange rates on cash............................ -- -- 10
Cash and cash equivalents at beginning of the period........ 11,740 6,383 8,894
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 7,782 $ 11,740 $ 6,383
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
27
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997
(ALL TABULAR $ IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. NATURE OF BUSINESS
Genzyme Transgenics Corporation (together with its subsidiaries, the
"Company") is engaged in the application of transgenic technology to the
development and production of recombinant proteins for therapeutic and
diagnostic uses and, through its wholly-owned subsidiary, Primedica Corporation
("Primedica"), formerly TSI Corporation ("TSI"), is a leading provider of
preclinical and toxicology testing services to pharmaceutical, biotechnology,
medical device and chemical companies.
The accompanying financial statements have been presented on the assumption
that the Company is a going concern. The Company has incurred losses and
negative operating cash flow in each of the fiscal years ended January 2, 2000,
January 3, 1999 and December 28, 1997. The Company had a working capital deficit
of $13.9 million at January 2, 2000. As of January 2, 2000, the Company had
$6.3 million available under a credit line with Genzyme Corporation ("Genzyme"),
$350,000 available under a line for the expansion of various Massachusetts
facilities and $793,000 available under a term note facility with a commercial
bank.
In November 1999, the Company redeemed all of its outstanding Series A
Convertible Preferred Stock (the "Series A Preferred Stock") for a cash payment
of approximately $6.6 million, representing cost plus 15%. To fund the
redemption, the Company issued approximately $6.6 million of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to Genzyme (see
Note 5).
In February 2000, the Company completed a follow-on public offering of
common stock raising in excess of $75 million after offering expenses (see
Note 12). In connection with this offering, the Genzyme Credit Line was
eliminated.
The Company is subject to risks common to companies in the biotechnology
industry, including, but not limited to, development by the Company or its
competitors of new technological innovations, raising additional capital,
dependence on key personnel, protection of proprietary technology and compliance
with government regulations.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was incorporated in February 1993. On October 1, 1994, the
Company acquired TSI and its respective subsidiaries, Argus Research
Laboratories, Inc. ("Argus"), The TSI Center for Diagnostic Products, Inc.
("CDP"), Health and Sciences Research Incorporated ("HSRI"), TSI Mason
Laboratories, Inc. ("Mason"), TSI Redfield Laboratories, Inc. ("Redfield"), TSI
Washington Laboratories, Inc. ("Washington") and G.D.R.U. Limited ("GDRU"). In
July 1995, the Company acquired BioDevelopment Laboratories, Inc. ("BDL"). In
1995, the Company closed its HSRI facility and completed the sale of GDRU. HSRI
and GDRU were the only facilities performing human clinical trials within the
Company's operations.
In February 1998, the Company reorganized TSI and its respective
subsidiaries and BDL to form Primedica Corporation.
Genzyme is the Company's largest single stockholder. As a result of various
equity transactions, Genzyme owned 33% of the Company's common stock at
January 2, 2000, and 37% on a fully diluted
28
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
basis. Following the conversion of the Series B Preferred Stock, Genzyme owned
36% of the Company's common stock and 37% on a fully diluted basis.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The Company accounts for its 22% investment
in the joint venture between SMI Genzyme Ltd. and Sumitomo Metals
Industries Ltd. ("SMIG JV") using the equity method. The Company accounts for
its 50% investment in the joint venture between the Company and Genzyme ("ATIII
LLC") under the equity method. All significant intercompany transactions have
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions in these financial
statements include contract revenue recognition, net realizable value of costs
in excess of net assets acquired, account receivable reserves and tax valuation
reserves. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents, consisting principally of money market funds with initial
maturities of three months or less, are valued at market.
MARKETABLE SECURITIES
Marketable securities, which include the Company's investment in equity
securities, have been classified as available for sale and are stated at market
value based on quoted market prices. Gains and losses on sales of securities are
calculated using the specific identification method.
At January 2, 2000 and January 3, 1999, there was $42,000 and $67,000,
respectively, of marketable securities included in other current assets and an
associated $41,000 and $16,000, respectively, of unrealized loss included in
accumulated other comprehensive loss and equity. The Company has no realized
gains on available for sale securities in any of the years ended January 2, 2000
and January 3, 1999.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. The Company is subject to the concentration of credit risk of its
commercial bank that holds the revolving line of credit and term loan which the
Company relies on for its future cash flows. At January 2, 2000 and January 3,
1999, approximately 92% and 94%, respectively, of cash and cash equivalents were
held by one financial institution. Total credit facilities at one commercial
bank are $24.6 million at January 2, 2000 and January 3, 1999.
29
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides most of its testing services to diverse pharmaceutical
companies worldwide. The Company also provides services to the U.S. government.
See Note 8 for additional revenue information. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company performs ongoing
credit evaluations of its customers' financial conditions and maintains reserves
for potential credit losses. Activity for fiscal 1997 included a provision of
$256,000, a recovery of $132,000 and write-offs of $156,000. Activity for fiscal
1998 included a provision of $166,000 and write-offs of $69,000. Activity for
fiscal 1999 included a provision of $744,000, a recovery of $27,000 and
write-offs of $295,000.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
life of the improvement or the remaining term of the lease, whichever is
shorter. The direct costs of the New Zealand goats ("Livestock") and related
costs to bring them to the United States are capitalized and amortized using the
straight-line method over three years.
The following is the summary of property, plant and equipment and related
accumulated amortization and depreciation as of January 2, 2000 and January 3,
1999.
YEARS JANUARY 2, JANUARY 3,
OF LIFE 2000 1999
---------- ---------- ----------
Land........................................................ -- $ 1,082 $ 983
Buildings................................................... 20 - 30 18,049 15,968
Livestock................................................... 3 1,959 1,959
Leasehold improvements...................................... lease life 6,722 4,880
Laboratory, manufacturing and office equipment.............. 3 - 10 11,785 10,023
Laboratory, manufacturing and office equipment--capital
lease..................................................... 3 - 10 9,154 6,823
Construction in process..................................... -- 713 179
------- -------
$49,464 $40,815
======= =======
Less accumulated amortization and depreciation.............. 15,162 10,329
------- -------
Net property, plant and equipment........................... $34,302 $30,486
======= =======
Depreciation and amortization expense was $4,423,000, $3,771,000 and
$2,919,000 for the fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, respectively. Accumulated amortization for equipment under
capital lease was $2,660,000 and $1,542,000 at January 2, 2000 and January 3,
1999, respectively.
NON CASH TRANSACTIONS
During fiscal 1997, the Company purchased $2,482,000 of fixed assets and
financed these additions with capital lease obligations. The Company issued
warrants valued at $130,000 in connection with the financing for the expansion
of Mason Laboratories (see Note 4).
30
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During fiscal 1998, the Company purchased $1,904,000 of fixed assets and
financed these additions with capital lease obligations. The Company received
stock in payment for an accounts receivable and an advance payment valued at
$583,000. The Company issued warrants valued at $969,000 in connection with the
Genzyme guarantee of a credit line with a commercial bank (see Note 4). The
Company issued warrants valued at $1,301,000 in connection with a Preferred
Stock offering (see Note 5). The Company issued stock options to non-employees
valued at $519,000.
During fiscal 1999, the Company purchased $2,411,000 of fixed assets and
financed these additions with capital lease obligations. The Company issued
common stock valued at $1,000,000 in connection with a license agreement with
Advanced Cell Technology, Inc. This license has been recorded as a long term
asset.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment by comparing the
cumulative undiscounted cash flows from the assets with their carrying amount.
Any write-downs are to be treated as permanent reductions in the carrying amount
of the assets. Management's policy regarding long-lived assets is to evaluate
the recoverability of its assets when the facts and circumstances suggest that
these assets may be impaired. This analysis relies on a number of factors,
including operating results, business plans, budgets, economic projections and
changes in management's strategic direction or market emphasis. The test of such
recoverability is a comparison of the asset value to its expected cumulative net
operating cash flow over the remaining life of the asset.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
The $15,860,000 of excess consideration paid and costs incurred over the net
value of assets acquired (primarily goodwill) by GTC in 1994 of TSI is being
amortized using the straight-line method over a twenty-year period. The carrying
value of goodwill is included in management's evaluation of the recoverability
of its long-lived assets. Accumulated amortization at January 2, 2000 was
$4,266,000.
The $7,329,000 of excess consideration paid and costs incurred over the net
fair value of assets of BDL acquired by GTC in 1995 is being amortized using the
straight-line method over twenty years. Accumulated amortization at January 2,
2000 was $1,663,000.
At January 2, 2000, goodwill totaled $23,189,000 with $5,929,000 accumulated
amortization.
DEFERRED FINANCE CHARGES
The Company incurs various charges relating to financings into which it has
entered. The Company includes these amounts in other assets and amortizes the
amount to interest expense over the life of the debt. The unamortized balance at
January 2, 2000 and January 3, 1999 was approximately $930,000 and
$1.3 million, respectively.
31
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED EXPENSES
Accrued expenses included the following:
AT JANUARY 2, AT JANUARY 3,
2000 1999
------------- -------------
Accrued payroll and benefits........................ $4,056 $3,475
Other............................................... 5,611 4,928
------ ------
Total accrued expenses............................ $9,667 $8,403
====== ======
As a result of the 1994 merger with TSI, the Company established severance
reserves for the elimination of 35 positions of which 20 were laboratory
positions, eight were accounting/finance positions and seven were general and
administrative positions. The total severance established was $1,417,000 to be
paid through 2000. As of January 2, 2000, $1,318,000 has been paid. The
remaining $99,000 balance is all classified as a short-term liability.
Additionally, there have been various other terminations for which the
Company recorded expense of $498,000 and $265,000 in 1999 and 1998,
respectively. At January 2, 2000 and January 3, 1999, approximately $381,000 and
$429,000 had been paid out, respectively, and $333,000 and $233,000 is included
in accrued expenses, respectively.
In September 1999, the Company recorded a charge in the amount of $1,245,000
relating to the consolidation of certain facilities. Costs consisted of facility
closing costs of $740,000 and severance and employee related costs of $505,000.
Severance costs relate to the elimination of 20 positions, of which 12 were
laboratory positions and 8 were general and administrative positions. The
facility closing costs included net write-offs of leasehold improvements of
$415,000 and rental and lease termination costs to be paid after the
consolidation in the amount of $325,000. These costs are expected to be fully
paid by the fourth quarter of 2000. As of January 2, 2000, $121,000 of the
severance and employee related costs had been paid with a remaining balance of
$252,000 to be paid during 2000. During the fourth quarter of 1999, the Company
recorded an adjustment to reverse $132,000 of the severance accrual and $62,000
of facility closing costs based on changed circumstances. Separately, the
Company recorded an expense of $194,000 directly to the income statement
relating to moving costs and recruiting fees paid in the fourth quarter
associated with this facility consolidation.
INVESTMENT IN JOINT VENTURES
In 1990, the Company entered into the SMIG JV joint venture with Sumitomo
Metal Industries as a minority owner (see Note 11). The investment has been
accounted for under the equity method since March 1994, with the Company
recognizing its 22% share of the SMIG JV losses in its Statement of Operations.
In October 1995 and March 1997, the Company made additional investments of
$807,000 and $528,000, respectively, in the SMIG JV, which maintained the
Company's interest at 22%. In December 1997, the equity investment in the SMIG
JV was reduced to zero as a result of recognizing the Company's share of the
SMIG JV's losses. The Company has neither obligation nor intention to provide
additional funding to the SMIG JV, and has therefore discontinued recognizing
its share of the SMIG JV's losses.
