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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: May 31, 1997
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
--- ------ ------ ------- ------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (617) 398-2300
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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 (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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 17,704,977
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$.10 PAR VALUE Outstanding July 9, 1997
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Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
Page
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Part I
Financial Information (Unaudited) :
Consolidated Condensed Balance Sheets as of 3
August 31, 1996 and May 31, 1997
Consolidated Condensed Statements of Operations 4
for the 39 week period ended May 25, 1996
and May 31,1997
Consolidated Statements of Cash Flows for the 5
39 week period ended May 25, 1996
and May 31,1997
Notes to Consolidated Condensed Financial 6-11
Statements for the 39 week
period ended May 25, 1996 and May 31,1997
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12-18
Part II
Other Information:
Other Information 19-20
Signature 21
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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August 31, May 31,
1996 1997
(Unaudited)
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ASSETS:
Current Assets:
Cash and cash equivalents $10,679,287 $ 7,125,677
Marketable securities 17,429,488 39,027,019
Interest receivable 1,296,657 1,293,732
Accounts receivable 1,338,418 1,899,856
Unbilled costs and fees 345,773 252,063
Prepaid expenses and other current assets 552,903 583,973
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Total current assets 31,642,526 50,182,320
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 6,403,221 11,012,048
Leasehold improvements 1,939,545 1,964,981
Office equipment and furniture 581,533 807,217
Construction-in-progress 77,027 414,014
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9,001,326 14,198,260
Less-Accumulated depreciation
and amortization 3,266,068 4,733,255
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5,735,258 9,465,005
Restricted cash 195,500 395,500
Long-term marketable securities 25,464,287 2,929,560
Other assets 241,446 318,532
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Total assets $63,279,017 $63,290,917
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 864,279 $ 692,794
Accrued expenses 1,731,220 2,186,688
Deferred revenue 1,035,504 2,932,403
Current maturities of capital lease obligations 2,106,882 3,292,412
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Total current liabilities 5,737,885 9,104,297
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Capital lease obligations, net of current maturities 3,228,374 4,549,151
Shareholders' equity 54,312,758 49,637,469
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Total liabilities and shareholders' equity $63,279,017 $63,290,917
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen Weeks Ended Thirty-nine Weeks Ended
May 25, May 31, May 25, May 31,
1996 1997 1996 1997
(Unaudited) (Unaudited)
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REVENUES:
Collaborative research, license fees and royalties $ 3,024,264 $ 2,987,210 $10,040,447 $ 9,816,045
Government research 1,815,077 918,999 4,833,051 4,229,562
Interest income 701,499 741,152 1,010,206 2,270,910
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Total revenues 5,540,840 4,647,361 15,883,704 16,316,517
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COSTS AND EXPENSES:
Research and development 2,076,438 5,787,821 4,685,563 13,975,650
Cost of government research 1,563,861 918,999 4,483,965 4,229,562
General, selling and administrative 596,163 1,166,428 1,839,453 3,037,313
Interest expense 92,491 159,066 175,793 430,545
Noncash charge for stock option grants 370,400 20,633 1,949,816 57,683
----------- ----------- ----------- -----------
Total costs and expenses 4,699,353 8,052,947 13,134,590 21,730,753
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 841,487 $(3,405,586) $ 2,749,114 $(5,414,236)
----------- ----------- ----------- -----------
Net income (loss) per common share $ 0.04 $ (0.19) $ 0.16 $ (0.31)
----------- ----------- ----------- -----------
Weighted average number of common and
equivalent shares outstanding 20,022,584 17,666,731 17,565,343 17,569,640
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Thirty-nine Weeks Ended
May 25, May 31,
1996 1997
(Unaudited)
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Cash Flows from Operating Activities:
Net Income (loss) $ 2,749,114 $ (5,414,236)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 587,023 1,554,338
Deferred compensation 1,949,816 57,683
Changes in assets and liabilities:
Interest receivable (724,290) 2,925
Accounts receivable (59,189) (561,438)
Unbilled costs and fees (124,974) 93,710
Prepaid expenses and other current assets (68,438) (31,070)
Accounts payable 274,249 (171,485)
Accrued expenses (123,641) 455,468
Deferred revenue 458,752 1,896,899
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Total adjustments 2,169,308 3,297,030
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Net cash provided by (used in) operating activities 4,918,422 (2,117,206)
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Cash Flows from Investing Activities:
Purchases of marketable securities (38,820,098) (18,236,804)
Proceeds from sale of marketable securities 7,883,708 19,174,000
Increase in restricted cash 0 (200,000)
Purchases of equipment and leasehold improvements, net (424,232) (643,716)
Increase in other assets (42,944) (88,189)
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Net cash provided by (used in) investing activities (31,403,566) 5,291
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Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 41,522,123 0
