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
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 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.)
Five Mountain Road, Framingham, Massachusetts 01701
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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 .
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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.
CLASS OUTSTANDING AT MAY 7, 1999
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Common Stock, $0.01 par value 19,172,009
GENZYME TRANSGENICS CORPORATION
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of April 4, 1999
and January 3, 1999.................................................................................3
Condensed Consolidated Statements of Operations for the Three Months Ended April 4,
1999 and March 29, 1998 ............................................................................4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended April 4, 1999 and March 29, 1998.............................................5
Notes to Unaudited Condensed Consolidated Financial Statements......................................6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................................8
ITEM 3
Quantitative and Qualitative Disclosures
About Market Risk .................................................................................11
PART II. OTHER INFORMATION
ITEM 2
Changes in Securities..............................................................................12
ITEM 6
Exhibits and Reports on Form 8-K...................................................................12
SIGNATURES..................................................................................................13
EXHIBIT INDEX...............................................................................................14
2
GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
APRIL 4, JANUARY 3,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 11,528 $ 11,740
Accounts receivable, net 9,400 12,334
Unbilled contract revenue 8,899 6,847
Other current assets 1,579 1,496
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Total current assets 31,406 32,417
Net property, plant and equipment 31,689 30,486
Costs in excess of net assets acquired, net 18,118 18,404
Other assets 1,728 2,030
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$ 82,941 $ 83,337
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,862 $ 2,811
Accounts payable - Genzyme Corporation 1,329 1,487
Due to ATIII LLC 794 2,418
Revolving line of credit 15,750 11,096
Accrued expenses 8,491 8,403
Advance payments 10,023 8,317
Current portion of long-term debt 2,884 2,204
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Total current liabilities 42,133 36,736
Long-term debt, net of current portion 9,501 9,561
Deferred lease obligation
752 741
Other liabilities
64 95
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Total liabilities 52,450 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 18,500 and 20,000 shares are issued and outstanding at
April 4, 1999 and January 3, 1999, respectively (Note 4)
(liquidation preference $18,500) -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
18,874,392 and 18,384,024 shares issued and outstanding
at April 4, 1999 and January 3, 1999, respectively 189 184
Dividend on preferred stock (1,156) (1,156)
Capital in excess of par value - preferred stock 17,277 18,777
Capital in excess of par value - common stock 67,994 65,716
Unearned compensation (375) (437)
Accumulated deficit (53,413) (46,864)
Accumulated other comprehensive loss (25) (16)
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Total stockholders' equity 30,491 36,204
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$ 82,941 $ 83,337
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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
APRIL 4, MARCH 29,
1999 1998
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Revenues
Services $ 13,076 $ 11,188
Sponsored research and development 1,693 2,563
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14,769 13,751
Costs and operating expenses:
Services 11,483 9,921
Research and development
Sponsored 2,577 1,841
Proprietary 1,286 1,839
Selling, general and administrative 4,552 3,886
Equity in loss of joint venture 866 864
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20,764 18,351
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Loss from operations (5,995) (4,600)
Other income (expense):
Interest income 7 12
Interest expense (510) (457)
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Loss before income taxes (6,498) (5,045)
Provision (benefit) for income taxes 51 (10)
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Net loss $ (6,549) $ (5,035)
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Dividend to preferred shareholders -- (1,156)
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Net loss available to common shareholders $ (6,549) $ (6,191)
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Net loss per common share (basic and diluted) $ (0.35) $ (0.35)
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Weighted average number of shares
outstanding (basic and diluted) 18,650 17,466
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Comprehensive loss:
Net loss (6,549) (5,035)
Other comprehensive income/(loss):
Unrealized holding losses on available for sale securities (9) --