32
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, a definitive collaboration agreement for the ATIII LLC
joint venture between the Company and Genzyme was executed. The Company's 50%
ownership in ATIII LLC is accounted for under the equity method (see Note 11).
REVENUE RECOGNITION AND CONTRACT ACCOUNTING
For fixed price contracts and cost reimbursement contracts in both the
Transgenics and Primedica segments, the Company records revenue using the
percentage of completion method based upon a ratio of costs incurred to total
estimated costs. Certain of the transgenic contracts contain license fees and
incentive-based milestone payments. The Company recognizes license fees only on
payments that are nonrefundable, and defers revenue recognition until
performance obligations have been completed in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101. The Company recognizes revenue on
incentive-based milestones only when achievement of the milestone has occurred
and defers profit recognition until performance obligations have been completed.
Profits expected to be realized are based on the total contract sales value
and the Company's estimates of costs at completion. The sales value of
Transgenic contracts in based on achievable milestones and is revised throughout
the contract as the Company demonstrates achievement of milestones. The
Company's estimates of costs include all costs expected to be incurred to
fulfill performance obligations of the contracts. For most Transgenic contracts,
this policy results in a deferral of contract profit until all performance
obligations have been completed. Estimates of total contract costs are reviewed
and revised periodically, throughout the lives of the contracts, with
adjustments to profits resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When management
believes the costs of completing a contract will exceed its sales value, the
full amount of the anticipated contract loss is immediately recognized.
Unbilled contract revenue represents recoverable costs and accrued profit
which had not been billed at the balance sheet date. Deferred contact revenue
represents amounts received from customers that exceed the amount of revenue
recognized to date. Research and development revenues in fiscal 1999 consisted
of $4,491,000 from the ATIII LLC (see Note 11) and $9,334,000 from commercial
clients.
NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
("SFAS 128") EARNINGS PER SHARE in calculating earnings per share ("EPS").
Common stock equivalents of the Company consist of warrants (see Note 5), stock
options (see Note 6), stock to be issued under the 401-K retirement plan (see
Note 6), convertible debt (see Note 4) and convertible preferred stock (see
Note 5). The Company was in a net loss position in 1999, 1998 and 1997,
therefore 4.8 million, 6.9 million and 2.8 million common stock equivalents,
respectively, were not used to compute diluted loss per share, as the effect was
antidilutive. Subsequent to year end, the Company issued 4 million shares of
common stock for cash proceeds and issued 1 million shares of common stock for
the redemption of the Series B Preferred Stock (see Note 12).
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using the expected
33
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
enacted tax rates for the year in which the differences are expected to reverse.
The measurement of deferred tax assets is reduced by a valuation allowance if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from the change in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
Company's fiscal year ending December 30, 2001. The Company believes the
adoption of SFAS 133 will not have a material effect on its financial
statements.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB
100"). This SAB expresses the views of the Staff regarding the accounting for
the disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. SAB 100 has been applied in recording the
charges associated with the Company's facility consolidation costs.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles in the United States, to revenue
recognition in financial statements. The Company's revenue recognition policy is
in compliance with SAB 101.
NOTE 3. COMMITMENTS & CONTINGENCIES
The Company leases equipment and facilities under various operating and
capital leases (see Note 4). The deferred lease obligation represents the
cumulative difference between actual facility lease payments and lease expense
recognized ratably over the lease period. Rent expense for the fiscal years
ended January 2, 2000, January 3, 1999 and December 28, 1997 was approximately
$3,613,000, $2,878,000 and $2,566,000, respectively.
34
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. COMMITMENTS & CONTINGENCIES (CONTINUED)
At January 2, 2000, the Company's future minimum payments required under
these leases are as follows:
OPERATING CAPITAL TOTAL
--------- -------- --------
2000............................................. $2,253 $2,413 $ 4,666
2001............................................. 1,953 950 2,903
2002............................................. 1,672 1,496 3,168
2003............................................. 1,502 1,568 3,070
2004............................................. 1,278 -- 1,278
Thereafter....................................... 711 -- 711
------ ------ -------
Total........................................ $9,369 6,427 $15,796
====== =======
Less amount representing interest................ 983
------
Present value of minimum lease payments.......... $5,444
======
The Company sold a 46.3% ownership interest in ATIII LLC to Genzyme on
January 1, 1998, for an aggregate amount of $12,500,010, of which $12,500,000 is
contingent upon the achievement of certain milestones (see Note 11).
The Company is a party to license agreements for certain technologies.
Certain of these agreements contain provisions for the future royalties to be
paid on commercial sales of products developed from the licensed technologies.
NOTE 4. BORROWINGS
In December 1998, the Company obtained new credit facilities (the "New
Credit Line" and the "New Term Loan") from another commercial bank. The New
Credit Line has a three year term expiring in December 2001. Under the New
Credit Line, the Company may borrow up to $17.5 million, a portion of which may
be utilized for a standby letter of credit. Under the financing, the amount of
the New Term Loan is $7.1 million. As of January 2, 2000 and January 3, 1999,
$6,307,421 and $1,836,024, respectively, was outstanding and at January 2, 2000,
$793,000 was available. The term loan is payable in quarterly payments through
December 2001 with a balloon payment for the remaining balance on December 28,
2001. As of January 2, 2000 and January 3, 1999, $15,750,000 and $11,096,000,
respectively, was outstanding under the New Credit Line and at January 2, 2000,
$250,000 was available. A standby letter of credit with a face amount of
$1.5 million has been issued under the New Credit Line to support a major
facility lease. At the Company's option, interest on loans under the New Credit
Line (other than the standby letter of credit) and the New Term Loan accrues
either at the Prime rate or at an adjusted libor rate. The interest rate on the
New Term Loan was 6.75% and 7.75% at January 2, 2000 and January 3, 1999,
respectively. The weighted average interest rate on all outstanding lines of
credit was approximately 5.1%, 2.0% and 5.7% for the fiscal years ended
January 2, 2000, January 3, 1999 and December 28, 1997, respectively. Under the
terms of the new agreement, the Company may not pay any dividends. No amounts
were due under the standby letter of credit as of January 2, 2000. Both loans
are guaranteed by Genzyme.
In connection with the New Credit Line, Genzyme provided a guaranty to the
bank under which Genzyme would become primarily liable under the credit line in
event of a default by the Company. In consideration of Genzyme's agreement to
provide such a guaranty, the Company granted a first lien on all
35
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. BORROWINGS (CONTINUED)
assets of the Company and issued to Genzyme warrants to purchase 288,000 shares
of the Company's common stock for a period of ten years, exercisable at $4.875
per share (market price at the effective date of the New Credit Line). The
warrants, valued at $969,000, were recorded as a deferred financing charge,
included in other assets, and are being amortized to interest expense over the
life of the New Credit Line.
The Company has also obtained various capital leasing commitments with
interest rates ranging from 9.79% to 14.23% and repayment terms of 48 months to
60 months.
In March 1996, the Company entered into a Convertible Debt and Development
Funding Agreement (the "Convertible Debt Agreement") with Genzyme under which
Genzyme agreed to provide a revolving line of credit ("Genzyme Credit Line") in
the amount of $10 million. The line is convertible into the Company's common
stock (at the average market price for the 20-day period ending two days before
any conversion), at GTC's option, to maintain GTC's tangible net worth or by
Genzyme at any time for up to the full amount outstanding. Any amount so
converted reduces by an equivalent amount the availability on the line. During
1996, approximately $1.7 million of debt was converted into 219,565 shares of
common stock, reducing availability under the Genzyme Credit Line to
$8.3 million. The agreement was amended again in 1997, extending the expiration
date to March 31, 2000. In 1998, the availability was reduced to $6.3 million
and in connection with the Company's equity financing in February 2000, this
line was eliminated (see Note 12).
The Company also has various mortgages and expansion lines relating to its
Primedica properties. Total loans outstanding at January 2, 2000 are $5,295,000
with interest rates ranging from 5.5% to 10%. Total availability under these
loans at January 2, 2000 is $350,000 which can be utilized for facility
expansion through March 2000. In connection with certain of the financing in
1997, the Company issued warrants to purchase 20,000 shares of the Company's
common stock with an expiration of ten years and an exercise price of $8.75 per
share. The warrants, valued at $130,000, are being amortized to interest expense
over the life of the mortgage.
Under the various debt agreements, restrictive covenants include the
following: (i) for each of the fiscal quarters ending on March 31, 1999, the two
fiscal quarters ending on June 30, 1999 and the three fiscal quarters ending on
September 30, 1999, the Company will not permit its consolidated earnings before
interest, taxes, depreciation and amortization, exclusive of unfunded research
and development and losses on the ATIII LLC joint venture ("EBITDA"), for any
such period as at the last day of such period to exceed a loss of $5,000,000;
(ii) for the four fiscal quarters ending on December 31, 1999, the Company will
not permit its consolidated EBITDA as at the last day of such period to exceed a
loss of $2,000,000; (iii) commencing with the fiscal quarter ending on
March 31, 2000, the Company will not, as at the last day of each fiscal quarter,
permit its consolidated EBITDA for the period of four consecutive fiscal
quarters ending or most recently ended prior to such date to be less than zero.
36
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. BORROWINGS (CONTINUED)
The Company's long-term debt consisted of the following:
JANUARY 2,
2000
----------
Note payable, with monthly payments of $48,750 through June
2007, interest at 9.25%, collateralized by real estate.... $ 3,131
Term loan, with quarterly payments of $162,276 through
December 2001, interest varies, collateralized by real
estate.................................................... 6,307
Note payable, with monthly payments of $15,250 through
November 2009, interest at 9.25%, collateralized by real
estate.................................................... 850
Note payable, with monthly payments of $9,921 through May
2001, interest at 9.5%, collateralized by real estate..... 559
Note payable, with quarterly payments of $8,605 through July
2012, interest at 5.5%, collateralized by real estate..... 310
Note payable, with monthly payments of $4,625 through June
2007, interest at 10%, collateralized by real estate...... 290
Note payable, with monthly payments of $6,066 through
December 2000, interest at 8%, collateralized by real
estate.................................................... 64
Capital lease obligations, with monthly payments of $208,398
through February 2000 and December 2003, interest varies,
collateralized by property................................ 5,444
Other....................................................... 91
-------
$17,046
Less current portion...................................... 3,149
-------
$13,897
=======
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the value of the notes payable
approximates fair value.
Maturities of long-term debt are as follows:
2000........................................................ $ 3,149
2001........................................................ 7,282
2002........................................................ 1,847
2003........................................................ 2,071
2004........................................................ 580
Thereafter.................................................. 2,117
-------
$17,046
=======
Cash paid for interest for the fiscal years ended January 2, 2000,
January 3, 1999, and December 28, 1997 was $2,267,000, $1,376,000, and
$1,098,000, respectively. In 1999 $105,000 of interest expense incurred was
capitalized. There was no capitalization of interest in 1998 or 1997.
37
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 40,000,000 shares of
common stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share of which 20,000 shares have been designated as
Series A Preferred Stock at January 2, 2000 and January 3, 1999 and 12,500 have
been designated as Series B Preferred Stock at January 2, 2000.
