-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UyNJxzLdMccpEKNW/oKKQcsLGvubnzo6KFc6jr6BDnyB3s0FZuMr8LS0RFQjbR+9 0+cS258BJ/4pTUlC4dboXw== 0000950135-99-001933.txt : 19990414 0000950135-99-001933.hdr.sgml : 19990414 ACCESSION NUMBER: 0000950135-99-001933 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENOME THERAPEUTICS CORP CENTRAL INDEX KEY: 0000356830 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042297484 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10824 FILM NUMBER: 99592656 BUSINESS ADDRESS: STREET 1: 1OO BEAVER ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178935007 MAIL ADDRESS: STREET 1: 100 BEAVER STREET CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: COLLABORATIVE RESEARCH INC DATE OF NAME CHANGE: 19920703 10-Q 1 GENOME THERAPUETICS CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter Ended: FEBRUARY 27, 1999 Commission File No: 0-10824 GENOME THERAPEUTICS CORP. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2297484 - --------------------------------- ------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02453 - ----------------------------------------- ------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK 18,357,421 -------------- -------------------------- $.10 PAR VALUE Outstanding April 12, 1999 2 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES Index to Financial Information (Unaudited) and Other Information Page ---- PART I Financial Information (Unaudited) : Consolidated Condensed Balance Sheets as of 3 August 31, 1998 and February 27, 1999 Consolidated Condensed Statements of Operations 4 for the 26 week periods ended February 28, 1998 and February 27,1999 Consolidated Statements of Cash Flows for the 5 26 week periods ended February 28, 1998 and February 27,1999 Notes to Consolidated Condensed Financial 6-11 Statements for the 26 week periods ended February 28, 1998 and February 27, 1999 Management's Discussion and Analysis of Financial 12-18 Conditions and Results of Operations PART II Other Information: Other Information 19 Signature 20 2 3 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
- -------------------------------------------------------------------------------------------- August 31, February 27, 1998 1999 (Unaudited) - -------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $10,978,176 $16,303,106 Marketable securities 21,969,524 14,526,250 Interest receivable 742,411 518,594 Unbilled costs and fees 150,299 109,886 Prepaid expenses and other current assets 721,239 548,697 ----------- ----------- Total current assets 34,561,649 32,006,533 Equipment and leasehold improvements, at cost: Laboratory and scientific equipment 14,434,808 15,186,577 Leasehold improvements 7,872,336 7,999,780 Equipment and furniture 1,334,268 1,333,698 Construction-in-progress 41,234 138,060 ----------- ----------- 23,682,646 24,658,115 Less accumulated depreciation and amortization 8,579,440 10,394,522 ----------- ----------- 15,103,206 14,263,593 Restricted cash 200,000 200,000 Long-term marketable securities 1,029,569 0 Note receivable from officer 160,000 160,000 Other assets 410,267 386,277 ----------- ----------- Total assets $51,464,691 $47,016,403 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 977,610 $ 862,020 Accrued expenses 2,450,400 2,418,441 Deferred revenue 4,699,137 5,973,400 Current maturities of long-term obligations 5,611,186 4,707,893 ----------- ----------- Total current liabilities 13,738,333 13,961,754 Long-term obligations, net of current maturities 8,478,558 7,336,027 Shareholders' equity 29,247,800 25,718,622 ----------- ----------- Total liabilities and shareholders' equity $51,464,691 $47,016,403 =========== ===========
See Notes to Consolidated Condensed Financial Statements. 3 4 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-six Weeks Ended February 28, February 27, February 28, February 27, 1998 1999 1998 1999 (Unaudited) (Unaudited) - ---------------------------------------------------------------------------------------------------------------------------- Revenues: Collaborative research, licenses, subscription fees and royalties $ 3,861,532 $ 6,301,218 $ 7,857,474 $11,138,227 Government research 202,232 101,525 463,603 374,773 ----------- ----------- ----------- ----------- Total revenues 4,063,764 6,402,743 8,321,077 11,513,000 ----------- ----------- ----------- ----------- Costs and Expenses: Research and development 7,840,057 6,571,140 14,470,972 13,110,894 Cost of government research 202,232 101,525 463,603 374,773 Selling, general and administrative 1,112,809 1,151,871 2,134,946 2,062,423 ----------- ----------- ----------- ----------- Total costs and expenses 9,155,098 7,824,536 17,069,521 15,548,090 ----------- ----------- ----------- ----------- Interest income 649,495 462,405 1,328,986 874,405 Interest expense (289,376) (258,715) (538,987) (529,060) ----------- ----------- ----------- ----------- Net interest income 360,119 203,690 789,999 345,345 ----------- ----------- ----------- ----------- Net loss $(4,731,215) $(1,218,103) $(7,958,445) $(3,689,745) =========== =========== =========== =========== Basic/diluted net loss per common share $ (0.26) $ (0.07) $ (0.44) $ (0.20) =========== =========== =========== =========== Basic/diluted weighted average number of common and common equivalent shares outstanding: 18,215,285 18,352,272 18,135,581 18,335,058 =========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements. 