SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-21794
GENZYME TRANSGENICS CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3186494
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Crossing Boulevard, Suite 410, Framingham, Massachusetts 01702
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(Address of principal executive offices) (Zip Code)
(508) 620-9700
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Registrant's telephone number, including area code
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 5, 1999
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Common Stock, $0.01 par value 20,830,430
GENZYME TRANSGENICS CORPORATION
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of October 3, 1999
and January 3, 1999.................................................................................3
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended October 3, 1999 and September 27, 1998 ...........................................4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended October 3, 1999 and September 27, 1998........................................5
Notes to Unaudited Condensed Consolidated Financial Statements......................................6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................10
ITEM 3
Quantitative and Qualitative Disclosures
About Market Risk .................................................................................14
PART II. OTHER INFORMATION
ITEM 2
Changes in Securities .............................................................................15
ITEM 6
Exhibits and Reports on Form 8-K...................................................................15
SIGNATURES..................................................................................................16
EXHIBIT INDEX...............................................................................................17
2
GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
October 3, January 3,
1999 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,577 $ 11,740
Accounts receivable, net of allowance of $815 and $487 11,031 12,334
Unbilled contract revenue 7,989 6,847
Other current assets 2,174 1,496
-------- --------
Total current assets 26,771 32,417
Net property, plant and equipment 33,229 30,486
Costs in excess of net assets acquired, net 17,546 18,404
Other assets 3,315 2,030
-------- --------
$ 80,861 $ 83,337
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,167 $ 2,811
Accounts payable - Genzyme Corporation 420 1,487
Due to ATIII LLC 2,573 2,418
Revolving line of credit 15,750 11,096
Accrued expenses 10,540 8,403
Advance payments 7,160 8,317
Current portion of long-term debt 2,867 2,204
-------- --------
Total current liabilities 41,477 36,736
Long-term debt, net of current portion 13,410 9,561
Deferred lease obligation 770 741
Other liabilities -- 95
-------- --------
Total liabilities 55,657 47,133
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; 4,000,000 have
been designated as Series A Convertible, of which 11,000 and 20,000
shares are issued and outstanding at October 3, 1999 and January 3, 1999,
respectively (Note 4) (liquidation preference $11,000) -- --
Common stock, $.01 par value; 40,000,000 shares authorized; 20,830,090 and
18,384,024 shares issued and outstanding
at October 3, 1999 and January 3, 1999, respectively 208 184
Dividend on preferred stock (1,156) (1,156)
Capital in excess of par value - preferred stock 10,326 18,777
Capital in excess of par value - common stock 76,382 65,716
Unearned compensation (259) (437)
Accumulated deficit (60,263) (46,864)
Accumulated other comprehensive loss (34) (16)
-------- --------
Total stockholders' equity 25,204 36,204
-------- --------
$ 80,861 $ 83,337
======== ========
The accompanying notes are an integral part of these financial statements.
3
GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
------------------------- ------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues
Services $ 14,544 $ 13,828 $ 41,934 $ 37,216
Sponsored research and development 5,219 2,703 11,200 7,479
-------- -------- -------- --------
19,763 16,531 53,134 44,695
Costs and operating expenses:
Services 11,888 11,538 35,472 31,751
Research and development
Sponsored 3,017 2,983 7,805 7,115
Proprietary 1,169 1,597 3,347 4,999
Selling, general and administrative 4,912 3,869 14,616 11,955
Facility consolidation costs 1,245 -- 1,245 --
Equity in loss of joint venture 853 993 2,696 2,717
-------- -------- -------- --------
23,084 20,980 65,181 58,537
-------- -------- -------- --------
Loss from operations (3,321) (4,449) (12,047) (13,842)
Other income (expense):
Interest income 19 121 39 231
Interest expense (654) (298) (1,668) (1,054)
Other income -- -- 484 100
-------- -------- -------- --------
Loss before income taxes (3,956) (4,626) (13,192) (14,565)
Provision (benefit) for income taxes 48 -- 207 (10)
-------- -------- -------- --------
Net loss $ (4,004) $ (4,626) $(13,399) $(14,555)
Dividend to preferred shareholders -- -- -- (1,156)
-------- -------- -------- --------