Proceeds from exercise of stock options and warrants 1,008,396 681,265
Payments on capital lease obligations (500,216) (2,122,960)
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Net cash provided by (used in) financing activities 42,030,303 (1,441,695)
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Net Increase in Cash and Cash Equivalents 15,545,159 (3,553,610)
Cash and Cash Equivalents, at beginning of period 5,886,184 10,679,287
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Cash and Cash Equivalents, at end of period $ 21,431,343 $ 7,125,677
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Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 117,000 $ 29,142
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Interest paid during period $ 175,793 $ 430,545
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Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital leases $ 1,990,283 $ 4,629,267
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See Notes to Consolidated Condensed Financial Statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
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The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the unaudited consolidated condensed financial statements have
been prepared on the same basis as the audited consolidated financial
statements and include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of interim period
results. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes, however, that its disclosures
are adequate to make the information presented not misleading. The results
of operations for the 39 week period ended May 31, 1997 are not
necessarily indicative of the results to be expected for the full fiscal
year. The accompanying consolidated condensed financial statements should
be read in conjunction with the Company's Form 10-K which was filed with
the Securities and Exchange Commission on November 27, 1996 and as amended
on Form 10-K/A on December 4, 1996.
2. REVENUE RECOGNITION
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Research and contract revenues are derived from government grant and
contract arrangements as well as under collaborative agreements with
pharmaceutical companies. Research revenues are recognized as earned under
grants, which consist of cost-plus-fixed-fee contracts and fixed price
contracts. Revenues are recognized under collaborative agreements as
earned. Milestone payments from collaborative research and development
arrangements are recognized when they are achieved. License fees are
recognized as earned. Subscription revenues are recognized ratably over
the term of the subscription agreement. Unbilled costs and fees represent
revenue recognized prior to billing. Deferred revenue represents amounts
received prior to revenue recognition.
3. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
--------------------------------------------------------
Net income per common and common equivalent share is computed by dividing
net income by the weighted average number of common and common equivalent
shares outstanding during the period using the treasury method. Net loss
per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the period.
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4. NEW ACCOUNTING STANDARD
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In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997 and early
adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt
this statement for its fiscal year ended August 31, 1998 and does not
believe that the effect of the adoption of this standard would be
materially different from the amounts presented in the accompanying
statements of operations.
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has determined that it will continue to account
for stock-based compensation for employees under Accounting Principles
Board (APB) Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company will be required to disclose the pro forma net
income or loss and per share amounts in the notes to the financial
statements using the fair-value-based method for year ending August 31,
1997, with comparable disclosures for the year ended August 31, 1996. The
Company has not determined the impact of these pro forma adjustments.
5. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
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The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company's cash equivalents and marketable
securities are classified as held-to-maturity, as the Company has the
positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original
maturities of less than three months. Marketable securities are investment
securities with original maturities of greater than three months. Cash
equivalents are carried at cost, which approximates market value, and
consist of money market funds, repurchase agreements and debt securities.
Marketable securities are recorded at amortized cost which approximates
market value. The Company has not recorded any realized holding gains or
losses on its marketable securities. Marketable securities consist of
commercial paper and U.S. Government debt securities. The Company has
restricted cash of $195,500 and $395,500 at August 31, 1996 and May 31,
1997, respectively, in connection with certain capital lease obligations.
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6. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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. Actual results could differ from those
estimates.
7. CAPITAL LEASE OBLIGATIONS
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On February 28, 1997, the Company entered into a leasing arrangement under
which it can finance up to $6.0. million of laboratory, computer and
office equipment. The lease is payable in 48 monthly installments at a
variable interest rate of prime (8.5% as of May 31, 1997) plus one-quarter
of one percent. At any time during the term of this agreement, the Company
may elect to convert to a fixed rate loan at the prevailing interest rate.