4 5 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------- Twenty-six Weeks Ended February 28, February 27, 1998 1999 (Unaudited) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net loss $ (7,958,445) $ (3,689,745) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,582,412 2,048,147 Loss on disposal of fixed assets 94,309 0 Deferred compensation 58,220 86,575 Changes in assets and liabilities: Interest receivable 149,244 223,817 Unbilled costs and fees (44,079) 40,413 Prepaid expenses and other current assets (167,622) 172,542 Accounts payable (80,542) (115,590) Accrued expenses 250,323 (31,959) Deferred revenue 1,732,606 1,274,263 ------------ ------------ Total adjustments 3,574,871 3,698,208 ------------ ------------ Net cash (used in) provided by operating activities (4,383,574) 8,463 ------------ ------------ Cash Flows from Investing Activities: Purchases of marketable securities (14,528,524) (11,135,157) Proceeds from sale of marketable securities 25,276,125 19,608,000 Purchases of equipment and leasehold improvements (4,553,714) (424,997) (Increase) / decrease in other assets (21,872) 23,990 ------------ ------------ Net cash provided by investing activities 6,172,015 8,071,836 ------------ ------------ Cash Flows from Financing Activities: Proceeds from exercise of stock options 852,851 73,992 Proceeds from long-term obligations 3,500,000 0 Payments on long-term obligations (1,894,760) (2,829,361) ------------ ------------ Net cash provided by (used in) financing activities 2,458,091 (2,755,369) ------------ ------------ Net Increase in Cash and Cash Equivalents 4,246,532 5,324,930 Cash and Cash Equivalents, at beginning of period 8,602,698 10,978,176 ------------ ------------ Cash and Cash Equivalents, at end of period $ 12,849,230 $ 16,303,106 ============ ============ Supplemental Disclosure of Cash Flow Information: Taxes paid during period $ 13,500 $ 11,700 ============ ============ Interest paid during period $ 538,988 $ 529,060 ============ ============ Supplemental Disclosure of Non-cash Investing Activities: Property and equipment acquired under capital lease obligations $ 1,770,943 $ 783,537 ============ ============
See Notes to Consolidated Condensed Financial Statements. 5 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION 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 26 week period ended February 27, 1999 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 25, 1998. 2. REVENUE RECOGNITION Research revenues are derived from collaborative agreements with pharmaceutical companies as well as government grants and contract arrangements. Research revenues are recognized as earned under government 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. Subscription fee revenue from the PathoGenome(TM) database is recognized ratably over the life of the subscription. License fees and royalties from collaborative agreements are recognized as earned. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts received prior to revenue recognition. 3. NET LOSS PER COMMON SHARE The Company applies SFAS No. 128, Earnings per Share. This statement established standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. Basic earnings per share was determined by dividing net loss by the weighted average common shares outstanding during the period. Diluted earnings per share was determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potential common stock, which include common stock options and warrants, based on the treasury stock method. Diluted loss per share is the same as basic loss per share for the periods ended February 28, 1998 and February 27, 1999 as the effect of the potential common stock is antidilutive. Potential common stock of 4,581,048 and 3,719,869 was excluded from diluted loss per share at February 28, 1998 and February 27, 1999, respectively. 4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At February 27, 1999 and August 31, 1998, 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 6 7 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 gains or losses on its marketable securities. Marketable securities consist of commercial paper and U.S. government debt securities. The Company has $200,000 in restricted cash at August 31, 1998 and February 27, 1999 in connection with certain long-term obligations (see Note 7). 5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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. 6. COMPREHENSIVE INCOME The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's total comprehensive net loss for the six month periods ended February 28, 1998 and February 27, 1999 were the same as reported net loss for those periods. 