Net loss available to common shareholders $ (4,004) $ (4,626) $(13,399) $(15,711)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share (basic and diluted) $ (0.20) $ (0.25) $ (0.69) $ (0.88)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares
outstanding (basic and diluted) 20,150 18,262 19,356 17,857
-------- -------- -------- --------
-------- -------- -------- --------
Comprehensive loss:
Net loss $ (4,004) $ (4,626) $(13,399) $(14,555)
Other comprehensive income (loss):
Unrealized holding gain (losses) on available for
sale securities 22 -- (18) --
-------- -------- -------- --------
Total other comprehensive income (loss) 22 -- (18) --
-------- -------- -------- --------
Comprehensive loss $ (3,982) $ (4,626) $(13,417) $(14,555)
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
4
GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Nine Months Ended
--------------------------
October 3, September 27,
1999 1998
-------- --------
Cash flows for operating activities:
Net loss $(13,399) $(14,555)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 4,652 3,697
Amortization of unearned compensation 86 --
Equity in loss of joint venture 2,696 2,717
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue 161 (2,318)
Other current assets (690) 506
Accounts payable (644) 980
Accounts payable - Genzyme Corporation (1,067) (1,647)
Other accrued expenses 2,648 676
Advance payments (1,157) 1,813
-------- --------
Net cash used in operating activities (6,714) (8,131)
Cash flows for investing activities:
Purchase of property, plant and equipment (4,652) (5,119)
Investment in ATIII joint venture (2,468) (546)
Other assets (468) (293)
-------- --------
Net cash used in investing activities (7,588) (5,958)
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 6,368
Net proceeds from employee stock purchase plan 759 956
Net proceeds from the exercise of stock options 61 456
Proceeds from preferred stock offering -- 19,000
Proceeds from long-term debt 4,600 233
Repayment of long-term debt (1,869) (1,523)
Net borrowings (repayment) under revolving line of credit 4,654 (1,500)
Investment and advances by Genzyme Corporation -- (6,000)
Other long-term liabilities (66) (65)
-------- --------
Net cash provided by financing activities 8,139 17,925
-------- --------
Net increase (decrease) in cash and cash equivalents (6,163) 3,836
Cash and cash equivalents at beginning of the period 11,740 6,383
-------- --------
Cash and cash equivalents at end of the period $ 5,577 $ 10,219
-------- --------
-------- --------
Noncash Investing and Financing Activities:
Property acquired under capital leases $ 1,781 $ 1,167
Receipt of stock for Accounts Receivable and Advance Payment -- 583
Technology license acquired by issuance of stock 1,000 --
The accompanying notes are an integral part of these financial statements.
5
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1999 and the
financial statements and footnotes included therein. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to Securities and Exchange Commission rules and
regulations.
The financial statements for the nine months ended October 3,
1999 and September 27, 1998 are unaudited but include, in the
Company's opinion, all adjustments (consisting only of
normally recurring accruals) necessary for a fair presentation
of the results for the periods presented.
2. ACCOUNTING POLICIES:
The accounting policies underlying the quarterly financial
statements are those set forth in Note 2 of the financial
statements included in the Company's Annual Report on Form
10-K for the year ended January 3, 1999.
Per share information is based upon weighted average number of
shares of Common Stock outstanding during the period. Common
stock equivalents consisting of warrants, stock options and
convertible preferred stock, totaled 5.5 million and 4.5
million shares at October 3, 1999 and September 27, 1998,
respectively. Since the Company incurred a net loss for the
period ending October 3, 1999 and September 27, 1998, these
common stock equivalents were not used to compute diluted loss
per share, as the effect was antidilutive.
Included in the net loss is an equity in loss of joint venture
of $2,696,000 which represents the Company's commitment to
fund 30% of the losses and capital expenditures incurred in
1999 of the joint venture between the Company and Genzyme
Corporation ("ATIII LLC"). Total net losses of the ATIII LLC
in the first nine months of 1999 were $8.6 million, and the
ATIII LLC did not record any revenues.
3. INCOME TAXES:
Due to the profitability of some of its contract research
laboratories in certain states, the Company has recorded a
state provision for income taxes for the period ended October
3, 1999.
4. PREFERRED STOCK CONVERSION:
6
During 1999, several institutional investors converted 9,000
shares of the Series A Convertible Preferred Stock (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. The conversion
prices represented the average of the five lowest bid prices
of the prior 20 trading days before conversion. After these
conversions, 11,000 shares of the Series A Preferred Stock
remained outstanding.