The Company is required to maintain certain restricted cash balances, as
defined (see Note 5). In addition, the Company is required to maintain
certain financial ratios pertaining to minimum cash balances, tangible net
worth and debt service coverage. The Company has approximately $4.2
million available under this capital lease agreement at May 31, 1997.
The Company has other capital lease line arrangements under which it
financed certain laboratory, computer and office equipment. These leases
are payable in 36 monthly installments. The interest rates range from
7.52% to 11.42%. The Company is required to maintain certain restricted
cash balances, as defined (see Note 5). In addition, the Company is
required to maintain certain financial ratios pertaining to minimum cash
balances, tangible net worth, debt to tangible net worth and maximum loss.
The Company has no funds available under these capital lease agreements at
May 31, 1997.
8. COLLABORATIVE AGREEMENTS
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SCHERING-PLOUGH
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In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd.
(collectively, "Schering-Plough") providing for the use by Schering-Plough
of the Company's Staph. aureus genomic database to identify new gene
targets for development of antibiotics effective against drug resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic
sequence databases. The Company also granted Schering-Plough a
non-exclusive license to use the Company's bioinformatics systems for
Schering-Plough's internal use in connection with the genomic databases
licensed to Schering-Plough under the agreement and other genomic
databases Schering- Plough develops or acquires. The Company also agreed
to undertake certain research efforts to identify bacteria-specific genes
essential to microbial survival and to develop biological assays to be
used by Schering-Plough in screening natural product and compound
libraries to identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and
milestone payments. Subject to the achievement of additional product
development milestones and Schering- Plough's election to extend the
research collaboration, Schering-Plough has agreed to pay the Company up
to an additional approximately $40.5 million (inclusive of the $10.3
million referred to in the previous sentence) in expense allowances,
research funding and milestone payments.
The agreement grants Schering-Plough exclusive world wide rights to make,
use and sell pharmaceutical and vaccine products based on the Company's
Staph. aureus genomic database and on the technology developed in the
course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the
research plan the Company desires to enter into a collaboration with a
third party with respect to the development or sale of any compounds which
are targeted against Staph. aureus. The Company will be entitled to
receive royalties on Schering-Plough's sale of therapeutic products and
vaccines developed using the technology licensed from the Company. Subject
to certain limitations, the Company retained the rights to make, use and
sell diagnostic products developed based on the Company's database
licensed to Schering-Plough or the technology developed in the course of
the research program.
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For the 13 and 39 week periods ended May 31, 1997, the Company recorded
revenue of $1.0 million and $2.8 million, respectively, under this
agreement, which consisted of sponsored research funding. For the 13 week
period ended May 25, 1996, the Company recorded revenue of $2.2 million
under this agreement, which consisted of sponsored research and a
milestone payment. For the 39 week period ended May 25, 1996, the Company
recorded revenue of $6.2 million under this agreement, which consisted of
a license fee, sponsored research and milestone payments.
The Company entered into its second research collaboration agreement with
Schering-Plough in December 1996. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted
Schering-Plough exclusive access to (i) certain gene sequence databases
made available under this research program, (ii) information made
available to the Company under certain third party research agreements,
(iii) an exclusive worldwide right and license to make, use and sell
pharmaceutical and vaccine products based on the technology developed in
the course of the research program. The Company will retain all rights to
develop and commercialize diagnostic products that may result from this
collaboration.
In December 1996, Schering-Plough made an initial payment for a license
fee and an expense allowance to the Company. Schering-Plough is also
required to fund a research program for a minimum number of years with an
option to extend. In addition, upon completion of certain scientific
developments, Schering-Plough will make milestone payments to the Company,
as well as pay royalties to the Company based upon sales of therapeutics
products developed from this collaboration. If all milestones are met and
the research program continues for its full term, total payments to the
Company will approximate $67 million, excluding royalties. Of the total
potential payments, approximately $22.5 million represents license fees
and research payments, and $44.5 million represents milestone payments
based on achievement of research and product development objectives.