7. LONG-TERM OBLIGATIONS On February 28, 1997, the Company entered into an equipment lease line of credit with a certain financial institution under which it financed $6,000,000 of laboratory, computer and office equipment. The lease is payable in 48 monthly installments from the point of takedown, at a variable interest rate of prime (7.75% as of February 27, 1999) plus 1/4 of 1%. On March 9, 1998, the Company increased the amount available under the equipment lease line of credit by $4,300,000 to $10,300,000. The additional borrowings under the equipment lease line of credit have been and will continue to be utilized to finance laboratory, computer and office equipment and are payable in 16 quarterly installments commencing March 31, 1999 at a variable interest rate of prime. 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 4). 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 had approximately $2,889,000 available under the modified line of credit at February 27, 1999. On July 31, 1997, the Company entered into a financing arrangement with another financial institution under which it financed $6,000,000 of laboratory and office renovations at its Beaver Street facility. The principal amount of the loan will be repaid over 48 consecutive months. The interest rates range from 7.19% to 8.16%. The Company is required to maintain certain financial ratios pertaining to minimum cash balances, debt to net worth and tangible net worth. The Company has no additional availability under this financing arrangement at February 27, 1999. The Company entered into other capital lease line arrangements under which it financed approximately $9,750,000 of certain laboratory, computer and office equipment. These leases are payable in 36 monthly installments. The interest rates range from 7.52% to 10.29%. The 7 8 Company is required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth, debt to tangible net worth and debt service coverage. The Company has no additional borrowing capacity under these capital lease agreements at February 27, 1999. 8. COLLABORATIVE AGREEMENTS (a) Astra Hassle AB In August 1995, the Company entered into a collaboration agreement with Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infection or any other disease caused by H. pylori. The Company granted Astra exclusive access to the Company's H. pylori genomic sequence database and exclusive worldwide rights to make, use and sell products based on the Company's H. pylori technology. The agreement also provides for a four-year research collaboration to further develop and annotate the Company's H. pylori genomic sequence database, identify therapeutic and vaccine targets and develop appropriate biological assays. This research is being directed by a Joint Management Committee and a Joint Research Committee, each consisting of representatives from both parties. Under this agreement, Astra agreed to pay an initial license fee, expense allowance, milestone payments, and fund a research program for a minimum of two and a half years with an option to extend. On June 4, 1998, Astra exercised its option to extend the research program for a second time which will carry the agreement through at least August 1999. Under this agreement as extended, Astra agreed to pay the Company a minimum of approximately $13.4 million and, subject to the achievement of certain product development milestones, up to approximately $23 million (and possibly a greater amount if more than one product is developed under the agreement) in license fees, expense allowances, research funding and milestone payments. Of such fees, $500,000 are creditable against any future royalties payable to the Company by Astra under the agreement. The Company will also be entitled to receive royalties on Astra's sale of products (i) protected by the claims of patents licensed exclusively to Astra by the Company pursuant to the agreement, or (ii) the discovery of which was enabled in a significant manner by the genomic database licensed to Astra by the Company. The Company has the right, under certain circumstances, to convert Astra's license to a nonexclusive license in the event Astra is not actively pursuing commercialization of the technology. For the 13 week periods ended February 27, 1999 and February 28, 1998, the Company recorded revenue of $172,000 and $359,000, respectively, under this agreement, which consisted of sponsored research funding. For the 26 week period ended February 27, 1999, the Company recorded revenue of $423,000 under this agreement, which consisted of sponsored research funding. For the 26 week period ended February 28, 1998, the Company recorded revenue of $1,069,000 under this agreement, which consisted of sponsored research funding and a milestone payment. (b) Schering-Plough 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 genomic sequence of Staph. aureus. The Company is identifying 8 9 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 nonexclusive 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 this agreement, Schering-Plough agreed to pay an initial license fee and fund a