A summary of the outstanding GTC warrants as of January 2, 2000, of which
896,324 are currently exercisable, is as follows:
COMMON SHARES EXERCISE WARRANT EXPIRATION
ISSUABLE FOR PRICE PER SHARE DATE
- - ------------- --------------- ------------------
145,000 $2.84375 July 3, 2005
2,000 $2.75000 December 31, 2001
2,000 $6.50000 December 31, 2001
20,000 $8.75000 June 26, 2007
450,000 $15.1563 March 20, 2002
288,000 $ 4.8750 December 28, 2008
55,833 $6.30000 November 12, 2009
29,491 $6.30000 November 22, 2009
- - -------------
992,324
=============
In March 1998, the Company completed a private placement of $20 million face
value of Series A Preferred Stock to three institutional investors. The
Series A Preferred Stock was immediately convertible into the Company's common
stock at a price equal to $14.55 per share and commencing December 1998, at any
time at a price equal to the lower of $14.55 or the average of any five closing
bid prices selected by the holder over the twenty days prior to conversion.
There was a maximum number of shares into which the Series A Preferred Stock
could be converted. In connection with the financing, warrants to purchase
400,000 shares of the Company's common stock were issued to the institutional
investors. Each warrant has a four year term and an exercise price of $15.1563
per share. Because the preferred stock could be converted into common stock
immediately, the warrants, valued at approximately $1.2 million, were recognized
as a dividend payment to preferred shareholders during the first quarter of
1998. The Company also issued warrants to purchase 50,000 shares of common stock
to the placement agency under the terms noted above. The warrants were valued at
approximately $145,000 and recognized as a reduction of preferred stock capital
in excess of par. As a result of this financing, the amount available under the
line of credit in the Convertible Debt and Development Funding Agreement with
Genzyme has decreased from approximately $8.3 million to $6.3 million.
During 1999, several institutional investors converted 9,000 shares of the
Series A Preferred Stock, $.01 par value per share, into 1,927,503 shares of the
Company's common stock at conversion prices ranging from $3.34 to $5.98 per
share. After these conversions, 11,000 shares of the Series A Preferred Stock
remained outstanding.
In November 1999, the Company issued a redemption call on the outstanding
$11.0 million of Series A Preferred Stock. The holders of the Series A Preferred
Stock converted $5.3 million into 901,807 common shares at a conversion price of
$5.83 per share. The remaining amount was redeemed in cash by the holders at
115% of par value. The 15% premium was recognized as a dividend payment to
preferred shareholders in the amount of $861,000.
38
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
In conjunction with the redemption call, the Company issued $6.6 million of
Series B Preferred Stock to Genzyme. The Series B Preferred Stock carried an
initial dividend of 11% and is convertible by the holder into common stock at a
fixed rate of $6.30 per common share. All accumulated or accrued and unpaid
dividends will be paid upon conversion, liquidation or redemptions of the
Series B Preferred Stock. The Company has the sole right to redeem unconverted
Series B Preferred Stock for cash at any time at its original value plus accrued
dividends. The Series B Preferred Stock were converted into common stock in
February 2000 (see Note 12).
In connection with the issuance of the Series B Preferred Stock, the Company
also issued to Genzyme 10-year warrants to purchase 85,324 shares of the
Company's common stock at an exercise price of $6.30 per share. In connection
with the warrants issued and a beneficial conversion feature, the Company
recorded a dividend of $636,000 to preferred shareholders in the fourth quarter
of 1999.
As of January 2, 2000, the Company has reserved 5,124,466 shares of common
stock, subject to adjustment, for future issuance under the various classes of
warrants, Stock Option and Employee Stock Purchase Plans (see Note 6) and
preferred stock conversion.
In December 1999, the Company completed a privately negotiated sale of
685,545 shares of common stock at $8.00 per share under a previously filed shelf
registration to two purchasers raising approximately $5.5 million in new equity.
NOTE 6. EMPLOYEE BENEFIT PLANS
STOCK OPTIONS AND PURCHASE PLAN
In May 1993, the Board of Directors adopted and the stockholders approved
the 1993 Equity Incentive Plan (the "Equity Plan"), the 1993 Director Stock
Option Plan (the "Director Plan") and the 1993 Employee Stock Purchase Plan (the
"Purchase Plan").
Under the Equity Plan, 2,015,000 shares of common stock were issued or
reserved for issuance pursuant to incentive stock options, non-statutory stock
options, restricted stock awards, stock appreciation rights or stock units in
accordance with specific provisions to be established by a committee of the
Board of Directors at the time of grant. To date, all options have been issued
at 85% or greater of the fair value at the grant date. The Equity Plan also
permits the Company to assume outstanding options in an acquisition without
using shares reserved under the Plan. Of the foregoing total, 224,350 shares are
subject to options assumed by the Company in the acquisition of TSI. The number
of shares reserved for issuance under this plan was increased to 2,515,000,
3,015,000 and 3,390,000 in 1997, 1998 and 1999, respectively.
Under the Director Plan, 50,000 shares of common stock were reserved for
issuance as non-statutory stock options at the rate of 2,000 shares for each
year of service to members of the Board of Directors who are not employees of
the Company. Such options are automatically granted at fair market value upon
the election or reelection of each director. The number of shares reserved for
issuance under this plan was increased to 100,000 and 200,000 in 1997 and 1998,
respectively. In May 1998, the plan was amended such that upon first election of
a director, such director shall receive 5,000 shares for each year of the term
of office to which he/she has been elected, and upon reelection such director
shall receive 3,000 shares for each year of the term of office to which he/she
has been reelected.
Under these plans, an option's maximum term is ten years and vest ratably
20% on the date of issuance and 20% thereafter on the anniversary of the grant.
39
Under the Purchase Plan, 300,000 shares of common stock were reserved for
the grant of purchase rights to employees in one or more offerings in accordance
with provisions to be established by a committee of the Board of Directors prior
to commencement of any offering period. In May 1997, the Board of Directors
increased the number of shares reserved for issuance under this plan to 900,000
shares. Participants may purchase shares of common stock at not less than 85% of
the lower of the market value at the beginning of each offering or on the
purchase date. Purchase dates occur every three months for a period of two years
from the offering date. Participants may not carry over balances from one
purchase date to the next. Offering dates occur every six months. A total of
42,726 shares of common stock remained available for issuance under the plan at
January 2, 2000. The purchases of common stock under the plan during fiscal 1999
and fiscal 1998 were 239,470 shares at an aggregate purchase price of
approximately $996,000 and 228,741 shares at an aggregate purchase price of
approximately $1,151,000, respectively. No compensation expense has been
recorded related to the Purchase Plan.
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for options
granted to employees with exercise prices equal to or greater than the fair
market value at the grant date. The Company applies the disclosure only
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
ACCOUNTING FOR STOCK BASED COMPENSATION. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates as calculated in accordance with SFAS 123, the Company's net loss
and loss per share for the years ended January 2, 2000, January 3, 1999 and
December 28, 1997 would have been increased to the pro forma amounts indicated
below:
JANUARY 2, 2000 JANUARY 3, 1999 DECEMBER 28, 1997
------------------------------ ------------------------------ ------------------------------
NET LOSS NET LOSS
AVAILABLE PER AVAILABLE PER
COMMON SHARE COMMON SHARE LOSS PER SHARE
NET LOSS (BASIC AND DILUTED) NET LOSS (BASIC AND DILUTED) NET LOSS (BASIC AND DILUTED)
-------- ------------------- -------- ------------------- -------- -------------------
As Reported............. $(18,761) $(1.02) $(19,590) $(1.15) $ (9,343) $(0.54)
Pro Forma............... (21,552) (1.16) (22,355) (1.31) (11,458) (0.66)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
40
A summary of the status of the Company's stock option plans as of
January 2, 2000, January 3, 1999 and December 28, 1997 and changes during the
years ending on those dates is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Balance at December 29, 1996....................... 1,596,514 $5.7432
--------- -------
Granted
Price = Fair value............................. 647,814 $7.7843
Price > Fair value............................. 10,400 $7.8462
Exercised........................................ (120,377) $4.5246
Cancelled........................................ (132,362) $5.9003
--------- -------
Balance at December 28, 1997....................... 2,001,989 $6.4611
--------- -------
Granted
Price = Fair value............................. 706,532 $8.7152
Price > Fair value............................. 18,000 $9.1875
Exercised........................................ (105,383) $4.5040
Cancelled........................................ (107,703) $7.5478
--------- -------
Balance at January 3, 1999......................... 2,513,435 $7.1560
--------- -------
Granted
Price = Fair value............................. 616,090 $4.7849
Exercised........................................ (151,626) $4.9580
Cancelled........................................ (151,702) $7.7554
--------- -------
Balance at January 2, 2000......................... 2,826,197 $6.7266
At January 2, 2000, January 3, 1999 and December 28, 1997, there were
1,678,156, 1,335,511 and 991,367 shares exercisable at a weighted average
exercise price of $6.6906, $6.5495 and $6.1142, respectively. The weighted
average fair value of options granted during fiscal 1999, 1998 and 1997 was
$4.7849, $8.73 and $7.79, respectively.
The following table summarizes information about stock options outstanding
at January 2, 2000:
WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- - ------------------ ----------- ---------------- -------------- ----------- --------------
$2.5000 - $ 4.5625 873,312 7.69 $ 3.9546 466,559 $ 3.4410
$4.6250 - $ 7.3750 747,697 7.28 $ 6.7447 424,667 $ 6.7978
$7.4375 - $ 8.8750 699,742 5.66 $ 8.0094 542,660 $ 7.9852
$9.0000 - $ 9.7500 402,276 8.16 $ 9.1508 188,770 $ 9.1517
$9.8750 - $55.0000 103,170 7.47 $11.9084 55,500 $12.1599
--------- ---- -------- --------- --------
2.5000 - $55.0000 2,826,197 7.14 $ 6.7266 1,678,156 $ 6.6906
========= =========
At January 2, 2000, 291,581 shares were available for grant.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumption: an expected life of five years, expected volatility of 80% for
fiscal 1999 and 78% for each of fiscal 1998 and 1997, a dividend yield of 0% and
a risk-free interest rate of 5.82% for fiscal 1999, 5.48% for fiscal 1998 and
6.36% for fiscal 1997.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions: a dividend
yield of 0%, expected volatility of 80% for fiscal 1999
41
and 78% for each of fiscal 1998 and 1997, an expected life of one year for
fiscal 1999, 1998 and 1997 and a risk-free interest rate of 4.81% for fiscal
1999, 5.55% for fiscal 1998 and 5.40% for fiscal 1997. The average fair value of
those purchase rights granted during fiscal 1999, fiscal 1998 and fiscal 1997
was $2.10, $3.27 and $2.71, respectively.
OTHER
All employees of the Company, subject to certain eligibility requirements,
can participate in the Company's defined contribution plan. Currently, the
Company may match up to 50% of each participating employee's contributions to
the plan to a maximum of 3% of salary. The Company may also contribute an
additional 2% of each employee's salary as a retirement contribution. All
contributions are at the discretion of the Board of Directors. Expense
recognized under this plan was approximately $450,000, $515,000 and $464,000 for
the fiscal years ended January 2, 2000, January 3, 1999 and December 28, 1997,
respectively.
NOTE 7. INCOME TAXES
Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using future expected enacted rates. A valuation allowance is
recorded against deferred tax assets if it is more likely than not that some or
all of the deferred tax assets will not be realized.