For the 13 week period ended May 31, 1997, the Company recorded revenue of
$0.7 million under this agreement, which consisted primarily of sponsored
research and subcontract activity. For the 39 week period ended May 31,
1997, the Company recorded revenue of $3.5 million under this agreement,
which consisted primarily of a license fee, expense allowance, sponsored
research and subcontract activity.
ASTRA AB
--------
In August 1995, the Company entered into a collaboration agreement with
Astra Hassle AB ("Astra") to develop pharmaceutical, vaccine and
diagnostic products
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effective against gastrointestinal infection or any other disease caused
by H. pylori. Under the terms of the agreement, the Company granted Astra
exclusive access to its H. pylori genomic sequence database and agreed to
undertake certain research efforts in exchange for a minimum of
approximately $11 million and up to $22 million in license fees, expense
allowances, research funding and milestone payments. The agreement granted
Astra exclusive worldwide rights to make, use and sell products based on
the Company's H. pylori technology and requires Astra to provide research
funding to the Company over a minimum period of two and one-half years to
further develop and annotate the Company's H. pylori genomic sequence
database, identify therapeutic and vaccine targets and develop appropriate
biological assays. The Company will also be entitled to receive royalties
on Astra's sale of any products (i) protected by claims of patents
licensed exclusively to Astra by the Company pursuant to the agreement, or
(ii) the discovery of which were enabled in a significant manner by the
genomic database licensed to Astra by the Company.
For the 13 week period ended May 31, 1997, the Company recorded revenue of
$0.8 million under this agreement, which consisted of sponsored research
funding and a milestone payment. For the 13 week period ended May 25,
1996, the Company recorded revenue of $0.8 million under this agreement,
which consisted of sponsored research funding.
For the 39 week periods ended May 31, 1997 and May 25, 1996, the Company
recorded revenue of $2.4 million and $3.7 million, respectively, under
this agreement, which consisted of sponsored research funding and
milestone payments.
9. DATABASE SUBSCRIPTIONS
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BAYER AG
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In May 1997, the Company entered into a license agreement with Bayer AG,
("Bayer") to provide Bayer with a non-exclusive license to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated
information relating to microbial organisms. The subscription agreement
calls for the Company to provide Bayer with periodic data updates,
analysis tools and software support. Under the agreement, Bayer has
agreed to pay a license fee, annual subscription fees and royalties on
any molecules developed as a result of access to the information
provided by PathoGenome(TM). The Company retains all rights associated
with protein therapeutic, diagnostic and vaccine use of bacterial genes
or gene products.
The Company records an upfront license fee and revenue derived from
subscription fees ratably over the term of the subscription agreement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues have been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the Company's Staph. aureus genomic database to identify new
gene targets for the development of novel antibiotics. In December 1996, the
Company entered into its second research collaboration with Schering-Plough to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals for treating asthma. In May 1997, the Company
entered into an agreement with Bayer AG ("Bayer") to provide Bayer with
non-exclusive license to the Company's proprietary genome sequence database,
PathoGenome(TM).
As of May 31, 1997, the Company had outstanding approximately $3,000,000 of
government grants and research contracts under which services were yet to be
performed. These grants and contracts call for services to be performed over the
next 33 months. The Company's government grants and contracts are typically
funded annually and are subject to appropriation by the United States Congress
each year. Funding may be discontinued or reduced at any time by the Congress.
For the 39 week periods ended May 25, 1996 and May 31, 1997, revenue recognized
pursuant to United States government grants and research accounted for
approximately 30% and 26%, respectively, of the Company's total revenues. The
Company expects government revenue, in absolute dollars and as a percentage of
total revenues, to decline in the future periods as the Company focuses its
resources towards Company sponsored research and development in order of
obtaining additional corporate partnerships. The Company plans to continue to
seek government grants and contracts which are synergistic to the Company's
overall strategic focus and to enter into additional corporate partnering
arrangements with the goal of advancing the Company's genomic technologies and
gene discovery programs and of obtaining revenues sufficient to cover a portion
of the Company's cash requirements. There can be no assurance that the Company
will be able to pursue this strategy successfully.