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Total other comprehensive income/(loss) (9) --
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Comprehensive loss $ (6,558) $ (5,035)
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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)
THREE MONTHS ENDED
APRIL 4, MARCH 29,
1999 1998
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Cash flows for operating activities:
Net loss $ (6,549) $ (5,035)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,355 1,171
Amortization of unearned compensation 25 --
Equity in loss of joint venture 866 864
Loss on disposal of fixed assets 1 --
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue 882 3,136
Inventory and other current assets (93) 15
Accounts payable 51 617
Accounts payable - Genzyme Corporation (158) (1,048)
Due to ATIII LLC (2,418) --
Other accrued expenses 599 (828)
Advance payments 1,706 (355)
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Net cash used in operating activities (3,733) (1,463)
Cash flows for investing activities:
Purchase of property, plant and equipment (1,548) (1,718)
Other assets 209 (78)
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Net cash used in investing activities (1,339) (1,796)
Cash flows from financing activities:
Net proceeds from employee stock purchase plan 279 474
Net proceeds from the exercise of stock options 30 369
Proceeds from preferred stock offering -- 19,000
Proceeds from long-term debt 545 --
Repayment of long-term debt (628) (484)
Net borrowings (repayment) under revolving line of credit 4,654 (6,000)
Investment and advances by Genzyme Corporation -- (6,000)
Other long-term liabilities (20) (23)
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Net cash provided by financing activities 4,860 7,336
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Net increase (decrease) in cash and cash equivalents (212) 4,077
Cash and cash equivalents at beginning of the period 11,740 6,383
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Cash and cash equivalents at end of period $ 11,528 $ 10,460
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Noncash Investing and Financing Activities:
Property acquired under capital leases $ 704 $ 385
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 three months ended April 4,
1999 and March 29, 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 the 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 $6.6
million and $4 million at April 4, 1999 and March 29, 1998,
respectively. Since the Company was in a net loss position at
April 4, 1999 and March 29, 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 $866,000 which represents the Company's commitment to fund
its 30% share of the losses incurred in 1999 of the joint
venture between the Company and Genzyme Corporation ("ATIII
LLC"). Total net losses of the ATIII LLC were $2.9 million and
the ATIII LLC did not record any revenues.
3. INCOME TAXES:
Due to the profitability of some if its contract research
laboratories in certain states, the Company has recorded a
provision for income taxes for the period ended April 4, 1999.
This is solely a provision for state, not federal, income
taxes.
6
4. PREFERRED STOCK CONVERSION:
On January 25, 1999, an institutional investor converted 1,500
shares of the Series A Convertible Preferred Stock ("Preferred
Stock"), $.01 par value per share into 321,716 shares of the
Company's common stock at a conversion price of $4.6625 per
share which represented the average of the five lowest bid
prices of the prior 20 trading days before conversion. After
this conversion, 18,500 shares of Convertible Preferred Stock
remain outstanding as of April 4, 1999.
Additionally, on May 4, 1999, an institutional investor
converted 1,000 shares of the Preferred Stock into 299,626
shares of the Company's stock at a conversion price of $3.3375
per share. After this conversion, 17,500 shares of the
Convertible 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
APRIL 4, MARCH 29,
1999 1998
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Revenues:
Primedica - external customers $ 13,076 $ 11,188
Primedica - intersegment 431 364
Transgenics 1,693 2,563
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15,200 14,115
Elimination of intersegment revenues (431) (364)
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$ 14,769 $ 13,751
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Loss from operations:
Primedica $ (893) $ (902)
Transgenics (3,256) (2,040)
Unallocated amounts:
Corporate expenses (980) (794)
Equity in loss of joint venture (866) (864)
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$ (5,995) $ (4,600)
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7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 4, 1999 AND MARCH 29, 1998
Total revenues for the three-month period ending April 4, 1999 were $14.8
million, compared with $13.8 million in the comparable period of 1998, an
increase of $1 million or 7%. Service revenues increased to $13.1 million in the
first quarter of 1999 from $11.2 million in the first quarter of 1998, an
increase of $1.9 million or 17%. Research and development revenue decreased to
$1.7 million in the first quarter of 1999 from $2.6 million in the first quarter
of 1998, a decrease of $900,000 or 34%. The decrease is a result of a $1 million
milestone payment received in the first quarter of 1998.