The income tax (benefit) provision consisted of the following:
1999 1998 1997
-------- -------- --------
Current:
Federal........................................ $ 0 $ 0 $ 0
State.......................................... 320 225 48
------- ------- -------
Total Current.................................... $ 320 $ 225 $ 48
======= ======= =======
Deferred:
Federal........................................ (8,677) (5,418) (3,158)
State.......................................... (1,959) (1,562) 1,241
Change in Valuation Allowance.................... 10,636 6,980 1,917
------- ------- -------
Total Deferred................................... $ -- $ -- $ --
======= ======= =======
The provision for income taxes was at rates different from the U.S. Federal
statutory income tax rate for the following reasons:
FISCAL YEARS ENDED
----------------------------------------------------
JANUARY 2, 2000 JANUARY 3, 1999 DECEMBER 28,1997
--------------- --------------- ----------------
Federal tax--expense (benefit)... (34.0)% (34.0)% (34.0)%
Goodwill......................... 2.1 2.0 3.2
State taxes--net................. (7.4) (4.6) 9.1
Joint Venture loss............... -- -- 3.0
Other............................ (2.4) 1.8 (1.3)
Change in valuation allowance.... 43.4 36.0 20.5
----- ----- -----
Effective tax rate............... 1.7% 1.2% 0.5%
===== ===== =====
42
The components of the deferred tax assets and liabilities at January 2, 2000
and January 3, 1999 respectively, are as follows (dollars in thousands):
JANUARY 2, 2000 JANUARY 3, 1999
--------------- ---------------
Deferred Tax Assets/(Liabilities):
Advance payments................................. $ 3,718 $ 2,742
Accrued compensation reserves.................... 1,366 1,126
Other reserves................................... 1,209 1,343
Tax credits...................................... 2,598 974
Net operating loss carryforwards................. 34,973 26,804
Depreciation..................................... (269) (300)
Other............................................ 20 12
------- -------
Total deferred tax asset......................... 43,615 $32,701
Valuation allowance.............................. (43,615) (32,701)
------- -------
$ -- $ --
======= =======
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets.
As of January 2, 2000, the Company had federal net operating loss ("NOL")
and research and experimentation credit carryforwards of approximately
$90.9 million and $1.4 million, respectively, available to offset future federal
income tax liabilities, which expire at various dates through 2019. The federal
NOL includes approximately $2.3 million of stock option compensation expense
which, when realized, will be credited to additional paid in capital. The
utilization of a portion of the NOL and research and experimentation credit
carryforwards is subject to Section 382 of the Internal Revenue Code. This
section established an annual limitation, based on changes in the Company's
ownership, on the amount of income, which may be offset by these tax attributes.
Approximately $40.6 million of these NOL's were acquired in connection with
its acquisition of TSI. Consequently, any realization of the benefit of these
purchased NOL's will be recorded as a reduction of goodwill. In 1995, goodwill
was reduced by approximately $1 million as a result of the utilization of
purchased NOL's to offset taxable gain principally resulting from the sale of
GDRU.
The Company paid taxes of $320,000, $225,000 and $48,000 in fiscal 1999,
1998 and 1997, respectively.
NOTE 8. SEGMENT AND REVENUE INFORMATION
The Company has two reportable segments: contract research organization
("Primedica") and research and development ("Transgenics"). Primedica provides
services such as preclinical efficacy and safety testing, IN VITRO testing and
formulation development to pharmaceutical, biotechnology, medical device and
other companies. These services are provided by five different laboratories,
which are aggregated into the Primedica segment. Transgenics applies transgenic
technology to the development and production of genetically engineered proteins
for therapeutic, diagnostic and other biomedical uses, both in collaboration
with pharmaceutical and biotechnology companies and independently. Transgenics
also includes the cancer vaccine research program which produces idiotypic
cancer vaccines for B-cell lymphoma and Myeloma.
The accounting policies are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on
profit or loss from operations before income taxes, interest expense and
interest revenue. The Company also accounts for intersegment sales as if the
sales were to third parties.
43
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business unit requires different technology and marketing strategies.
The following table presents certain segment financial information and the
reconciliation of segment financial information to consolidated totals as of and
for the years ended January 2, 2000, January 3, 1999 and December 28, 1997
(dollars in thousands). Asset information by segment is not reported because the
Company does not evaluate such information internally.
FISCAL YEARS ENDED
-----------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
----------- ----------- -------------
Revenues:
Primedica--external customers............. $ 54,959 $ 50,816 $43,417
Primedica--intersegment................... 1,332 1,389 1,424
Transgenics............................... 13,825 11,596 19,521
-------- -------- -------
70,116 63,801 64,362
Elimination of intersegment revenues...... (1,332) (1,389) (1,424)
-------- -------- -------
$ 68,784 $ 62,412 $62,938
======== ======== =======
Income (loss) from operations:
Primedica................................. $ 1,606 $ 2,342 $ 1,599
Transgenics............................... (5,517) (8,303) (1,956)
Unallocated amounts:
Corporate expenses........................ (9,116) (8,120) (7,184)
Equity in loss of joint ventures.......... (3,797) (4,285) (811)
-------- -------- -------
$(16,824) $(18,366) $(8,352)
======== ======== =======
Capital expenditures:
Primedica................................. $ 3,219 $ 1,722 $ 4,215
Transgenics............................... 3,023 4,201 2,034
Corporate(1).............................. 2,412 1,986 2,408
-------- -------- -------
$ 8,654 $ 7,909 $ 8,657
======== ======== =======
- - ------------------------
(1) Includes all expenditures financed through capital leases for equipment used
by both segments. These expenditures were $2,131, $1,614, and $1,760 for the
Primedica segment and $111, $290 and $722 for the Transgenics segment for
the years ended January 2, 2000, January 3, 1999 and December 28, 1997.
Net revenues to external customers are based on the location of the
customer.
Geographic information for net revenues to external customers, by fiscal
year, is presented in the table below:
UNITED STATES ASIA EUROPE CANADA TOTAL
------------- -------- -------- -------- --------
1999.............................. 60,733 1,681 4,242 2,128 68,784
1998.............................. 53,508 3,276 5,628 -- 62,412
1997.............................. 49,120 9,178 4,640 -- 62,938
All of the Company's long-lived assets are located in the United States.
44
Revenues from Genzyme accounted for 11% of total revenues for the period
ending December 28, 1997. All of this revenue was attributable to the
Transgenics segment. No other single entity accounted for more than 10% of total
revenues for the periods presented in this table.
NOTE 9. ARRANGEMENTS WITH GENZYME CORPORATION
From the Company's inception, certain facilities and support services,
including both research and administrative support, have been provided by
Genzyme. For these services, the Company was charged $1,605,000, $3,568,000 and
$8,073,000 for the fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, respectively. These charges represent an allocation of the
Company's proportionate share of Genzyme's overhead costs using formulae which
management believes are reasonable based upon the Company's use of the
facilities and services. All other costs for all periods presented, including
payroll costs, are directly attributable to the Company and have been paid by
Genzyme and charged to the Company.
In April 1993, the Company entered into several agreements under which
Genzyme has agreed to provide various services, facilities and funding to the
Company as described below:
SERVICES AGREEMENT
Under the Services Agreement, the Company receives certain basic support
services in exchange for a fixed monthly payment ($37,080 for 9 months and
$37,500 for 3 months during 1999) adjusted annually. These basic services
include laboratory support, as well as assistance with certain administrative
functions including purchasing, data processing, risk management, corporate
communications and treasury activities. If the Company requests additional
services from Genzyme, the Company has agreed to pay Genzyme fully allocated
costs of those services. The Services Agreement is automatically renewed each
year thereafter unless terminated by either party not less than 90 days prior to
the end of any annual period. Under the Services Agreement, the Company made
payments of $446,000, $497,000 and $509,000 for the fiscal years ended
January 2, 2000, January 3, 1999 and December 28, 1997, respectively, and is
committed to make a minimum annual payment of $285,000 in 2000.
SUBLEASE AGREEMENT
Under the Sublease Agreement, the Company has leased certain laboratory,
research and office space from Genzyme through May 1998 in exchange for fixed
monthly rent payments which approximate the estimated current rental value for
such space. In addition, the Company reimburses Genzyme for its pro rata share
of appropriate facilities' operating costs such as maintenance, cleaning,
utilities and real estate taxes. The sublease is automatically renewed each year
and renewals are subject to earlier termination of the sublease by either party
after the initial five-year term. Under the Sublease Agreement, the Company made
payments for the fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, of $137,000, $411,000 and $280,000, respectively, and is
committed to make a monthly minimum rental payment of $14,611 in 2000.
TECHNOLOGY TRANSFER AGREEMENT
Under the Technology Transfer Agreement, Genzyme has transferred
substantially all of its transgenic assets and liabilities to the Company
including its ownership in the joint venture with Sumitomo Metal Industries,
assigned its relevant contracts and licensed to the Company technology owned or
controlled by it and relating to the production of recombinant proteins in the
milk of transgenic animals (the "Field") and the purification of proteins
produced in that manner. The license is worldwide and royalty free as to Genzyme
although the Company is obligated to Genzyme's licensors for any royalties due
them.
45
As long as Genzyme's ownership of the Company remains below 50%, Genzyme may
use the transferred technology and the new technology only on its own behalf and
without any royalty obligation to the Company.
RESEARCH AND DEVELOPMENT AGREEMENT
The Research and Development Agreement defines the relationship among the
parties whereby each entity may perform research for the other. This agreement
was in effect through December 31, 1998 and the parties are in the process of
negotiating an extension. Genzyme has agreed to use the Company to perform all
research in the field of production of recombinant proteins in transgenic
animals. The Company has a similar obligation to use Genzyme to purify proteins
produced transgenically. Each party must request such services from the other
company before seeking them from a third party although the Company may perform
purification services on its own behalf. These obligations are qualified by the
ability of each party to perform the requested services in accordance with the
performance, scheduling, cost and other specifications reasonably established by
the requesting party. Each company will receive payments from the other equal to
the performing party's fully allocated cost of performing such services, which
shall not be less than 80% of the annual budgets established by the parties
under the agreement, plus, in most cases, a fee equal to 10% of such costs. The
Company provided development services to Genzyme for which it recognized
revenues of $0, $11,000 and $11,000 for the fiscal years ended January 2, 2000,
January 3, 1999 and December 28, 1997, respectively. In addition, the Company
received $738,000 of services revenue, unrelated to research and development,
from Genzyme for the fiscal year ended January 2, 2000. The Company also
receives research and development services from Genzyme, for which it incurred
costs of $423,000, $1.9 million and $7.3 million in 1999, 1998 and 1997,
respectively.
In March 1996, the Company entered into the Convertible Debt Agreement (see
Note 4) with Genzyme under which Genzyme agreed to provide a revolving line of
credit (the "Genzyme Credit Line") in the amount of $10 million and agreed to
fund development costs of the transgenic Antithrombin III ("AT-III") program.
During 1996, Genzyme converted $1,673,000 of debt to equity under this
agreement, leaving the availability under the Genzyme Credit Line at
$8.3 million which was subsequently reduced to $6.3 million in 1999 (see
Note 5). As of January 2, 2000, there were no amounts outstanding under the
Genzyme Credit Line. This line was eliminated as of February 2000 as a result of
the offering.
In March 1997, the Company amended the Convertible Debt Agreement with
Genzyme to provide for continued funding by Genzyme of the development costs of
the AT-III program through June 30, 1997. In June 1997, the Company agreed to
extend the Convertible Debt Agreement until December 31, 1997. Under the
agreements in effect in 1997, Genzyme provided $7 million in development
funding. In July 1997, the Company and Genzyme announced an agreement to
establish a joint venture for the development, marketing and distribution of
AT-III, subject to the execution of a definitive agreement. On January 1, 1998,
a definitive collaboration agreement for the ATIII LLC joint venture between the
Company and Genzyme was executed (see Note 11).
In November 1999, the Company completed a $6.6 million private placement of
Series B Preferred Stock to Genzyme. The proceeds from this placement were used
to redeem $6.6 million of the Company's Series A Preferred Stock. In connection
with the issuance of the Series B Preferred Stock, the Company issued warrants
to purchase 85,324 shares of the Company's common stock at $6.30 per share to
Genzyme.