The Company will not receive significant product revenues on a sustained basis
until such time, if any, at which products based on the Company's research
efforts are commercialized. The Company's product development strategy is to
enter into collaborations with pharmaceutical and biotechnology companies
whereby these corporate partners will provide most of or all of the financial
and other resources required to complete the development and to commercialize
products based on the Company's genomics research in exchange for a variety of
license and milestone payments, research
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support and royalties. In order for a product to be commercialized based on the
Company's research, it will be necessary for the collaborators to conduct
preclinical tests and clinical trials, obtain regulatory clearances and make
manufacturing, distribution and marketing arrangements. Accordingly, the Company
does not expect to receive royalties based on product revenues for many years.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $38,668,000 as of May 31, 1997. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new government grants and contracts and collaborative
agreements. The Company is subject to risks common to companies in its industry
including unproven technology and business strategy, availability of, and
competition for, family resources, reliance upon collaborative partners and
others, reliance on United States government funding, history of operating
losses, need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty of
pharmaceutical pricing, health care reform and related matters, product
liability exposure, and volatility of the Company's stock price.
RESULTS OF OPERATIONS
- ---------------------
THIRTEEN WEEK PERIOD ENDED MAY 25, 1996 AND MAY 31, 1997
- --------------------------------------------------------
REVENUE
- -------
Total revenues decreased 16% from $5,541,000 for the 13 week period ended May
25, 1996 to $4,647,000 for the 13 week period ended May 31, 1997. Collaborative
research, license fees and royalties remained relatively constant for the 13
week period ended May 31, 1997 when compared to the same period last year.
Government research revenue decreased 49% from $1,815,000 for the 13 week period
ended May 25, 1996 to $919,000 for the 13 week period ended May 31, 1997. The
decrease in government research revenue was primarily attributable to a higher
concentration of research effort on Company sponsored research and development
programs, particularly the microbial genetic database program. The Company
expects government research revenue to continue to decrease, in absolute dollars
and as a percentage of total revenues, in the future periods as the Company
focuses its resources toward Company sponsored research and development
programs. Revenue derived from government research grants and contracts is
generally based upon direct cost such as labor, laboratory supplies, as well as
an allocation for reimbursement of a portion of overhead.
Interest income increased 6% from $701,000 for the 13 week period ended May 25,
1996 to $741,000 for the 13 week period ended May 31, 1997 reflecting an
increase in the return on invested cash.
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COST AND EXPENSES
- -----------------
Total cost and expenses increased 71% from $4,699,000 for the 13 week period
ended May 25, 1996 to $8,053,000 for the 13 week period ended May 31, 1997.
Research and development expense, which includes company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators increased 179% from $2,076,000 for the 13 week period
ended May 25, 1996 to $5,788,000 for the 13 week period ended May 31, 1997. The
increase in research and development expenses was directly related to the
Company's expansion of its pathogen, microbial genetic database and gene
discovery programs which consisted primarily of increases in payroll and related
expenses, laboratory supplies and overhead expenses. The Company expects to
continue to increase research and development expenditures in the future
periods, particularly with respect to its human gene discovery and microbial
genetic database programs.
The cost of government research decreased 41% from $1,564,000 for the 13 week
period ended May 25, 1996 to $919,000 for the 13 week period ended May 31, 1997.
The decrease in cost of government research was primarily attributable to the
decrease in government research revenues. Cost of government research, as a
percentage of government research revenue, was 86% for the 13 week period ended
May 25, 1996 and 100% for the 13 week period ended May 31, 1997. The increase
was primarily due to an increase in overhead expenses associated with the
expansion of the Company's laboratory space as well as purchases of research and
development equipment.
General, selling, and administrative expenses increased 96% from $596,000 for
the 13 week period ended May 25, 1996 to $1,166,000 for the 13 week period
ended May 31, 1997. The increase in general, selling, and administrative
expenses was primarily due to increases in payroll and related expenses, legal
fees and facility expenses.
Interest expense increased from $92,000 for the 13 week period ended May 25,
1996 to $159,000 for the 13 week period ended May 31, 1997 which was
attributable to the increase in the Company's outstanding balance under its
capital lease arrangements.