research program for a minimum number of years with an option to extend. On March 4, 1998, Schering-Plough elected to extend the research program to the full term of the agreement which expires on March 31, 2000. Under the agreement as extended, Schering-Plough has agreed to pay the Company a minimum of $18.5 million in an up-front license fee, research funding and milestone payments. Subject to the achievement of additional product development milestones, Schering-Plough has agreed to pay the Company up to an additional $24 million in milestone payments. The agreement grants Schering-Plough exclusive worldwide rights to make, use and sell pharmaceutical and vaccine products based on the genomic sequence databases licensed to Schering-Plough by the Company 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 that are targeted against Staph. aureus, as their primary indication. 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 genomic database licensed to Schering-Plough or the technology developed in the course of the research program. For the 13 week periods ended February 27, 1999 and February 28, 1998, the Company recorded revenue of $621,000 and $575,000, respectively, under this agreement, which consisted of sponsored research funding. For the 26 week period ended February 27, 1999, the Company recorded revenue of $1,332,000 under this agreement, which consisted of sponsored research funding. For the 26 week period ended February 28, 1998, the Company recorded revenue of $1,912,000 under this agreement, which consisted of sponsored research funding and milestone payments. In December 1996, the Company entered into its second research collaboration and license agreement with Schering-Plough. This agreement calls for the use of genomics to discover new genes to be used as targets in the development of 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 that may result from this collaboration. 9 10 Under this agreement, Schering-Plough agreed to pay an initial 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 July 1998, Schering-Plough amended the original agreement in order to accelerate the research effort being undertaken. 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 on 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 milestones. For the 13 week periods ended February 27, 1999 and February 28, 1998, the Company recorded revenue of $2,841,000 and $1,799,000, respectively, under this agreement, which consisted of sponsored research funding, subcontract activity and milestone payments. For the 26 week periods ended February 27, 1999 and February 28, 1998, the Company recorded revenue of $4,785,000 and $2,951,000, respectively, under this agreement, which consisted of sponsored research funding, subcontract activity and milestone payments. On September 24, 1997, the Company entered into a third research collaboration and license agreement with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infection. Under the agreement, the Company will employ its bioinformatics, high-throughput sequencing and functional genomics capabilities to identify and validate genes and associated proteins as drug discovery targets that can be utilized by Schering-Plough to develop novel antifungal treatments. Schering-Plough will receive exclusive access to the genomic information developed in the collaboration related to two fungal pathogens, Candida albicans and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide right to make, use and sell products based on the technology developed in the course of the research program. In return, Schering-Plough has agreed to fund a research program for a minimum number of years with an option to extend. If all milestones are met and the research program continues for its full term, total payments to the Company will approximate $34 million, excluding royalties. Of the total potential payments, approximately $11 million represents research payments and $23 million represents milestone payments based on achievement of research and product development milestones. Additionally, the Company entered into a subscription agreement with Schering-Plough to provide Schering-Plough with nonexclusive access to the Company's proprietary PathoGenome(TM) database and associated information relating to microbial organisms (see Note 9). For the 13 week period ended February 27, 1999, the Company recorded revenue of $1,336,000 under this agreement, which consisted of sponsored research funding and a milestone payment. For the 13 week period ended February 28, 1998, the Company recorded revenue of $570,000 under this agreement, which consisted of sponsored research funding. For the 26 week period ended February 27, 1999, the Company recorded revenue of $2,025,000 under this agreement, which consisted of sponsored research funding and a milestone payment. For the 26 week period ended February 28, 1998, the Company recorded revenue of $1,007,000 under this agreement, which consisted of sponsored research funding. 