NOTE 10. OTHER AGREEMENTS
TUFTS UNIVERSITY SCHOOL OF VETERINARY MEDICINE ("TUFTS")
Since 1988, pursuant to a cooperation agreement, the Company has funded an
ongoing program to develop transgenic animals at Tufts. During the term of the
agreement, which extends through September 2000, Tufts has agreed to work
exclusively with the Company for commercial applications within the field of
transgenic protein production in milk. The Company paid Tufts $313,000, $402,000
and $284,000
46
for the fiscal years ended January 2, 2000, January 3, 1999 and December 28,
1997, respectively. Sales of products derived from transgenic goats produced by
Tufts, or from their offspring, are subject to royalties payable to Tufts.
NOTE 11. JOINT VENTURES
In 1990, Genzyme entered into the SMIG JV joint venture with Sumitomo Metal
Industries to develop proteins produced transgenically. The SMIG JV has engaged
the Company, as the successor to Genzyme's Transgenics business, to perform
research and development for which the Company is reimbursed a portion of its
costs and receives additional payments based on achievement of specified
milestones. However, GTC does not have any intercompany profits or losses as a
result of its transactions with the SMIG JV. This three-year program ended
during 1993 and the parties decided to extend the contract for an additional
three years.
The Company has contributed $4 million to the SMIG JV since inception. The
Company maintained a 22% ownership since 1994 and accounted for the SMIG JV on
the equity basis since then. For the fiscal years January 2, 2000, January 3,
1999 and December 28, 1997, the Company recognized revenue of $450,000, $0 and
$4,413,000, respectively, under the SMIG JV agreement. As of January 3, 1999,
the Company no longer has any obligation nor intention to provide financial
support to the SMIG JV and since the investment balance has been written down to
zero, it has discontinued recognizing its share of SMIG JV's losses.
The SMIG JV has a license, exclusive as to Asia and non-exclusive as to
Europe, to use the Company's transgenic technology and to market and sell
products and transgenic animals produced by the SMIG JV based on that
technology. The Company retained the exclusive right to market and sell such
products within the Americas. Each party is obligated to make royalty payments
based on its sales of products developed by the SMIG JV and, additionally, the
Company is obligated to pay royalties on sales of other transgenically produced
proteins in Asia.
On January 1, 1998, a definitive collaboration agreement for the ATIII LLC
joint venture between the Company and Genzyme was executed. Under the terms of
the agreement, Genzyme will fund 70% of the development costs, excluding
facility costs, up to $33 million including costs incurred in 1997. The Company
will fund the other 30% of these costs. Development costs in excess of these
amounts will be funded equally by the partners. The Company and Genzyme will
also make capital contributions to ATIII LLC sufficient to pay 50% each of all
new facility costs to be incurred. In addition to the funding, both partners
will contribute manufacturing, marketing and other resources to ATIII LLC at
cost. Under the agreement to establish the joint venture, Genzyme and the
Company were the only members and owned 3.7% and 96.3% interest, respectively.
In accordance with the executed purchase agreement, the Company sold and
assigned a 46.3% ownership interest to Genzyme so that Genzyme and GTC each own
50% of the venture. The purchase price was $12,500,010, payable as follows: an
initial payment of $10 upon execution of the purchase agreement, $2.5 million
after the second consecutive quarter in which net sales of collaboration
products for such quarter exceed $5 million, and $10 million on the first full
approval, if and when approved by the Food and Drug Administration ("FDA") of a
major market country or by the European Union's European Medicines Evaluation
Agency ("EMEA") of (i) a BLA filed by ATIII LLC for the use of transgenic AT-III
for the treatment of sepsis or (ii) an amendment to the BLA previously filed by
ATIII LLC and approved by the FDA of a major market country or by the EMEA to
add sepsis as an indication for transgenic AT-III. The Company will record the
contingent payments if and when received. Profits and losses are shared
according to ownership percentages. These agreements cover all territories other
than Asia. The Company accounts for its 50% ownership of the ATIII LLC under the
equity method. For the fiscal years ended January 2, 2000 and January 3, 1999,
the Company recognized research and development revenue and related expenses of
$4,491,000 and $3,318,000, respectively, under ATIII LLC.
47
Summarized financial information for ATIII LLC is as follows:
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
-------------------- --------------------
Balance sheet data:
Current assets........................ $2,646 $3,525
Noncurrent assets..................... 220 200
Current liabilities................... 2,554 3,078
Venturers' capital.................... 312 647
FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- -----------------
Statement of operations data:
Research and development expenses.......... $12,106 $11,984
General and administrative expense......... 141 35
------- -------
Net loss................................. $12,247 12,019
======= =======
NOTE 12. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (PRO FORMA BALANCE SHEET)
In February 2000, the Company completed a public offering of 3.5 million
shares of common stock at $20 per share. The Company granted the underwriters an
option to purchase an additional 525,000 shares of its common stock to cover
over-allotments which was exercised. In total, the Company issued 4,025,000
shares, including underwriter's overallotment, with net proceeds to the Company
of $75.1 million. Subsequent to the completion of the secondary public offering,
the Company paid down its revolving credit lines in the amount of
$15.8 million. Following this pay down, $15.8 million was available under these
credit lines. Accordingly, the Pro Forma Balance Sheet reflects net proceeds of
$75.1 million from the issuance of 4,025,000 shares of common stock as well as
the full pay down of the line of credit in the amount of $15.8 million.
In conjunction with the offering, the Company issued a Notice of Redemption
to Genzyme for all outstanding shares of the Company's Series B Preferred Stock.
Prior to the effectiveness of this redemption, Genzyme converted the Series B
Preferred Stock into 1,048,021 shares of common stock. The Company paid a cash
dividend of $157,000 in conjunction with the conversion. After conversion of the
Series B Preferred Stock and completion of the public offering, Genzyme owns
approximately 31% of the Company's common stock and 37% on a fully diluted
basis. As a result of the offering, the $6.3 million Genzyme Credit Line was
eliminated.
In March 2000, the Company issued a warrant call notice for the 450,000
warrants issued in connection with the Series A Preferred Stock. Each warrant
has an exercise price of $15.16 per share. All of the warrants were exercised
with proceeds to the Company of $6.8 million.
48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Steering Committee and the
Venturers of AT III LLC:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in Venturers' capital present
fairly, in all material respects, the financial position of the ATIII LLC (the
"Company") (A Development Stage Enterprise) at December 31, 1999 and
December 31, 1998, and the results of its operations and its cash flows for each
of the two fiscal years in the period ended December 31, 1999 and for the
cumulative period from inception (January 1, 1998) to December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000
49
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash...................................................... $ 495,016 $ 1,135,038
Contributions receivable--Genzyme Transgenics
Corporation............................................. 2,150,919 2,389,631
------------ ------------
Total current assets.................................... 2,645,935 3,524,669
Net fixed assets............................................ 220,258 200,484
------------ ------------
$ 2,866,193 $ 3,725,153
============ ============
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Accounts payable--Genzyme Corporation..................... $ 2,110,218 $ 2,109,969
Accounts payable--Genzyme Transgenics Corporation......... 413,955 968,344
Accrued expenses.......................................... 30,000 --
------------ ------------
Total liabilities........................................... 2,554,173 3,078,313
Venturers' capital:
Genzyme Corporation....................................... 16,496,202 8,337,512
Genzyme Transgenics Corporation........................... 8,081,261 4,328,147
Deficit accumulated during the development stage.......... (24,265,443) (12,018,819)
------------ ------------
Total venturers' capital.................................... 312,020 646,840
------------ ------------
$ 2,866,193 $ 3,725,153
============ ============
The accompanying notes are an integral part of these financial statements.
50
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE
CUMULATIVE
PERIOD
FOR THE YEARS ENDED FROM INCEPTION
--------------------------- (JANUARY 1, 1998)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
------------ ------------ -----------------
Operating costs and expenses:
General and administrative....................... $ 140,592 $ 34,721 $ 175,313
Research and development--Genzyme Corporation.... 7,615,478 8,666,328 16,281,806
Research and development--Genzyme Transgenics
Corporation.................................... 4,490,554 3,317,770 7,808,324
------------ ------------ ------------
Total operating costs and expenses................. 12,246,624 12,018,819 24,265,443
------------ ------------ ------------
Net loss........................................... $(12,246,624) $(12,018,819) $(24,265,443)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
51
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE
CUMULATIVE
PERIOD
FOR THE YEARS ENDED FROM INCEPTION
--------------------------- (JANUARY 1, 1998)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
------------ ------------ -----------------
Operating activities:
Net loss........................................... $(12,246,624) $(12,018,819) $(24,265,443)
Reconciliation of net loss to net cash used in
operating activities:
Depreciation..................................... 35,022 12,485 47,507
Accounts receivable.............................. 238,712 -- 238,712
Accounts payable................................. (554,140) 3,078,313 2,524,173
Accrued expenses................................. 30,000 30,000
Loss on disposal of fixed assets................. 4,742 -- 4,742
------------ ------------ ------------
Net cash used in operating activities.............. (12,492,288) (8,928,021) (21,420,309)
Investing activities:
Purchase of property, plant and equipment........ (59,538) (212,969) (272,507)
------------ ------------ ------------
Net cash used in investing activities.............. (59,538) (212,969) (272,507)
Financing activities:
Capital contributions by Genzyme Corporation..... 8,158,690 8,337,512 16,496,202
Capital contributions by Genzyme Transgenics
Corporation.................................... 3,753,114 1,938,516 5,691,630
------------ ------------ ------------
Net cash provided by financing activities.......... 11,911,804 10,276,028 22,187,832
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... (640,022) 1,135,038 495,016
Cash and cash equivalents at beginning of period... 1,135,038 -- --
------------ ------------ ------------
Cash and cash equivalents at end of period......... $ 495,016 $ 1,135,038 $ 495,016
============ ============ ============
The accompanying notes are an integral part of these financial statements.
52
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN VENTURERS' CAPITAL
GENZYME TOTAL
GENZYME TRANSGENICS VENTURERS'
CORPORATION CORPORATION CAPITAL
----------- ----------- ------------
Capital contribution.................................. $ 7,835,468 $ 1,938,516 $ 9,773,984
Contributions receivable.............................. -- 2,389,631 2,389,631
Advance contributions................................. 502,044 -- 502,044
Net loss.............................................. (7,690,672) (4,328,147) (12,018,819)
----------- ----------- ------------
Balance at December 31, 1998.......................... 646,840 -- 646,840
----------- ----------- ------------
Capital contribution.................................. 8,158,690 1,602,195 9,760,885
Contributions receivable.............................. -- 2,150,919 2,150,919
Advance contributions................................. -- -- --
Net loss.............................................. (8,493,510) (3,753,114) (12,246,624)
----------- ----------- ------------
Balance at December 31, 1999.......................... $ 312,020 $ -- $ 312,020
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
53
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND NATURE OF BUSINESS:
ATIII LLC ("the Company") is a limited liability company organized under the
laws of Delaware. The Company was established as a Joint Venture among
Genzyme Corporation ("Genzyme") and Genzyme Transgenics Corporation ("GTC")
under the terms of a collaboration agreement dated January 1, 1998 which
stated original ownership of the Company at 96.3% and 3.7% by GTC and
Genzyme (collectively the "Members"), respectively. Immediately thereafter,
a purchase agreement was executed so that GTC sold to Genzyme a 46.3%
ownership of the Company for an aggregate amount of $12,500,010 payable as
follows: $10 upon execution of the purchase agreement, $2,500,000 after the
second consecutive quarter in which net sales of collaboration products for
such quarter exceed $5,000,000 and $10,000,000 upon product approval as
defined in the agreement.