In November and December 1995, the Company's Board of Directors granted certain
employees, officers, and directors options to purchase an aggregate of 440,000
shares of common stock which were subject to shareholder approval. The options
were granted at exercise prices ranging from $7.25 to $9.56 per share, in each
case, the fair market value of the common stock on the date the Company's Board
of Directors granted the option. The Company recorded deferred compensation of
$2,565,000 which represents an amount equal to the difference between the fair
market value of the common stock on February 16, 1996, the date of shareholder
approval, and the per share exercise price of the options. Additionally, in
March 1997, the Company granted options valued at $51,000 to certain
consultants in lieu of cash for services. The Company recorded $370,000 and
$21,000 as compensation expense in the 13 week periods ended May 25, 1996 and
May 31, 1997, respectively.
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THIRTY-NINE WEEK PERIOD ENDED MAY 25, 1996 AND MAY 31, 1997
- -----------------------------------------------------------
REVENUE
- -------
Total revenues increased 3% from $15,884,000 for the 39 week period ended May
25, 1996 to $16,317,000 for the 39 week period ended May 31, 1997. Collaborative
research, license fees and royalties decreased 12% from $10,040,000 for the 39
week period ended March 25, 1996 to $9,816,000 for the 39 week period ended May
31, 1997. The decrease reflects a reduction in milestone payments and license
fees received from the Company's corporate partners, partially offset by an
increase in collaborative research revenues.
Government research revenue decreased 12% from $4,833,000 for the 39 week period
ended May 25, 1996 to $4,230,000 for the 39 week period ended May 31, 1997. The
decrease in government research revenue was primarily attributable to a higher
concentration of research effort on Company sponsored research and development
programs, particularly the microbial genetic database program. The Company
expects government research revenue to continue to decrease, in absolute dollars
and as a percentage of total revenues, in the future periods as the Company
focuses its resources toward Company sponsored research and development
programs. Revenue derived from government research grants and contracts is
generally based upon direct cost such as labor, laboratory supplies, as well as
an allocation for reimbursement of a portion of overhead expenses.
Interest income increased from $1,010,000 for the 39 week period ended May 25,
1996 to $2,271,000 for the 39 week period ended May 31, 1997 reflecting the
increase in funds available for investment as a result of proceeds received from
the sale of common stock through a public offering in February 1996.
COST AND EXPENSES
- -----------------
Total cost and expenses increased 65% from $13,135,000 for the 39 week period
ended May 25, 1996 to $21,731,000 for the 39 week period ended May 31, 1997.
Research and development expense, which includes company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators increased 198% from $4,686,000 for the 39 week period
ended May 25, 1996 to $13,976,000 for the 39 week period ended May 31, 1997. The
increase in research and development expenses was directly associated with the
Company's expansion of its pathogen, microbial genetic database and gene
discovery programs which consisted of increases in payroll and related expenses,
laboratory supplies, and overhead expenses. The Company expects to continue to
increase research and development expenditures in the future periods,
particularly with respect to its human gene discovery and microbial genetic
database programs.
The cost of government research decreased 6% from $4,484,000 for the 39 week
period ended May 25, 1996 to $4,230,000 for the 39 week period ended May 31,
1997. The
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decrease in cost of government research revenue was primarily attributable to a
decrease in government research revenue. Cost of government research, as a
percentage of government research revenue, was 93% for the 39 week period ended
May 25, 1996 and 100% for the 39 week period ended May 31, 1997. The increase
was primarily due to an increase in overhead expenses associated with the
expansion of the Company's laboratory space as well as purchases of research and
development equipment.
General, selling, and administrative expenses increased 65% from $1,839,000 for
the 39 week period ended May 25, 1996 to $3,037,000 for the 39 week period ended
May 31, 1997. The increase in general, selling, and administrative expenses was
primarily due to increases in payroll and related expenses, legal fees, and
facility expenses.
Interest expense increased from $176,000 for the 39 week period ended May 25,
1996 to $431,000 for the 39 week period ended May 31, 1997 which was
attributable to the increase in the Company's outstanding balance under its
capital lease arrangements.
In November and December 1995, the Company's Board of Directors granted certain
employees, officers, and directors options to purchase an aggregate of 440,000
shares of common stock which were subject to shareholder approval. The options
were granted at exercise prices ranging from $7.25 to $9.56 per share, in each
case, the fair market value of the common stock on the date the Company's Board
of Directors granted the option. The Company recorded deferred compensation of
$2,565,000 which represents an amount equal to the difference between the fair
market value of the common stock on February 16, 1996, the date of shareholder
approval, and the per share exercise price of the options. Additionally, in
March 1997, the Company granted options valued at $51,000 to certain consultants
in lieu of cash for services. The Company recorded $1,950,000 and $58,000 as
compensation expense in the 39 week periods ended May 25, 1996 and May 31, 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of cash have been revenue from government grants
and contract, revenue from collaborative research agreements, borrowings under
capital leases and proceeds from sale of equity securities.