5. SEGMENT INFORMATION:
Below is the Company's segment information for its two
reportable segments: Contract research organization
("Primedica") and research and development ("Transgenics").
During 1999, the Company began to allocate certain corporate
expenses to the Primedica segment in its evaluation of the
segment's loss from operations. Certain reclassifications have
been made to prior year's numbers to conform to 1999
classifications.
Three Months Ended Nine Months Ended
------------------------- ------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Primedica - external customers $ 14,544 $ 13,828 $ 41,934 $ 37,216
Primedica - intersegment 332 666 1,108 1,556
Transgenics 5,219 2,703 11,200 7,479
-------- -------- -------- --------
20,095 17,197 54,242 46,251
Elimination of intersegment revenues (332) (666) (1,108) (1,556)
-------- -------- -------- --------
$ 19,763 $ 16,531 $ 53,134 $ 44,695
-------- -------- -------- --------
-------- -------- -------- --------
Loss from operations:
Primedica $ (36) $ (76) $ (1,313) $ (1,742)
Transgenics (17) (2,719) (3,307) (7,397)
Unallocated amounts:
Corporate expenses (2,415) (661) (4,731) (1,986)
Equity in loss of joint venture (853) (993) (2,696) (2,717)
-------- -------- -------- --------
$ (3,321) $ (4,449) $(12,047) $(13,842)
-------- -------- -------- --------
-------- -------- -------- --------
6. ACT LICENSE AGREEMENT:
In June 1999, the Company entered into an Exclusive License
and Development Agreement ("the Agreement") with Advanced Cell
Technology, Inc. ("ACT"). The Company paid $1,750,000 to ACT
in consideration of the license granted to the Company from
ACT. Of the amount paid, $1million was in the form of 216,798
shares of the Company's common stock and $750,000 was in cash.
The number of shares issued was based on a price of $4.61 per
share, which was the
7
fair market value at that time. Since the licensed technology
is being used in research and development and to generate
research and development revenues, the Company has capitalized
the amount paid for the license fee as Other Assets which is
being amortized over ten years based on its estimated economic
life. Additionally, the Company paid ACT $250,000 in cash as
an advance payment which shall be fully creditable against ACT
services for which parties have separately contracted,
milestone payments, royalties, sublicense revenues or other
payments payable or to become payable to ACT from the Company.
7. FACILITY LEASE:
On March 26, 1999, the Company entered into a seven year
facility lease for 12,468 square feet located in Framingham,
Massachusetts. The monthly payment is $26,945 for years one
and two, $27,534 for years three and four and $28,573 for
years five through seven.
8. PHARMING CROSS-LICENSE AGREEMENT - SECOND AMENDMENT:
On August 31, 1999, the Company entered into a Second
Amendment ("Amendment") with Pharming Group N.V. ("Pharming").
The Company paid a license fee of $750,000 to Pharming which
was recorded as research and development expense.
Additionally, the Company has agreed to pay an annual
maintenance fee, milestone payments and royalties on
hSA-related income for any products that receive marketing
approval.
9. FACILITY CONSOLIDATION:
In September 1999, the Company incurred costs of $1,245,000
relating to the consolidation of certain facilities. The
consolidation is expected to be completed by the end of fiscal
1999, therefore all costs are included in Accrued Expenses at
October 3, 1999. Costs consisted of facility closure costs of
$740,000 and severance and employee related costs of $505,000.
The facility closure costs include write-offs of leasehold
improvements of $415,000 and rental and lease termination
costs to be incurred after the consolidation of $325,000. The
rental and lease termination costs are expected to be paid
through December of 2003. Severance costs related to the
elimination of 20 positions of which 12 were laboratory
positions, one was accounting/finance and seven were general
and administrative positions. The total severance is to be
paid through 2000.
10. SUBSEQUENT EVENT:
On November 12, 1999, the Company issued a redemption call on
the outstanding $11.0 million of Series A Preferred Stock.
Under the redemption terms, the holders of the Series A
Preferred Stock have five business days in which to convert
the preferred stock shares into Common Stock or be redeemed at
par plus 15%.