The Company was organized as the vehicle for a joint venture between GTC and
Genzyme to develop and commercialize products comprising of ATIII together
with processes developed and/or licensed through GTC and Genzyme throughout
the territories defined within the collaboration agreement (the
"Collaboration Products"). Immediately following the execution of the
collaboration and purchase agreements, a restated operating agreement was
executed between Genzyme, GTC and ATIII LLC. The operating agreement
establishes the allocation of profit and losses in accordance with the
ownership percentages. In no event shall the net losses of the Company be
allocated to a member if such allocation would cause or increase a negative
balance in such member's adjusted capital account. In the event that net
losses were reallocated to other members to avoid a negative balance,
subsequent profits would first be allocated to the members to restore the
capital accounts of the members to reflect the ownership percentage.
Distributions shall be made annually to each Member under the terms set
forth in the operating agreement in amounts equal to (a) the amount of items
of gross income allocated to the Members in accordance with their respective
ownership percentages and (b) thereafter, to the Members in proportion to
their positive capital accounts reduced by their initial capital
contributions, determined to be $13,500,000 each per the operating
agreement.
Since its inception, the Company has devoted substantially all of its
efforts to establishing its business and developing its initial products.
Accordingly through the date of the financial statements, the Company is
considered to be a development stage company. The Company has incurred
losses since inception and expects to incur net operating losses and
negative cash flows from operations in the near term.
Under the terms of the collaboration agreement, Genzyme and GTC are required
to make capital contributions to the Company. Genzyme and GTC shall make
contributions sufficient to pay (a) 70% and 30%, respectively, of all
program costs, including costs incurred in 1997, other than new facility
costs until such time as the aggregate capital contributions by Genzyme
equals $33,000,000, and (b) 50% each of all program costs other than new
facility costs thereafter. The Members will also make capital contributions
to the Company sufficient to pay 50% of all new facility costs. In the event
that either GTC or Genzyme fails to make a capital contribution pursuant to
these requirements and the other Member does not elect to terminate the
agreement, then the percentage interests in the Company and the future
funding responsibilities of the Members shall be adjusted. At December 31,
1999 and December 31, 1998, each Member owned 50% of the Company.
54
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements have been prepared under the accrual method of
accounting in conformity with generally accepted accounting principles in
the United States of America. All balances are denominated in United States
dollars, unless otherwise noted.
FISCAL YEAR-END
Under the terms of the operating agreement, the fiscal year end of the Joint
Venture is December 31.
CONCENTRATION OF CREDIT RISK
The Company maintains all of its cash at one commercial bank.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
FIXED ASSETS
Fixed assets consisting of equipment are stated at cost and depreciated
using the straight-line method over an estimated useful life of seven years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
INCOME TAXES
The Company is considered a partnership for federal and state income tax
purposes. As such, items of income, loss, deductions and credits flow
through to the Members. The Members have responsibility for the payment of
any income tax and are entitled to losses for their proportionate share of
taxable income or loss of the Company.
UNCERTAINTIES
The Company is subject to risks common to companies in the biotechnology
industry, including but not limited to, development by its competitors of
new technological innovations, protection of proprietary technology, health
care cost containment initiatives, product liability and compliance with the
government regulations, including those of the U.S. Department of Health and
Human Services and the U.S. Food and Drug Administration.
55
ATIII LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. RESEARCH AND DEVELOPMENT COSTS:
The research and development efforts are currently being conducted by the
two members, GTC and Genzyme. The costs incurred by the two related parties,
which are subject to an annual budget as approved by the Company's Steering
Committee, are then charged to the Company.
D. FIXED ASSETS:
At December 31, 1999 and December 31, 1998, gross fixed assets of $267,766
and $212,969, respectively, had an associated depreciation of $47,508 and
$12,485, respectively.
E. LICENSED TECHNOLOGY:
During the terms of the collaboration agreement GTC and Genzyme have granted
to the Company exclusive, irrevocable royalty-free rights and sublicenses,
with the right to grant further sublicenses, under the GTC/Genzyme licensed
ATIII patent rights, technology, know-how, and any associated technology and
manufacturing know-how owned or controlled by the Members to develop, make,
have made, use, offer for sale, sell, have sold, import and export
collaboration products in the field and territory.
F. TRANSACTIONS AND AFFILIATES:
The Company's operating expenses are for payments to the Members and their
affiliates for project expenses incurred, either as internal operating costs
or as third-party obligations on behalf of the Company. At December 31, 1999
and December 31, 1998, the Company owed $2,554,173 and $3,078,313,
respectively, to the Members for project expenses and equipment purchased by
Members on behalf of the Company.
The Company has an agreement effective for 1999 with Genzyme Corporation,
acting through its Molecular Oncology Division ("GMO") and ATIII LLC, to
develop and commercialize the angiogenesis inhibitor protein aaATIII as a
potential treatment for cancer. GMO and the Company will equally share in
the development costs of aaATIII and equally share in any profits from a
successful oncology product created through the collaboration. The Company
will have the rights to develop aaATIII for potential non-oncologic
indications. The Company incurred costs of $507,637 through December 31,
1999.
G. VENTURERS' CAPITAL:
Venturers' capital is comprised of monthly capital contributions made by the
Members to fund budgeted costs and expenses of the Company in accordance
with the Collaboration Agreement, net of losses allocated to the Members. As
of December 31, 1999 and December 31, 1998, there was an unpaid capital
contribution of $2,150,919 and $2,389,631, respectively, owed to the Company
from one Member, which has been included in venturers' capital in the
accompanying financial statements. The amounts were subsequently paid in
January 2000 and March 1999, respectively. Additionally, there was a
contribution of $502,044 received from the other member in advance of 1999
spending and none in 2000.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Framingham,
Massachusetts on the 3rd day of April 2000.
GENZYME TRANSGENICS CORPORATION
By: /s/ SANDRA NUSINOFF LEHRMAN
-----------------------------------------
Sandra Nusinoff Lehrman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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 date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES A. GERAGHTY
------------------------------------------- Chairman of the Board April 3, 2000
James A. Geraghty
/s/ SANDRA NUSINOFF LEHRMAN
------------------------------------------- President, Chief Executive April 3, 2000
Sandra Nusinoff Lehrman Officer and Director
/s/ JOHN B. GREEN Chief Financial and Accounting
------------------------------------------- Officer (Principal Financial April 3, 2000
John B. Green and Accounting Officer)
/s/ ROBERT W. BALDRIDGE
------------------------------------------- Vice Chairman of the board April 3, 2000
Robert W. Baldridge
/s/ HENRI A. TERNEER
------------------------------------------- Director April 3, 2000
Henri A. Terneer
/s/ ALAN E. SMITH
------------------------------------------- Director April 3, 2000
Alan E. Smith
/s/ HENRY E. BLAIR
------------------------------------------- Director April 3, 2000
Henry E. Blair
/s/ ALAN W. TUCK
------------------------------------------- Director April 3, 2000
Alan W. Tuck
/s/ FRANCIS J. BULLOCK
------------------------------------------- Director April 3, 2000
Francis J. Bullock
57
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JANUARY 2, 2000
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 14, 1994,
among TSI Corporation ("TSI"), Genzyme Transgenics
Corporation ("GTC") and New Acorn Corporation. Filed as
Appendix A to the Joint Proxy Statement--Prospectus
included in Part I of the Company's Registration Statement
on Form S-4 (File No. 33-80924) (the "GTC S-4") and
incorporated herein by reference.
2.2 Asset Purchase and Sale Agreement, dated as of January 3,
1995, between The TSI Center for Diagnostic Products, Inc.
and BioVest, Inc. Filed as Exhibit 2.2 to the original
filing of the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 (Commission File
No. 0-21794) (the "GTC 1994 10-K") and incorporated herein
by reference. Pursuant to Item 601(b)(2) of Regulation
S-K, the schedules to this Agreement are omitted. A list
of such schedules appears in the table of contents to the
Agreement. The Company hereby undertakes to furnish
supplementally upon request a copy of any such schedule to
the Commission.
2.3 Agreement and Plan of Merger, dated May 23, 1995, among GTC,
Biodevelopment Laboratories, Inc. and BDL Acquisition
Corp. Filed as Exhibit 2 to the Company's Current Report
on Form 8-K dated as of July 3, 1995 (File No. 0-21794)
and incorporated herein by reference.
2.4 Share Purchase Agreement, dated as of September 1, 1995,
among GTC, TSI and Quintiles Holdings Limited. Filed as
Exhibit 2 to the Company's Current Report on Form 8-K
dated as of September 19, 1995 (File No. 0-21794) and
incorporated herein by reference.
3.1.1 Restated Articles of Organization of GTC, filed with the
Secretary of the Commonwealth of Massachusetts on
December 27, 1993. Filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 0-21794) (the "GTC 1993 10-K")
and incorporated herein by reference.
3.1.2 Articles of Amendment to the Restated Articles of
Organization filed with the Secretary of the Commonwealth
of Massachusetts on October 3, 1994. Filed as
Exhibit 3.1.2 to GTC's Annual Report on Form 10-K for the
year ended December 28, 1997 (File No. 0-21794) (the "GTC
1997 10-K") and incorporated herein by reference.
3.1.3 Articles of Amendment to the Restated Articles of
Organization filed with the Secretary of Commonwealth of
Massachusetts on June 26, 1997. Filed as Exhibit 3 to
GTC's Quarterly Report on Form 10-Q for the quarter ended
June 29, 1997 (File No. 0-21794) (the "GTC June 1997
10-Q") and incorporated herein by reference.
3.1.4 Certificate of Vote of Directors Establishing a Series of a
Class of Stock (Series A Convertible Preferred Stock).
Filed with the Secretary of the Commonwealth of
Massachusetts on March 20, 1998. Filed as Exhibit 3.1.4 to
the GTC 1997 10-K and incorporated herein by reference.
3.1.5 Certificate of Vote of Directors Establishing a Series of a
Class of Stock (Series B Convertible Preferred Stock).
Filed with the Secretary of the Commonwealth of
Massachusetts on November 12, 1999. Filed as
Exhibit 4.1.4 to the Company's Registration Statement on
Form S-3 (File No. 333-94187) and incorporated herein by
reference.
58
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
3.2 By-Laws of the Company, as amended. Filed as Exhibit 3.1 to
the Company's Form 10-Q for the quarter ended July 4,
1999 (File No. 000-21794) (the "GTC July 1999 10-Q") and
incorporated herein by reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
the GTC S-1 and incorporated herein by reference.
4.2 Specimen Series A Convertible Preferred Stock Certificate.
Filed as Exhibit 4.4 to the GTC 1997 10-K and incorporated
herein by reference.
4.3 Specimen Series B Convertible Preferred Stock Certificate.
Filed as Exhibit 4.4 to the Company's Registration
Statement on Form S-3 (File No. 333-94187) and
incorporated herein by reference.
4.4.1 TSI Specimen Warrant Certificate. Filed as Exhibit 4.8 to
TSI's Registration Statement on Form S-3 (File
No. 33-48107) and incorporated herein by reference.
4.4.2 TSI Common Stock Purchase Warrant No. G-1, dated
September 27, 1994, issued to Financing for Science
International, Inc. ("FSI"). Filed as Exhibit 4.4 to the
original filing of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (the
"GTC 1994 10-K) and incorporated herein by reference.