Cost of services for the first quarter of 1999 were $11.5 million compared to
$9.9 million in the comparable period of 1998, an increase of $1.6 million or
16% due to the increase in revenues. Sponsored research and development expenses
increased to $2.6 million in the first quarter of 1999 from $1.8 million in the
first quarter of 1998, an increase of $700,000 or 40%. The increase in expense
was due to an increase in activity on sponsored research. Proprietary research
and development expenses decreased to $1.3 million in the first quarter of 1999
from $1.8 in the first quarter of 1998, a decrease of $600,000 or 30%. The
decrease is due to decreased work 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 quarter of 1999 amounted to a loss of
$577,000 versus a profit of $150,000 in the first quarter of 1998 due to the
increase in unfunded research and development expenditures. Gross profit on
services for the first quarter of 1999 was $1.6 million, a gross margin of
12%, versus $1.3 million, a gross margin of 11%, in the first quarter of 1998.
Selling, general and administrative ("SG&A") expenses increased to $4.6 million
in the first quarter of 1999 from $3.9 million in the first quarter of 1997, an
increase of $700,000 or 17%. 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 and additional patent
expenditures.
Interest income decreased to $7,000 in the first quarter of 1999, from $12,000
in the first quarter of 1998, due to lower funds available for investment.
Interest expense increased to $510,000 in the first quarter of 1999 from
$457,000 in the first quarter of 1998 due to increased borrowings in 1999.
The Company recognized $866,000 of joint venture losses incurred on the joint
venture ("ATIII LLC") between the Company and Genzyme Corporation ("Genzyme")
during the first quarter of 1999 as compared to $864,000 incurred during the
first quarter of 1998.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $11.5 million at April 4, 1999.
During the first three months of 1999, the Company had a $212,000 net decrease
in cash: $3.7 million of cash was used in operations (due primarily to the net
loss of $6.5 million offset by a decrease in non-cash working capital of
$594,000 and $2.2 million of non-cash charges), $1.5 million was invested in
capital equipment, further expansion of the transgenic production facility and
laboratory facilities and $629,000 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, $545,000 of proceeds from issuance of
long-term debt and $309,000 of proceeds from the issuance of common stock under
various employee stock plans.
The Company had a working capital deficit of $10.7 million at April 4, 1999
compared to a deficit of $4.3 million at January 4, 1999. As of April 4, 1999
the Company had approximately $6.4 million available under the Genzyme
Convertible Debt Agreement, $250,000 available under a line of credit with a
commercial bank, $4.3 million available under various capital lease lines and
$4.7 million available under a term loan for 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 Convertible Debt Agreement are
expected to be sufficient to fund the Company through the third quarter of 2000.
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 sources.
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.
9
IMPACT OF 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 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 Summer of 1999. The Company has
spent approximately $150,000 and estimates that it will spend approximately
$300,000 to $400,000 in capital replacement of computers, equipment and software
upgrades. The Company will incur another $100,000 to $200,000 for costs of
implementation. The Company has 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 is assessing 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 operations.
10
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.
11
PART II
ITEM 2: CHANGES IN SECURITIES
On January 25 and May 4, 1999, an institutional investor
converted 1,500 and 1,000 shares of its Series A Convertible Preferred
Stock, $.01 par value per share, of the Company (its "Preferred
Stock"), into 321,716 and 299,626 shares of the Company's Common Stock,
$.01 par value per share (the "Common Stock"), at conversion prices of
$4.6625 and $3.3375, respectively. 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.
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
April 4, 1999.
12
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARY
FORM 10-Q
APRIL 4, 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: May 19, 1999 GENZYME TRANSGENICS CORPORATION
BY: /s/ John B. Green
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John B. Green
Duly Authorized Officer,
Vice President and
Chief Financial Officer
13
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10 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 herewith.
27 Financial Data Schedule. (EDGAR only.)
14