8
In conjunction with the redemption call, the Company will
issue up to $12.5 million of Series B Convertible Preferred
Stock ("Series B Preferred Stock") to Genzyme. The
Series B Preferred Stock carries an initial 11% dividend which
increases to 12% effective July 1, 2000 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 the Series B Preferred Stock for cash at any time
at its original value plus accrued dividends. Genzyme has the
right to require redemption only under circumstances
involving new permanent equity being invested in the Company.
The Company will issue Series B Preferred Stock only to the
extent needed to fund redemption of the Series A Preferred
Stock.
In connection with signing the agreement to purchase the
Series B Preferred Stock, the Company also issued to Genzyme
a 10-year warrant to purchase 55,833 shares of the Company's
Common Stock at an exercise price of $6.30 per share.
Additionally, upon the closing of the investment, an
additional warrant to purchase up to 55,833 shares with
similar terms will be issued based upon the amount of Series B
Preferred Stock actually issued. Finally, if any shares of
Series B Preferred Stock remain outstanding on July 1, 2000,
up to 55,833 warrants exercisable at the then-current market
price for the Company's Common Stock will be issued based upon
the amount of Series B Preferred then outstanding.
The Company will record a dividend to preferred shareholders
in the fourth quarter of 1999 relating to this transaction.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
Total revenues for the three-month period ending October 3, 1999 were $19.8
million, compared with $16.5 million in the comparable period of 1998, an
increase of $3.3 million or 20%. Service revenues increased to $14.5 million in
the third quarter of 1999 from $13.8 million in the third quarter of 1998, an
increase of $700,000 or 5%. Research and development revenue increased to $5.2
million in the third quarter of 1999 from $2.7 million in the third quarter of
1998, an increase of $2.5 million or 93%. The increase is primarily a result of
a $3.5 million milestone payment earned during the third quarter of 1999 in
association with a program to produce human serum albumin ("the hSA program") in
transgenic cattle offset by success fees earned on other programs during the
third quarter of 1998.
Cost of services for the third quarter of 1999 were $11.9 million compared to
$11.5 million in the comparable period of 1998, an increase of $400,000 or 3.0%,
due to the increase in revenues. Sponsored research and development expenses
were $3 million in both the third quarter of 1999 and the third quarter of 1998.
Proprietary research and development expenses decreased to $1.2 million in the
third quarter of 1999 from $1.6 million in the third quarter of 1998, a decrease
of $400,000 or 25%. The decrease is due to reduced expenditures on the cancer
vaccine program.
Gross profit, defined as revenues less service costs and research and
development costs, for the third quarter of 1999 amounted to a profit of $3.7
million versus a profit of $413,000 in the third quarter of 1998 due primarily
to the increase in research and development revenues and milestones in the third
quarter of 1999. Gross profit on services for the third quarter of 1999 was $2.7
million, a gross margin of 18%, versus $2.3 million, a gross margin of 17% in
the third quarter of 1998.
Selling, general and administrative ("SG&A") expenses increased to $4.9 million
in the third quarter of 1999 from $3.9 million in the third quarter of 1998, an
increase of $1 million or 26%. The increase is due to the increased marketing
effort and to the addition of administrative personnel required to support the
growth in transgenic research and development programs as well as additional
patent related expenditures.
Interest income decreased to $19,000 in the third quarter of 1999, from $121,000
in the third quarter of 1998, due to lower funds available for investment.
Interest expense increased to $654,000 in the third quarter of 1999 from
$298,000 in the third quarter of 1998 due to increased borrowings in 1999.
The Company recognized $853,000 of Joint Venture losses incurred on the joint
venture ("ATIII LLC") between the Company and Genzyme Corporation ("Genzyme")
during the third quarter of 1999 as compared to $993,000 incurred during the
third quarter of 1998.
10
During the third quarter of 1999, the Company recognized $1.2 million of
facility consolidation costs associated with the consolidation of Primedica's
Massachusetts operations into a single facility. Costs consisted of facility
closure costs of $740,000 and severance and employee related costs of $505,000.
The facility closure costs include write-offs of leasehold improvements of
$415,000 and rental and lease termination costs to be incurred after the
consolidation of $325,000. The rental and lease termination costs are expected
to be paid through December of 2003. Severance costs related to the elimination
of 20 positions of which 12 were laboratory positions, one was
accounting/finance and seven were general and administrative positions. The
total severance is to be paid through 2000. This consolidation is expected to
increase the Company's ability to perform higher margin clinical services due to
the decreased capacity requirements of these services, while at the same time
reducing operating expenses.