4.4.3 Form of Notice of Assumption by GTC of the TSI Common Stock
Purchase Warrants Nos. F-1 and G-1. Filed as Exhibit 4.5
to the original filing of the GTC 1994 10-K and
incorporated herein by reference.
4.5 Common Stock Purchase Warrant, dated June 30, 1995, issued
to FSI. Filed as Exhibit 10.9 to the Company's Quarterly
Report on Form 10-Q for the period ended July 2, 1995
(Commission File No. 0-21794) (the "GTC July 1995 10-Q")
and incorporated herein by reference.
4.6 Common Stock Purchase Warrant, dated July 3, 1995, issued to
Genzyme. Filed as Exhibit 10.5 to the GTC July 1995 10-Q
and incorporated herein by reference.
4.7 Common Stock Purchase Warrant, dated March 13, 1996, issued
to FSI. Filed as Exhibit 4.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
(File No. 0-21794) (the "GTC 1995 10-K") and incorporated
herein by reference.
4.8 Common Stock Purchase Warrant, dated as of June 26, 1997,
issued to Government Land Bank d/b/a The MassDevelopment
("MassDevelopment"). Filed as Exhibit 4 to the GTC
June 1997 10-Q and incorporated herein by reference.
4.9 Common Stock Purchase Warrant, dated as of December 28,
1998, issued to Genzyme. Filed as Exhibit 4.11 to the
original filing of the Company's Annual Report on
Form 10-K for the year ended January 3, 1999 (the "GTC
1999 10-K") and incorporated herein by reference.
4.10 Registration Rights Agreement between the Company and
certain Stockholders named therein. Filed as
Exhibit 10.53 to the GTC 1997 10-K and incorporated herein
by reference.
4.11 Warrant to Purchase Common Stock, dated November 22, 1999,
issued to Genzyme. Filed as Exhibit 8 to Genzyme's
Amendment No. 6 to Schedule 13D (File No. 055-48837) filed
with the Commission on November 24, 1999 and incorporated
herein by reference.
4.12 Warrant to Purchase Common Stock, dated November 22, 1999,
issued to Genzyme. Filed as Exhibit 9 to Genzyme's
Amendment No. 6 to Schedule 13D (File No. 055-48837) filed
with the Commission on November 24, 1999 and incorporated
herein by reference.
59
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.1 Technology Transfer Agreement between GTC and Genzyme
Corporation ("Genzyme"), dated as of May 1, 1993. Filed as
Exhibit 2.1 to the GTC S-1 and incorporated herein by
reference.**
10.2 Research and Development Agreement between GTC and Genzyme,
dated as of May 1, 1993. Filed as Exhibit 10.1 to the
GTC S-1 and incorporated herein by reference.
10.3 Services Agreement between GTC and Genzyme, dated as of
May 1, 1993. Filed as Exhibit 10.2 to the GTC S-1 and
incorporated herein by reference.
10.4 Sublease Agreement between GTC and Genzyme, dated as of
May 1, 1993. Filed as Exhibit 10.3 to the GTC S-1 and
incorporated herein by reference.
10.5 License Agreement between GTC and Genzyme, as successor to
IG Laboratories, Inc., dated as of May 1, 1993. Filed as
Exhibit 10.4 to the GTC S-1 and incorporated herein by
reference.
10.6 Series A Convertible Preferred Stock Purchase Agreement
between GTC and Genzyme, dated as of May 1, 1993. Filed as
Exhibit 10.5 to the GTC S-1 and incorporated herein by
reference.
10.7.1 Mortgage and Security Agreement, dated as of June 30, 1995,
between GTC and Genzyme. Filed as Exhibit 10.6 to the
GTC July 1995 10-Q and incorporated herein by reference.
10.7.2 First Amendment to Mortgage and Security Agreement, dated as
of December 15, 1995, between GTC and Genzyme. Filed as
Exhibit 10.7.2 to the GTC 1996 10-K and incorporated
herein by reference.
10.7.3 Second Amended to Mortgage and Security Agreement, dated as
of December 28, 1998, between the GTC and Genzyme. Filed
herewith.
10.8* GTC 1993 Equity Incentive Plan, as amended through May 25,
1999. Filed as Exhibit 10.2 to GTC's July 1999 10-Q and
incorporated herein by reference.
10.9* GTC 1993 Employee Stock Purchase Plan, as amended through
May 28, 1997. Filed as Exhibit 10.4 to the GTC June 1997
10-Q and incorporated herein by reference.
10.10* GTC 1993 Director Stock Option Plan, as amended through
May 27, 1998. Filed as Exhibit 10.3 to the GTC June 1998
10-Q and incorporated herein by reference.
10.11 GTC Form of Confidential and Proprietary Information
Agreement signed by GTC employees. Filed as Exhibit 10.9
to the GTC S-1 and incorporated herein by reference.
10.12 GTC Form of Agreement Not to Compete. Filed as
Exhibit 10.10 to the GTC S-1 and incorporated herein by
reference.
10.13 Form of Indemnification Agreement between GTC and its
directors. Filed as Exhibit 10.12 to the original filing
of the GTC 1994 10-K and incorporated herein by reference.
Such agreements are materially different only as to the
signing directors and the dates of execution.
10.14 License Agreement between GTC and Biogen, Inc., dated
December 26, 1990. Filed as Exhibit 10.12 to the GTC S-1
and incorporated herein by reference.**
10.15 Agreement between GTC, SMI Genzyme Limited ("SMIG") and a
European pharmaceutical company, dated as of
September 29, 1990. Filed as Exhibit 10.13 to the GTC S-1
and incorporated herein by reference.**
60
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.16 Research and Development Agreement between Genzyme and SMIG,
dated as of September 11, 1990, filed as Exhibit 10.14 to
the GTC S-1, as amended by an Agreement between GTC and
SMIG, dated as of March 15, 1994, filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994, and, in each case,
incorporated herein by reference.**
10.17 Joint Venture and Shareholders Agreement between GTC,
Sumitomo Metal Industries, Ltd. ("SMI") and SMIG, dated as
of September 7, 1990. Filed as Exhibit 10.15 to the
GTC S-1 and incorporated herein by reference.
10.18 Shareholders' Subscription Agreement among GTC, SMI and
SMIG, dated as of March 15, 1994. Filed as Exhibit 10.17
to the GTC 1993 10-K and incorporated herein by
reference.**
10.19.1 Cooperation and Licensing Agreement between GTC and Tufts
University, dated September 6, 1988, as amended through
May 13, 1993 (the "Cooperation and Licensing Agreement").
Filed as Exhibit 10.18 to the GTC 1994 10-K and
incorporated herein by reference.**
10.19.2 Amendment No. 7, dated April 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the period
ended October 1, 1995 (File No. 0-294) (the
"GTC October 1995 10-Q") and incorporated herein by
reference.
10.19.3 Amendment No. 8, dated October 21, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.7 to the
GTC October 1995 10-Q and incorporated herein by
reference.
10.19.4 Amendment No. 9, dated December 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.8 to the
GTC October 1995 10-Q and incorporated herein by
reference.**
10.19.5 Amendment No. 10, dated November 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.9 to the
GTC October 1995 10-Q and incorporated herein by
reference.
10.19.6 Amendment No. 11, dated May 25, 1995, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.10 to the
GTC October 1995 10-Q and incorporated herein by
reference.
10.20 United States Patent No. 4,873,191 Sublicense Agreement
between DNX, Inc. and Genzyme Regarding Transgenic
Experimental Animals and Transgenic Mammary Production
Systems, dated February 1, 1990; and letter of amendment,
dated April 19, 1991. Filed together as Exhibit 10.17 to
the GTC S-1 and incorporated herein by reference.**
10.21.1 Indenture of Lease, dated March 17, 1986, between TSI Mason
Laboratories, Inc. ("Mason") and Stephen W. Wolfe and
William C. Greene as Trustees of the Fifty-Seven Union
Street Trust (the "Mason Lease"). Filed as Exhibit 10.15
to TSI's Registration Statement on Form S-1 (File
No. 33-33708) and incorporated herein by reference.
10.21.2 Amendment to the Mason Lease, dated September 30, 1993.
Filed as Exhibit 10.4 to Amendment No. 1 to TSI's Annual
Report on Form 10-K for the fiscal year ended June 27,
1993 (the "TSI 1993 10-K") and incorporated herein by
reference.
10.21.3 Guaranty by TSI of the obligations of Mason under the TSI
Mason Lease. Filed as Exhibit 10.41 to the TSI 1993 10-K
and incorporated herein by reference.
61
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.22 Lease Agreement, dated September 25, 1989, between TSI and
Laboratory Animal Services, Inc. and Greg E. Beatty and
Betty L. Beatty. Filed as Exhibit 10.15 to TSI's Annual
Report on Form 10-K for the fiscal year ended July 1, 1990
and incorporated herein by reference.
10.23.1 Lease Agreement, dated November 14, 1990, between TSI and
Hechinger Enterprises ("the Hechinger Lease"). Filed as
Exhibit 10.21 to Amendment No. 2 to TSI's Registration
Statement on Form S-1 (File No. 33-39008) and incorporated
herein by reference.
10.23.2 First Amendment to the Hechinger Lease, dated January 20,
1991. Filed as Exhibit 10.22 to Amendment No. 1 to TSI's
Registration Statement on Form S-1 (File No. 33-39008) and
incorporated herein by reference.
10.24 Non-Competition and Confidentiality Agreement, dated as of
August 7, 1991, between TSI and Mildred S. Christian.
Filed as Exhibit 10.27 to Amendment No. 2 to TSI's
Registration Statement on Form S-1 (File No. 33-44724) and
incorporated herein by reference.
10.25 Agreement to Terminate Existing Leases and Contemporaneously
to Enter Into a New Lease, dated as of July 1, 1992,
between Heffernan and Partners and Argus Research
Laboratories, Inc. Filed as Exhibit 10.31 to the TSI 1993
10-K and incorporated herein by reference.
10.26.1 Lease Agreement, dated as of October 8, 1992, between W.M.
Rickman Construction Company and TSI Washington
Laboratories, Inc. (the "Washington Lease"). Filed as
Exhibit 10.32 to the TSI 1993 10-K and incorporated herein
by reference.
10.26.2 Amendment to the Washington Lease, dated as of January 17,
1995. Filed as Exhibit 10.26.2 to the GTC 1997 10-K and
incorporated herein by reference.
10.26.3 Second Amendment and accompanying Side Agreement to the
Washington Lease, dated as of July 7, 1997. Filed as
Exhibit 10.26.3 to the GTC 1997 10-K and incorporated
herein by reference.
10.27 Lease dated March 26, 1999 between Genzyme Transgenics
Corporation and NDNE 9/90 Corporate Center LLC. Filed as
Exhibit 10.1 to GTC's July 1999 10-Q and incorporated
herein by reference.
10.28.1 Second Amended and Restated Convertible Debt Agreement,
dated as of December 28, 1998, between the GTC and
Genzyme. Filed as Exhibit 10.37 to Genzyme's Annual Report
on Form 10-K for the year ended December 31, 1998 (File
No. 0-14680) and incorporated herein by reference.
10.28.2 Amended and Restated Convertible Revolving Credit Note in
the amount of $6,300,000, dated as of December 28, 1998,
executed by GTC to Genzyme. Filed as Exhibit 10.29.2 to
the original filing of the GTC 1999 10-K and incorporated
herein by reference.
10.28.3 Amended and Restated Reimbursement Agreement, dated as of
December 28, 1998, 1995, among GTC, certain of its
subsidiaries and Genzyme. Filed as Exhibit 10.57.4 to the
original filing of the GTC 1999 10-K and incorporated
herein by reference.