10 11 (9) DATABASE SUBSCRIPTIONS The Company has entered into PathoGenome(TM) database subscriptions with Bayer AG, Bristol-Meyers Squibb, Scriptgen Pharmaceuticals, Inc., Hoechst Marion Roussel and Schering-Plough (see Note 8). The database subscription provides nonexclusive access to the Company's proprietary PathoGenome(TM) database and associated information relating to microbial organisms. The subscription agreement calls for the Company to provide periodic data updates, analysis tools and software support. Under the subscription agreements, the customer has agreed to pay an annual subscription fee and royalties on any molecules developed as a result of access to the information provided by PathoGenome(TM) database. The Company retains all rights associated with protein therapeutic, diagnostic and vaccine use of bacterial genes or gene products. The Company has recognized $1,312,000 and $543,000 in revenue under these subscription agreements for the 13 week periods ended February 27, 1999 and February 28, 1998, respectively. The Company has recognized $2,554,000 and $918,000 in revenue under these subscription agreements for the 26 week periods ended February 27, 1999 and February 28, 1998, respectively. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leader in the field of genomics-based drug targets discovery -- the identification and functional characterization of genes. The Company has over ten years of experience in the field of genomics, having served as one of the primary researchers under genome programs sponsored by the United States government, and has developed numerous techniques and tools that are widely used in the field. The Company's commercial gene discovery strategy capitalizes on its pioneering work in genomics by applying its high-throughput sequencing technology and positional cloning, its experience and skills in functional genomics and its bioinformatics capabilities. The two areas of focus are: the discovery and characterization of (i) genes of pathogens that are responsible for many serious diseases and (ii) human disease genes. The Company believes that its genomic discoveries may lead to the development of novel therapeutics, vaccines and diagnostic products by it and its strategic partners. The Company has entered into numerous corporate collaborations in connection with its pathogen and human gene discovery programs. The Company does not anticipate revenues on a sustained basis until such time that therapeutic, vaccine and diagnostic products based on the Company's research efforts are commercialized, if at all. The Company's product development strategy is to form collaborations with pharmaceutical and biotechnology companies accessing drug discovery and clinical development capabilities that currently do not exist at the Company. In the pharmaceutical alliances, the Company generates revenues from licensing fees, sponsored research and milestone payments during the term of the collaboration. Once a product resulting from the research collaboration is commercialized, the Company is entitled to receive royalty payments based upon product revenues. Additionally, the Company will sell nonexclusive access to its proprietary PathoGenome(TM) database. These collaborations are expected to result in the discovery and commercialization of novel therapeutics, vaccines and diagnostics. The sale of the genetic database generates subscription revenue over the term of the subscription and royalty payments to the Company from product sales downstream. 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 upon product revenues for many years. The Company's primary sources of revenue are collaborative agreements with pharmaceutical company partners, subscription agreements to the Company's proprietary PathoGenome(TM) database and government research grants and contracts. As of February 27, 1999, the Company had four collaborative research agreements and five subscribers to its proprietary PathoGenome(TM) database. 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 September 1997, the Company entered into its third research collaboration with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infections. 12 13 In May 1997, the Company introduced its proprietary PathoGenome(TM) database and sold its first subscription to Bayer AG ("Bayer"). In September 1997, the Company sold subscriptions to Bristol-Myers Squibb and Schering-Plough. In May 1998, the Company sold a subscription to Scriptgen Pharmaceuticals, Inc. ("Scriptgen"). In September 1998, the Company sold a subscription to Hoechst Marion Roussel ("HMR"). Under these agreements, the subscribers will receive nonexclusive access to the Company's PathoGenome(TM) database and associated information relating to microbial organisms. Since 1989, the Company has been awarded a number of research grants and contracts by various agencies of the United States government pursuant to the government genomics programs. The scope of the research covered by grants and contracts encompasses technology development, sequencing production, technology automation projects and positional cloning projects. These programs strengthened the Company's genomics technology base and increased the number and enhanced the expertise of its scientific personnel. From January 1991 through February 27 1999, the United States government awarded the Company grants and contracts providing for the aggregate payments over their terms of approximately $37 million. However, over the last two years, the Company has substantially reduced its reliance on government research grants and contracts as the Company focuses its resources more toward drug discovery in collaboration with pharmaceutical partners. The Company has incurred significant losses, since inception, with an accumulated deficit of approximately $64,059,000 at February 27, 1999. 