NINE MONTHS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
Total revenues for the nine-month period ending October 3, 1999 were $53.1
million, compared with $44.7 million in the comparable period of 1998, an
increase of $8.4 million or 19%. Service revenues increased to $41.9 million
during the first nine months of 1999 from $37.2 million in the comparable period
of 1998, an increase of $4.7 million or 13%. Research and development revenue
increased to $11.2 million during the first nine months of 1999 from $7.5
million in the comparable period of 1998, an increase of $3.7 million or 49%.
The increase is primarily a result of a $3.5 million milestone payment earned
during the third quarter of 1999 in association with progress on the hSA
program.
Cost of services during the first nine months of 1999 were $35.5 million
compared to $31.8 million in the comparable period of 1998, an increase of $3.7
million or 12%, due to the increase in revenues. Sponsored research and
development expenses increased to $7.8 million in the first nine months of 1999
from $7.1 million in the comparable period of 1998, an increase of $700,000 or
10%. The increase in expense was due to increased activity on sponsored research
programs. Proprietary research and development expenses decreased to $3.3
million in the first nine months of 1999 from $5 million in the comparable
period of 1998, a decrease of $1.7 million or 34%. The decrease is due primarily
to reduced expenditures on the cancer vaccine program and a shifting of
resources to sponsored research and development.
Gross profit, defined as revenues less service costs and research and
development costs, for the first nine months of 1999 increased to a profit of
$6.5 million versus $830,000 in the comparable period of 1998 due to higher
revenues and milestone payments and a decrease in proprietary costs. Gross
profit on services for the first nine months of 1999 was $6.5 million, a gross
margin of 15%, versus $5.5 million, a gross margin of 15%, in the comparable
period of 1998.
Selling, general and administrative ("SG&A") expenses increased to $14.6 million
in the first nine months of 1999 from $12.0 million in the comparable period of
1998, an increase of $2.6 million or 22%. The increase is due to the increased
marketing effort and to the addition of administrative personnel required to
support the growth in transgenic research and development programs as well as
additional patent related expenditures.
11
Interest income decreased to $39,000 in the first nine months of 1999, from
$231,000 in the comparable period of 1998, due to lower funds available for
investment. Interest expense increased to $1.7 million in the first nine months
of 1999 from $1.1 million in the comparable period of 1998 due to increased
borrowings in 1999. Other income increased to $484,000 in the first nine months
of 1999, from $100,000 in the comparable period of 1998, due to the receipt in
1999 of an insurance settlement.
The Company recognized $2.7 million of Joint Venture losses incurred on the
joint venture ("ATIII LLC") between the Company and Genzyme Corporation
("Genzyme") during the first nine months of 1999 as well as during the
comparable period of 1998.
During the third quarter of 1999, the Company recognized $1.2 million of
facility consolidation costs associated with the consolidation of Primedica's
Massachusetts operations into a single facility. Costs consisted of facility
closure costs of $740,000 and severance and employee related costs of $505,000.
The facility closure costs include write-offs of leasehold improvements of
$415,000 and rental and lease termination costs to be incurred after the
consolidation of $325,000. The rental and lease termination costs are expected
to be paid through December of 2003. Severance costs related to the elimination
of 20 positions of which 12 were laboratory positions, one was
accounting/finance and seven were general and administrative positions. The
total severance is to be paid through 2000. The consolidation is expected to
increase the Company's ability to perform higher margin clinical services due to
the decreased capacity requirements of these services, while at the same time
reducing operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $5.6 million at October 3, 1999.
During the first nine months of 1999, the Company had a $6.2 million net
decrease in cash: $6.7 million of cash used in operations (due primarily to the
net loss of $13.4 million and a decrease in non-cash working capital of $749,000
offset by an increase in non-cash charges of $7.4 million), $4.7 million was
invested in capital equipment, further expansion of the transgenic production
facility and the expansion of the laboratory facilities, and $1.9 million was
used to pay down long-term debt. Sources of funds during the period included
$4.7 million in net borrowings under a commercial bank revolving line of credit,
$4.6 million of proceeds from issuance of long-term debt and $820,000 of
proceeds were received from the issuance of common stock under various employee
stock plans.
