<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27150
__________________
PathoGenesis Corporation
(Exact name of Registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
201 Elliott Avenue West, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 467-8100
__________________
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
------- -------
On November 12, 1999, the registrant had an aggregate of 16,446,567 shares of
Common Stock issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial statements
PathoGenesis Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 3,277,265 $ 8,139,153
Investment securities.................................................... 36,904,446 46,868,390
Accounts receivable, net................................................. 6,952,554 10,961,242
Interest receivable...................................................... 426,359 427,618
Inventories.............................................................. 14,983,140 9,907,916
Other.................................................................... 2,219,844 3,480,022
------------- ------------
Total current assets................................................ 64,763,608 79,784,341
------------- ------------
Restricted investment...................................................... 675,000 675,000
Property and equipment, at cost:
Land..................................................................... 3,085,875 3,194,923
Building and improvements................................................ 1,481,220 1,515,543
Leasehold improvements................................................... 9,697,830 9,367,898
Furniture and equipment.................................................. 15,740,888 13,263,162
------------- ------------
30,005,813 27,341,526
Less accumulated depreciation and amortization........................... 12,085,487 9,704,385
------------- ------------
Net property and equipment.......................................... 17,920,326 17,637,141
------------- ------------
License rights, net........................................................ 13,834,023 14,562,129
Other assets............................................................... 996,598 107,136
------------- ------------
Total assets............................................................. $ 98,189,555 $112,765,747
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 804,647 $ 1,180,909
Compensation and benefits................................................ 1,978,525 2,580,790
Clinical development costs............................................... 782,562 199,869
Accrued royalties........................................................ 415,492 827,739
License payable.......................................................... -- 2,000,000
Other accrued expenses................................................... 2,981,623 2,691,572
Current portion of long-term liability................................... 5,039,755 5,149,847
------------- ------------
Total current liabilities........................................... 12,002,604 14,630,726
------------- ------------
Long-term liability, net of current portion................................ -- 4,724,630
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
1,000,000 shares; none issued and outstanding........................... -- --
Common stock, $0.001 par value.
Authorized 60,000,000 shares; 16,406,792 shares and 16,328,580 shares
issued and outstanding at September 30, 1999 and December 31, 1998, 16,407 16,329
respectively
Additional paid-in capital............................................... 194,119,122 193,188,363
Deferred compensation.................................................... (641,438) (987,156)
Accumulated other comprehensive income (loss)............................ (346,510) 133,117
Accumulated deficit...................................................... (106,960,630) (98,940,262)
------------- ------------
Total stockholders' equity............................................... 86,186,951 93,410,391
------------- ------------
Total liabilities and stockholders' equity............................... $ 98,189,555 $112,765,747
============= ============
</TABLE>
See accompanying notes.
1
<PAGE>
PathoGenesis Corporation
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales....................................... $16,279,342 $14,833,256 $40,400,926 $42,921,866
Grants and royalties........................ 182,000 67,649 621,863 293,564
----------- ----------- ----------- -----------
Total revenues......................... 16,461,342 14,900,905 41,022,789 43,215,430
Operating expenses:
Cost of sales............................... 3,013,216 2,163,607 7,762,206 6,946,023
Research and development.................... 7,135,945 7,841,431 21,455,003 21,533,846
Selling, general and administrative......... 7,525,543 4,646,519 21,265,173 14,599,053
License fee................................. -- 4,000,000 -- 4,000,000
----------- ----------- ----------- -----------
Total operating expenses............... 17,674,704 18,651,557 50,482,382 47,078,922
----------- ----------- ----------- -----------
Operating loss (1,213,362) (3,750,652) (9,459,593) (3,863,492)
----------- ----------- ----------- -----------
Other income (expense):
Investment income, net...................... 575,260 1,003,688 2,098,481 3,214,881
Interest expense............................ (113,574) (232,567) (515,243) (281,496)
Other expense............................... (31,429) (22,500) (144,013) (105,537)
----------- ----------- ----------- -----------
Net other income....................... 430,257 748,621 1,439,225 2,827,848
----------- ----------- ----------- -----------
Net loss............................... $ (783,105) $(3,002,031) $(8,020,368) $(1,035,644)
=========== =========== =========== ===========
Loss per common share-
Basic and diluted........................... $ (0.05) $ (0.18) $ (0.49) $ (0.06)
=========== =========== =========== ===========
Weighted average common shares outstanding-
Basic and diluted........................... 16,405,294 16,263,785 16,392,817 16,253,225
</TABLE>
See accompanying notes.