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 collaborative agreements and government research grants and contracts. 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, 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 FEBRUARY 28, 1998 AND FEBRUARY 27, 1999 REVENUE Total revenues increased 58% from $4,064,000 for the 13 week period ended February 28, 1998 to $6,403,000 for the 13 week period ended February 27, 1999. Collaborative research, licenses, subscription fees and royalties increased 63% from $3,862,000 for the 13 week period ended February 28, 1998 to $6,301,000 for the 13 week period ended February 27, 1999. The increase in collaborative research, licenses, subscription fees and royalties was primarily attributable to increased revenue recognized under the Company's collaborative research agreements with Schering-Plough, consisting of milestone payments and sponsored research, as well as increased subscription fees earned in fiscal 1999 under the Company's subscription agreements with Bayer, Scriptgen and HMR to access the Company's proprietary PathoGenome(TM) database. 13 14 COST AND EXPENSES Total cost and expenses decreased 15% from $9,155,000 for the 13 week period ended February 28, 1998 to $7,825,000 for the 13 week period ended February 27, 1999. Research and development expense, which includes company-sponsored research and development and research funded pursuant to arrangements with the Company's corporate collaborators decreased by 16% from $7,840,000 for the 13 week period ended February 28, 1998 to $6,571,000 for the 13 week period ended February 27, 1999. The reduction in research and development expenses was primarily attributable to the Company's expenses returning to more historical levels after being elevated for much of fiscal 1998 as new research programs and capabilities were being established specifically in the area of microbial genetics, human gene discovery and functional genomics. The reduction consisted primarily of decreases in payroll and related expenses, laboratory supplies and overhead expenses. Selling, general and administrative expenses increased slightly by 4% from $1,113,000 for the 13 week period ended February 28, 1998 to $1,152,000 for the 13 week period ended February 27, 1999. The increase in selling, general and administrative expenses was primarily due to increased legal fees. INTEREST INCOME AND EXPENSE Interest income decreased 29% from $649,000 for the 13 week period ended February 28, 1998 to $462,000 for the 13 week period ended February 27, 1999 reflecting a decrease in funds available for investment during fiscal 1999 as a result of cash being utilized to fund operations. Interest expense decreased 10% from $289,000 for the 13 week period ended February 28, 1998 to $259,000 for the 13 week period ended February 27, 1999. The decrease in interest expense was attributable to the scheduled repayment of the Company's long-term obligations. TWENTY-SIX WEEK PERIOD ENDED FEBRUARY 28, 1998 AND FEBRUARY 27, 1999 REVENUE Total revenues increased 38% from $8,321,000 for the 26 week period ended February 28, 1998 to $11,513,000 for the 13 week period ended February 27, 1999. Collaborative research, licenses, subscription fees and royalties increased 42% from $7,857,000 for the 26 week period ended February 28, 1998 to $11,138,000 for the 26 week period ended February 27, 1999. The increase in collaborative research, licenses, subscription fees and royalties was primarily attributable to increased revenue recognized under the Company's collaborative research agreements with Schering-Plough as well as increased subscription fees earned in fiscal 1999 under the Company's subscription agreements with Bayer, Bristol-Myers Squibb, Schering-Plough, Scriptgen and HMR to access the Company's proprietary PathoGenome(TM) database. 