The Company had a working capital deficit of $14.7 million at October 3, 1999
compared to a deficit of $4.3 million at January 3, 1999. As of October 3,
1999, the Company had approximately $6.4 million available under a credit
line with Genzyme ("the Genzyme Credit Line"), $250,000 available under a
line of credit with a commercial bank, $3.2 million available under various
capital lease lines and $683,000 available under a term loan for the Charlton
facility expansion. Under the Company's 1999 operating plan, existing cash
balances along with funds available under the bank and lease lines and the
Genzyme Credit Line are expected to be sufficient to fund the Company into
the third quarter of 2000. On November, 12, 1999, the Company issued a
redemption call on the outstanding $11.0 million of Series A Preferred. Under
12
the redemption terms, the holders of the Series A Preferred Stock have five
business days in which to convert the preferred stock shares into Common
Stock or be redeemed at par plus 15%.
In conjunction with the redemption call, the Company will issue up to $12.5
million of Series B Convertible Preferred Stock ("Series B Preferred Stock")
to Genzyme. The Series B Preferred Stock carries an initial 11% dividend
which increases to 12% effective July 1, 2000 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 the Series B Preferred Stock for cash at any time at
its original value plus accrued dividends. Genzyme has the right to require
redemption only under circumstances involving new permanent equity being
invested in the Company. The Company will issue Series B Preferred Stock only
to the extent needed to fund redemption of the Series A Preferred Stock.
In connection with signing the agreement to purchase the Series B Preferred
Stock, the Company also issued to Genzyme a 10-year warrant to purchase
55,833 shares of the Company's Common Stock at an exercise price of $6.30 per
share. Additionally, upon the closing of the investment, an additional
warrant to purchase up to 55,833 shares with similar terms will be issued
based upon the amount of Series B Preferred Stock actually issued. Finally,
if any shares of Series B Preferred Stock remain outstanding on July 1, 2000,
up to 55,833 warrants exercisable at the then-current market price for the
Company's Common Stock will be issued based upon the amount of Series B
Preferred then outstanding.
The Company is considering various alternative financing strategies, such as
collaborative arrangements, public or private sales of its securities, including
securities in certain subsidiaries, additional mortgage or lease financing,
asset sales and other strategies.
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,
regulatory requirements and the Company's ability to complete the financing for
the Mason Laboratory expansion. The Company intends 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.
IMPACT OF THE YEAR 2000
Certain companies may face problems if the computer processors and software upon
which they directly or indirectly rely are unable to process date values
correctly upon the turn of the millennium ("Year 2000"). Such a system failure
and corruption of data of the Company or its customers or suppliers could
disrupt the Company's operations, including, among other things a
13
temporary inability to process transactions or engage in other business
activities or to receive information or services from suppliers.
The Company has appointed a Year 2000 task force to address the issues and
assess the potential impact of the Year 2000 problem. The task force is
evaluating the Company's financial systems, computers, software and other
equipment to ensure that the programs and systems will be Year 2000 compliant.
The Company presently believes that its computer systems, software and other
equipment will be Year 2000 compliant by the end of the fiscal year. The Company
has spent approximately $440,000 and estimates that it will spend approximately
$400,000 to $460,000 in capital replacement of computers, equipment and software
upgrades. The Company will incur another $190,000 to $275,000 for costs of
implementation. The Company initiated communications with third party suppliers
and is requesting that they represent that their products and services are to be
Year 2000 compliant and that they have a program to test for compliance.
Additionally, the Company has assessed those vendors that are not Year 2000
compliant and is in the process of finding alternative vendors that are
compliant.
Because the Company currently anticipates that it will achieve Year 2000
compliance, it has not formulated a contingency plan. However, should the
Company determine there is significant risk that it may be unable to adhere to
its compliance timetable, it will assess reasonably likely scenarios resulting
from noncompliance and establish a contingency plan to address such scenarios.