In fiscal 1996, the Company received $11,671,000 in payments from its corporate
partners consisting of an up-front license fee, milestone payments and sponsored
research funding.
In fiscal 1996, the Company closed a public offering of 3,000,000 shares of its
common stock at $13.00 per share, resulting in proceeds of approximately
$36,007,000, net of issuance costs. The Company also sold an additional 450,000
shares of its common stock in the underwriter's over-allotment, resulting in
proceeds of
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$5,515,000, net of issuance costs. Additionally, the Company received proceeds
of $1,311,000 from the issuance of 534,831 shares of common stock resulting from
the exercise of stock options and warrants during fiscal 1996.
For the 39 week period ending May 31, 1997, the Company received payments of
$9,304,000 from its corporate partners consisting of an up-front license
fee, expense allowance, milestone payments and sponsored research funding.
As of May 31, 1997, the Company had cash, cash equivalents, restricted cash and
long and short-term marketable securities of approximately $49,478,000. The
Company has various arrangements under which it can finance certain office and
laboratory equipment and leasehold improvements. Under these arrangements, the
Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, and minimum restricted cash balances. At May 31, 1997, the Company had
approximately $4,168,000 available under these arrangements and had an
outstanding balance of approximately $7,842,000 which is repayable over the four
year period ending May 2001.
The Company's operating activities used cash of approximately $2,117,000 for the
39 week period ended May 31, 1997 primarily to fund the Company's operations.
The Company's operating activities provided cash of approximately $4,918,000 for
the 39 week period ended May 25, 1996 primarily from an up-front license fee
from Schering-Plough, as well as milestone payments under its collaborative
agreements. These payments were partially offset by cash used to fund the
Company's operations.
The Company's investing activities provided cash of approximately $5,000 for the
39 week period ended May 31, 1997 from the sale of marketable securities,
partially offset by purchases of marketable securities, and property and
equipment. The Company investing activities for the 39 week period ended May 25,
1996 used cash of approximately $31,404,000 for purchases of marketable
securities.
Financing activities used cash of approximately $1,442,000 for the 39 week
period ended May 31, 1997 primarily for payments of capital lease obligations,
partially offset by the exercise of stock options. Financing activities provided
cash of approximately $42,030,000 for the 39 week period ended May 25, 1996
primarily from the sale of equity securities and the exercise of stock options,
net of payments of capital lease obligations.
Capital expenditures totaled $5,273,000 during the 39 week period ended May 31,
1997. The Company currently estimates that it will acquire an additional
$2,000,000 in capital equipment in fiscal 1997, consisting primarily of
laboratory, computer and office equipment. The Company also plans to consolidate
its operations at its Beaver Street facility at an estimated cost of $6,000,000
which consists of laboratory and office renovations. The Company plans to
utilize capital lease arrangements to finance
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substantially all of these capital expenditures which will be incurred through
October 1997.
At August 31, 1996, the Company had net operating loss and tax credit
carryforwards of approximately $33,968,000 and $1,128,000 respectfully. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period in
excess of 50%. The Company does not believe it has experienced a cumulative
ownership change in excess of 50%. However, there can be no assurance that
ownership changes will not occur in future periods which will limit the
Company's ability to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing and
expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment, described more fully in the Company's
Annual Report on Forms 10-K and 10-K/A for the year ended August 31, 1996, filed
with the Securities and Exchange Commission.
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Part II
-------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
--------
Exhibit 10.39 filed herewith.
b) Reports on Form 8-K
-------------------
None.
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EXHIBIT INDEX
10.39 Credit agreement between the Company and Fleet National Bank dated
February 28, 1997. (22)
FOOTNOTES
(22) Filed herewith.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Fenel M. Eloi
-----------------
Fenel M. Eloi
(Principal Financial Officer)
Date: July 14, 1997
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