15 COST AND EXPENSES Total cost and expenses decreased 9% from $17,070,000 for the 26 week period ended February 28, 1998 to $15,548,000 for the 26 week period ended February 27, 1999. Research and development expense, which includes company-sponsored research and development and research funded pursuant to arrangements with the Company's corporate collaborators decreased by 9% from $14,471,000 for the 26 week period ended February 28, 1998 to $13,111,000 for the 26 week period ended February 27, 1999. The reduction in research and development expenses was primarily attributable to the Company's expenses returning to more historical levels after being elevated for much of fiscal 1998 as new research programs and capabilities were being established specifically in the area of microbial genetics, human gene discovery and functional genomics. The reduction consisted primarily of decreases in payroll and related expenses, laboratory supplies and overhead expenses. Selling, general and administrative expenses decreased slightly by 3% from $2,135,000 for the 26 week period ended February 28, 1998 to $2,062,000 for the 26 week period ended February 27, 1999. INTEREST INCOME AND EXPENSE Interest income decreased 34% from $1,329,000 for the 26 week period ended February 28, 1998 to $874,000 for the 26 week period ended February 27, 1999 reflecting a decrease in funds available for investment during fiscal 1999 as a result of cash being utilized to fund operations. Interest expense decreased slightly by 2% from $539,000 for the 26 week period ended February 28, 1998 to $529,000 for the 26 week period ended February 27, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash have been revenue from collaborative research agreements and subscription fees, revenue from government grants and contract, borrowings under equipment lending facilities and capital leases and proceeds from sale of equity securities. As of February 27, 1999, the Company had cash, cash equivalents, restricted cash and long and short-term marketable securities of approximately $31,029,000. 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, debt service coverage and minimum restricted cash balances. At February 27, 1999, the Company had approximately $2,889,000 available under these arrangements for future borrowings. At February 27, 1999, the Company had an aggregate of approximately $12,044,000 outstanding under its borrowing arrangements which is repayable over the next 46 months, of which $4,708,000 is repayable within the next 12 months. The Company's operating activities used cash of approximately $4,384,000 for the 26 week period ended February 28, 1998 to fund the Company's operating loss which was partially offset by increases in deferred revenue and accrued liabilities. The Company's operating activities provided cash of approximately $8,000 for the 26 week period ended February 27, 1999. 15 16 For the 26 week periods ending February 28, 1998 and February 27, 1999, the Company's investing activities provided cash of approximately $6,172,000 and $8,072,000, respectively, from the sale of marketable securities, partially offset by the purchases of equipment and leasehold improvements. Capital expenditures, including property and equipment acquired under capital leases, totaled $1,209,000 for the 26 week period ended February 27, 1999 consisting primarily of laboratory, computer and office equipment. The Company currently estimates that it will acquire an additional $770,000 in capital equipment in fiscal 1999 consisting of primarily computer and laboratory equipment which it intends to finance under existing equipment financing arrangements. The Company's financing activities provided cash of approximately $2,458,000 for the 26 week period ended February 28, 1998 primarily from proceeds from long-term obligations, exercise of stock options, net of payments of long-term obligations. Financing activities used cash of approximately $2,755,000 for the 26 week period ended February 27, 1999 primarily for payments of long-term obligations. At August 31, 1998, the Company had net operating loss and tax credit carryforwards of approximately $62,908,000 and $1,658,000, respectively, and certain of these net operating losses will expire in the next few years. These net operating losses and tax credits are available to reduce federal taxable income and federal income taxes, respectively, in future years, if any, 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 at least two years under its current rate of investment in research and development. 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. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, and type of instrument. The Company does not expect any material loss with respect to its investment portfolio. 16 17 IMPACT OF YEAR 2000 Many currently installed computer systems and software applications are designed to accept only two-digit entries in the date code field used to identify years. These date code fields require modification to recognize twenty-first century years. As a result, computer systems and software applications used by many companies may need to be upgraded to comply with the Year 2000 requirements. Significant uncertainty exists concerning the potential effects of failure to comply with such requirements. The Company has performed an extensive inventory and initial testing of its electronic equipment, computer systems, software applications, and genomic database storage and retrieval systems used both internally and sold to its customers, to identify which systems may be impacted by Year 2000. The