The Company's ability to achieve Year 2000 compliance is subject to various
uncertainties including the Company's ability to successfully identify systems
and programs not Year 2000 compliant, the nature and amount of programming
required to correct or replace affected programs, the availability and magnitude
of labor and consulting costs and the success of the Company's business
partners, vendors and clients in addressing the Year 2000 issue. Therefore,
while the financial impact of implementing Year 2000 compliance remediation has
not been and is not anticipated to be material to the Company's business,
financial position or results of operations, the Company can make no assurances
with respect to the costs of remediation efforts not yet incurred. Additionally,
the Company cannot be certain that it will achieve adequate Year 2000 compliance
in a timely manner or that any impact of a failure to achieve such compliance
will not have a material adverse effect on the Company's business, financial
condition or results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk since January
3, 1999. The Company's market risk disclosures are discussed in the Genzyme
Transgenics Corporation Form 10-K under the heading Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.
14
PART II
ITEM 2: CHANGES IN SECURITIES
On July 23, July 27, August 27, September 2, September 7, and
September 15, 1999, several institutional investors converted 1,000,
750, 500, 1,000, 500, and 2,000 shares of their Series A Convertible
Preferred Stock, $.01 par value per share, of the Company (the "Series
A Preferred Stock"), into 223,462, 167,131, 93,458, 185,186, 90,908 and
334,378 shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock"), at conversion prices of $4.475, $4.485, $5.350,
$5.400, $5.500 and $5.981 per share, respectively. These conversions
resulted in the issuance of an aggregate of 1,094,523 shares of the
Company's Common Stock during the quarter ended October 3, 1999. The
Company believes the issuance of its Common Stock upon conversion of
the Preferred Stock qualified as a transaction by an issuer not
involving a public offering within the meaning of Section 4(2) of the
Securities Act of 1933, as amended, based on the number and nature of
the holders.
On November 12, 1999, the Company issued a redemption call
on the remaining, outstanding shares of its Series A Preferred Stock.
Under the redemption terms, the holders can choose to convert their
shares into Common Stock or be redeemed at a 15% redemption premium.
On the same date, the Company agreed to issue up to 12,500
shares of its Series B Convertible Preferred Stock, par value $0.01 per
share (the "Series B Preferred Stock"), and a warrant exercisable for
55,833 shares of its Common Stock to Genzyme for a maximum aggregate
purchase price of $12,500,000. Upon closing the investment, the Company
will issue only enough shares of Series B Preferred Stock necessary to
fund its redemption of the Series A Preferred Stock. It will also issue
additional warrants to purchase up to another 55,833 shares of Common
Stock, depending on the number of Series B Preferred Stock shares
issued. The Company believes that the issuance of the Series B
Preferred Stock and the warrants qualify as a transaction by an
issuer not involving a public offering within the meaning of Section
4(2) of the Securities Act.
The Series B Preferred Stock initially yields an annual
dividend of 11%, which increases to a 12% rate on July 1, 2000.
Accumulated or accrued and unpaid dividends are payable upon
conversion, liquidation or redemption of the Series B Preferred Stock.
Each share of the Series B Preferred Stock is convertible into shares
of the Company's Common Stock, determined by dividing the $1,000 face
amount of the share (the "Liquidation Value") by its $6.30 conversion
price. Each Initial Warrant is exercisable at any time until November
12, 2000 at a $6.30 per share exercise price. The conversion price and
Liquidation Value of the shares of Series B Preferred Stock and
exercise price of the Initial Warrants are subject to customary
anti-dilution adjustments.
The Company can completely or partially redeem the Series B
Preferred Stock at any time for the Liquidation Value plus any
accumulated dividends. If additional equity investment exceeding
$20,000,000 are made in the Company, the holders of the Series B
Preferred Stock can elect by majority vote to force the redemption of
their shares in varying amounts depending on the size of the new
investments. If any shares of Series B Preferred Stock remain
outstanding on July 1, 2000, the Company must issue to Genzyme
additional warrants to purchase up to 55,833 shares of Common Stock,
depending on what fraction of the originally issued 12,500 shares of
Series B Preferred Stock are outstanding, exercisable at the
then-current market price of the Common Stock.
ITEM 6: EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
See the Exhibit Index immediately following the signature
page.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
October 3, 1999.
15
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARY
FORM 10-Q
OCTOBER 3, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 17, 1999 GENZYME TRANSGENICS CORPORATION
By: /s/ JOHN B. GREEN
-----------------------------
John B. Green
Duly Authorized Officer,
Vice President and
Chief Financial Officer
16
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule. (EDGAR only.)
17