10.28.4 Amended and Restated Security Agreement, dated as of
December 28, 1998, among GTC, certain of its subsidiaries
and Genzyme. Filed herewith.
10.28.5 Hazardous Materials Indemnity Agreement, December 28, 1998,
between the GTC and Genzyme. Filed herewith.
62
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.29 Master Equipment Lease Agreement, dated as of September 27,
1994, between TSI and FSI. Filed as Exhibit 10.33 to the
original filing of the GTC 1994 10-K and incorporated
herein by reference.
10.30.1 Reserve Pledge and Security Agreement, dated as of
September 27, 1994, between TSI and FSI. Filed as
Exhibit 10.34 to the original filing of the GTC 1994 10-K
and incorporated herein by reference.
10.30.2 Modification to Reserve Pledge and Security Agreement, dated
as of June 30, 1995, between TSI and FSI. Filed as
Exhibit 10.35.2 to the GTC 1997 10-K and incorporated
herein by reference.
10.31 Security Agreement, dated as of September 27, 1994, between
TSI and FSI. Filed as Exhibit 10.35 to the original filing
of the GTC 1994 10-K and incorporated herein by reference.
10.32.1 Intercreditor Agreement, dated as of July 3, 1995, among
GTC, TSI, certain other subsidiaries of GTC, Finova and
FSI. Filed as Exhibit 10.7 to the GTC July 1995 10-Q and
incorporated herein by reference.
10.32.2 First Amendment to Intercreditor Agreement, dated as of
December 28, 1998, among GTC, Genzyme, certain other
subsidiaries of GTC, and Finova. Filed herewith.
10.33 Guaranty of Lease, dated as of December 26, 1996, by GTC in
favor of FSI. Filed as Exhibit 10.38 to the GTC 1997 10-K
and incorporated herein by reference.
10.34 Conversion and Registration Rights Agreement, dated as of
June 29, 1994, between GTC and TSI. Filed as
Exhibit 10.47 to the GTC S-4 and incorporated herein by
reference.
10.35 Common Stock Purchase Agreement, dated as of June 8, 1995,
between GTC and Genzyme. Filed as Exhibit 10.1 to the
GTC July 1995 10-Q and incorporated herein by reference.
10.36* Amended and Restated Employment Agreement, dated as of
August 28, 1997, between the Company and John B. Green.
Filed as Exhibit 10.2 to the GTC September 1997 10-Q and
incorporated herein by reference.
10.37* Amended and Restated Employment Agreement, dated as of
September 16, 1997, between the Company and Peter Glick.
Filed as Exhibit 10.3 to the GTC September 1997 10-Q and
incorporated herein by reference.
10.38* Employment Agreement, dated as of March 27, 1996, between
GTC and Harry Meade. Filed as Exhibit 10.44 to the
Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996 and incorporated herein by reference.
10.39* Form of Employment and Consulting Agreement among GTC, TSI
and Robert W. Baldridge. Filed as Exhibit 10.56 to the
GTC S-4 and incorporated herein by reference.
10.40.1 Agreement, dated as of September 21, 1994, between GTC and
Gene Pharming Europe B.V. ("Pharming B.V."). Filed as
Exhibit 10.49 to the Company's Registration Statement on
Form S-1 (File No. 333-05843) and incorporated herein by
reference.**
10.40.2 Amendment Agreement, dated as of April 23, 1997, between
GTC and Pharming B.V. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997 (File No. 0-21794) (the
"GTC March 1997 10-Q") and incorporated herein by
reference.
63
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.41 Development and Commercialization Agreement, dated as of
September 25, 1997, between the Company and Advanced Cell
Technology, Inc. Filed as Exhibit 10.5 to the GTC
September 1997 10-Q and incorporated herein by
reference.**
10.42 Development and Commercialization Agreement, dated as of
September 25, 1997, between the Company and B. Braun
Melsungen AG. Filed as Exhibit 10.6 to the GTC
September 1997 10-Q and incorporated herein by
reference.**
10.43.1 Loan Agreement, dated as of May 22, 1997, between Redfield
and Simmons First National Bank ("SFNB"). Filed as
Exhibit 10.49.1 to the GTC 1997 10-K and in order to
correct a typographical error regarding the date of the
agreement as contained in the version previously filed as
Exhibit 10.9.1 to the GTC June 1997 10-Q.
10.43.2 Promissory Note in the amount of $700,000.00, dated as of
May 22, 1997, executed by Redfield and issued to SFNB.
Filed as Exhibit 10.49.2 to the GTC 1997 10-K in order to
correct a typographical error regarding the date of the
agreement as contained in the version previously filed as
Exhibit 10.9.2 to the GTC June 1997 10-Q.
10.43.3 Promissory Note in the amount of $350,000.00, dated as of
May 22, 1997, executed by Redfield and issued to SFNB.
Filed as Exhibit 10.49.3 to the GTC 1997 10-K in order to
correct a typographical error regarding the date of the
agreement as contained in the version previously filed as
Exhibit 10.9.3 to the GTC June 1997 10-Q.
10.43.4 Mortgage, dated as of May 22, 1997, entered into by and
between Redfield and SFNB. Filed as Exhibit 10.49.4 to the
GTC 1997 10-K in order to correct a typographical error
regarding the date of the agreement as contained in the
version previously filed as Exhibit 10.9.4 to the GTC
June 1997 10-Q.
10.43.5 Security Agreement, dated as of May 22, 1997, entered into
by and between Redfield and SFNB. Filed as
Exhibit 10.49.5 to the GTC 1997 10-K in order to correct a
typographical error regarding the date of the agreement as
contained in the version previously filed as
Exhibit 10.9.5 to the GTC June 1997 10-Q.
10.43.6 Unconditional Guaranty, dated as of May 22, 1997, executed
by TSI Corporation, Inc. in connection with the Loan
Agreement, dated as of May 22, 1997, between Redfield and
SFNB. Filed as Exhibit 10.49.6 to the GTC 1997 10-K in
order to correct a typographical error regarding the date
of the agreement as contained in the version previously
filed as Exhibit 10.9.6 to the GTC June 1997 10-Q.
10.43.7 Unconditional Guaranty, dated as of May 22, 1997, executed
by the Company in connection with the Loan Agreement,
dated as of May 22, 1997, between Redfield and SFNB. Filed
as Exhibit 10.49.7 to the GTC 1997 10-K in order to
correct a typographical error regarding the date of the
agreement as contained in the version previously filed as
Exhibit to 10.9.7 the GTC June 1997 10-Q.
10.44.1 Loan Agreement, dated as of May 22, 1997, between TSI
Redfield Laboratories, Inc. ("Redfield") and Jefferson
County, Arkansas ("Jefferson County"). Filed as
Exhibit 10.2.1 to the GTC June 1997 10-Q and incorporated
herein by reference.
10.44.2 Promissory Note in the amount of $350,000.00, dated as of
May 22, 1997, executed by Redfield and issued to Jefferson
County. Filed as Exhibit 10.2.2 to the GTC June 1997 10-Q
and incorporated herein by reference.
10.44.3 Mortgage, dated as of May 22, 1997, entered into by and
between Redfield and Jefferson County, Arkansas. Filed as
Exhibit 10.2.3 to the GTC June 1997 10-Q and incorporated
herein by reference.
64
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.44.4 Guaranty Agreement, dated as of May 22, 1997, executed by
the Company in connection with the Loan Agreement, dated
as of May 22, 1997, between Redfield and Jefferson County.
Filed as Exhibit 10.2.4 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.45.1 Loan Agreement, dated as of June 26, 1997, between
GTC Mason Laboratories ("Mason") and MassDevelopment.
Filed as Exhibit 10.8.1 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.45.2 Promissory Note in the amount of $5,000,000.00, dated as of
June 26, 1997, executed by Mason and issued to
MassDevelopment. Filed as Exhibit 10.8.2 to the GTC
June 1997 10-Q and incorporated herein by reference.
10.45.3 Mortgage and Security Agreement, dated as of June 26, 1997,
entered into by and between Mason and MassDevelopment.
Filed as Exhibit 10.8.3 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.45.4 Guaranty, dated as of June 26, 1997, executed by the Company
in connection with the Loan Agreement, dated as of
June 26, 1997, between Mason and MassDevelopment. Filed
10.8.4 as Exhibit to the GTC June 1997 10-Q and
incorporated herein by reference.
10.45.5 Hazardous Materials Indemnification Agreement, dated as of
June 26, 1997, entered into by and between Mason and
MassDevelopment. Filed as Exhibit 10.8.5 to the GTC
June 1997 10-Q and incorporated herein by reference.
10.46.1 Amended and Restated Operating Agreement of ATIII LLC dated
as of January 1, 1998. Filed as Exhibit 10.52.1 to the GTC
1997 10-K and incorporated herein by reference.**
10.46.2 Purchase Agreement between GTC and Genzyme dated as of
January 1, 1998, transferring an interest in ATIII LLC
from Genzyme to GTC. Filed as Exhibit 10.52.2 to the GTC
1997 10-K and incorporated herein by reference.**
10.46.3 Collaboration Agreement among Genzyme, GTC and ATIII LLC,
dated as of January 1, 1998. Filed as Exhibit 10.52.3 to
the GTC 1997 10-K and incorporated herein by reference.**
10.47* Employment Agreement dated as of July 1, 1998 between the
Company and Dr. Sandra Nusinoff Lehrman. Filed as
Exhibit 10.1 to the GTC June 1998 10-Q and incorporated
herein by reference.
10.48* Amendment No. 1 to Employment Agreement between the Company
and Dr. Sandra Nusinoff Lehrman. Filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the period
ended September 27, 1998 (File No. 0-21794) (the "GTC
September 1998 10-Q) and incorporated herein by reference.
10.49* Amendment No. 1 to Employment Agreement between the Company
and John B. Green. Filed as Exhibit 10.3 to the GTC
September 1998 10-Q and incorporated herein by reference.
10.50* Consulting Agreement between the Company and James A.
Geraghty. Filed as Exhibit 10.4 to the GTC
September 1998 10-Q and incorporated herein by reference.
10.51.1 Credit Agreement between GTC and Fleet National Bank, dated
as of December 28, 1998. Filed as Exhibit 10.57.1 to the
original filing of the GTC 1999 10-K and incorporated
herein by reference.
10.51.2 Revolving Credit Note in the amount of $17,500,000, dated as
of December 28, 1998, executed by GTC and issued to Fleet
National Bank. Filed as Exhibit 10.57.2 to the original
filing of the GTC 1999 10-K and incorporated herein by
reference.
65
EXHIBIT NO. DESCRIPTION
- - --------------------- ------------------------------------------------------------
10.51.3 Term Note in the amount of $7,100,000, dated as of
December 28, 1998, executed by GTC and issued to Fleet
National Bank. Filed as Exhibit 10.57.3 to the original
filing of the GTC 1999 10-K and incorporated herein by
reference.
10.51.4 First Amendment to Credit Agreement dated as of
November 12, 1999 between Fleet National Bank and GTC.
Filed herewith.
10.52 Extension and Modification of Promissory Note, Mortgage,
Security Agreement and Loan Agreement dated March 31,
1999, by and between Primedica Redfield, Inc. and Simmons
First National Bank. Filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the period ended
April 4, 1999 (File No. 000-21794) and incorporated herein
by reference.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27 Financial Data Schedule. Filed herewith.
99 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
- - ------------------------
* Indicates a management contract or compensatory plan.
** Certain confidential information contained in the document has been omitted
and filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2
promulgated under the Securities and Exchange Act of 1934, as amended
66