Company formed a Y2K Task Force with Coordinators from every Department, which identified the Company's mission-critical systems. The Company is completing its assessment and developing a comprehensive compliance program, using internal and external resources to address Year 2000 issues. The compliance program incorporates best practices from such sources as the General Services Administration and the Government Accounting Office (see www.y2k.gov). The program includes an evaluation of its internally developed operating systems and internally used financial and administration systems. Externally, the program has solicited and continues to obtain compliance certificates from third-party software and equipment vendors as well as statements of readiness from major suppliers. The Company estimates that its mission critical systems will be compliant by September 1999. At this time, given that the Company's internal financial, administrative, and scientific systems have been installed within the last few years and the internally developed software-based systems are not generally date sensitive, the Company does not expect the cost of addressing the Year 2000 Issue to have a material impact on the Company's business, results of operations or financial condition. The Company has incurred approximately $50,000 to date on the year 2000 initiative consisting of labor and outside contracting. The Company has not had to defer any other projects, and does not anticipate having to do so. If such modifications, conversions, and/or replacements are not completed in a timely manner, or if any of the Company's suppliers or collaborators do not successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's research and development efforts could be significantly interrupted resulting in delays in meeting its scientific obligations to existing collaborations, delays in progress of its internal drug discovery programs and, consequently, delays in attracting new collaborative partners. However, the Company expects cash inflow from its existing corporate partners to be unaffected by Year 2000 issues for at least the first two months of 2000 since the first quarterly research payments of 2000 will be made prior to the start of 2000. The Company's reasonable worst case internal scenario includes greater date sensitivity than presently indicated, which may require additional remediation and/or porting of software and databases to compliant platforms, user interface modifications preventing erroneous date entry, and redefining internal file-naming conventions. The Company's reasonable worst case external scenario includes a) prolonged loss of electrical power which could compromise critical biological samples, and b) vendor fixes that are either unavailable or delayed, which would require the purchase of replacement systems or force a delay in the Company's compliance schedule. After periodic reviews of its internal compliance efforts as well as the compliance efforts of third parties with which the Company does business, the Company will modify as appropriate its 17 18 present contingency plans to address situations in which various systems of the Company, or of third parties are not yet Year 2000 compliant. Contingency plans for each Department will be incorporated into a Company-wide contingency plan. Some Departments already stockpile one month's supply of consumables, and the existing emergency power generator has a one-day fuel supply. If there are unidentified dependencies on systems to operate the business, or if any required modifications are not completed on a timely basis or are more costly to implement than anticipated, the Company's business, financial condition or results of operations could be materially affected. Statements in this Form 10K 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. 19 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 The Company's Special Meeting in lieu of an Annual Meeting was held on February 22, 1999. At the meeting, shareholders took the following actions: 1) Election of Directors
Name of Nominee Shares Voted For Withhold Authority --------------- ---------------- ------------------ Marc Garnick 17,184,448 239,682 Robert J. Hennessey 14,904,532 2,519,598 Philip J. Leder 17,263,641 160,489 Lawrence Levy 14,850,832 2,573,298 Steven M. Rauscher 14,994,299 2,429,831 Norbert Riedel 17,269,441 154,689
2) To ratify the selection of Arthur Andersen LLP as the Company's auditors for the fiscal year ending August 31, 1999. For Against Abstain --- ------- ------- 17,343,982 56,573 23,575 Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS: None. b) REPORTS ON FORM 8-K None. 19 20 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: April 13, 1999 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000356830 GENOME THERAPEUTIC CORPORATION 1,000 U.S. DOLLARS 6-MOS AUG-31-1999 SEP-01-1998 FEB-27-1999 1 16,303 14,526 628 0 0 32,007 24,658 10,395 47,016 13,962 0 0 0 1,836 23,882 47,016 0 11,513 0 15,548 0 0 529 0 0 0 0 0 0 (3,690) (.20) (.20)
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