2
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PathoGenesis Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (8,020,368) $ (1,035,644)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 2,569,086 1,805,756
Amortization of license rights.............................................. 728,106 76,565
Amortization of discount on long-term liability............................. 498,611 281,458
Compensation expense from stock options..................................... 345,718 298,879
Loss on disposal of property and equipment 33,076 --
Change in certain assets and liabilities:
Accounts receivable....................................................... 4,008,459 (7,512,033)
Interest receivable....................................................... 1,259 181,058
Inventories............................................................... (5,075,224) (4,955,340)
Other current assets...................................................... 1,255,139 791,231
Other assets.............................................................. 39,569 (131,858)
Accounts payable.......................................................... (361,416) (705,587)
Compensation and benefits................................................. (602,265) 409,329
Clinical development costs................................................ 582,693 (1,911,137)
Accrued royalties......................................................... (412,247) 383,684
License payable........................................................... (2,000,000) 4,000,000
Other accrued expenses.................................................... 300,993 (25,705)
------------ ------------
Net cash used in operating activities.................................... (6,108,811) (8,049,344)
------------ ------------
Cash flows from investing activities:
Purchases of investment securities............................................ (23,218,150) (46,922,465)
Sales of investment securities................................................ 32,842,831 66,172,985
Purchases of property and equipment........................................... (3,044,090) (8,404,403)
Purchases of other investments................................................ (929,031) --
Purchase of license rights.................................................... (5,333,334)
------------
Net cash provided by investing activities................................ 5,651,560 5,512,783
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock in connection 463,740 --
with employee stock purchase plan.........................................
Stock option and warrant exercises............................................ 467,097 512,953
Payment of long-term liability................................................ (5,333,333) --
------------ ------------
Net cash provided by (used in) financing activities...................... (4,402,496) 512,953
------------ ------------
Effect of exchange rate changes on cash......................................... (2,141) --
------------ ------------
Net decrease in cash and cash equivalents................................ (4,861,888) (2,023,608)
Cash and cash equivalents at beginning of period................................ 8,139,153 5,171,591
------------ ------------
Cash and cash equivalents at end of period...................................... $ 3,277,265 $ 3,147,983
============ ============
Supplemental schedule of noncash investing and financing activities -
Seller-financed acquisition of license rights................................. 9,381,926
</TABLE>
See accompanying notes.
3
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PathoGenesis Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
We have prepared the accompanying condensed consolidated financial
statements of PathoGenesis Corporation and subsidiaries and these notes in
accordance with Securities and Exchange Commission rules and regulations for
interim financial statements. As permitted by those rules and regulations, we
have condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles. You should read the accompanying condensed consolidated
financial statements and these notes in conjunction with our audited
consolidated financial statements for 1998 included in our annual report on Form
10-K.
The information furnished reflects, in the opinion of our management, all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
(2) INVENTORIES
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Finished goods $ 3,901,799 $4,174,206
Work in progress 1,569,305 2,747,380
Raw materials and supplies 9,512,036 2,986,330
----------- ----------
$14,983,140 $9,907,916
=========== ==========
</TABLE>
(3) LOSS PER COMMON SHARE
We have not included options and warrants to purchase 3,690,189 and
2,505,095 shares of common stock that were outstanding during the third quarters
of 1999 and 1998, respectively, in the computation of diluted loss per share
because the representative share increments would be antidilutive. For the same
reason, we have not included options and warrants to purchase 3,176,764 and
2,534,244 shares of common stock that were outstanding during the nine-month
periods ended September 30, 1999 and 1998, respectively, in the computation of
diluted loss per share.
(4) COMPREHENSIVE LOSS
Total comprehensive loss amounted to $939,049 for the third quarter of 1999
and $2,733,182 for the third quarter of 1998. Total comprehensive loss for the
nine-month periods ended September 30, 1999 and 1998 amounted to $8,499,995 and
$678,148, respectively. Our other comprehensive income (loss) is comprised of
unrealized gains and losses on available-for-sale investment securities and
foreign currency translation adjustments.
4
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(5) BUSINESS SEGMENTS
In 1998, we adopted Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment, the
development of drugs to treat chronic infectious diseases.
(6) FACILITY AGREEMENT
On February 22, 1999, we entered into a facility agreement with Harris
Trust and Savings Bank. The agreement provides us with a $10.0 million
revolving line of credit in the form of short-term demand loans. The loans may
bear interest at floating rates based on LIBOR (London Interbank Offered Rate),
the bank's prime commercial rate or a combination of both, and may be converted
from one basis to another from time to time in accordance with the terms of the
agreement. The credit facility, subject to annual review, will be available to
us on an uncommitted basis. We have not drawn funds under this facility
agreement to date.
(7) CONTINGENCY
PathoGenesis Corporation, its chief executive officer and its chief
financial officer are named as defendants in eight consolidated putative class
action lawsuits pending in the United States District Court for the Western
District of Washington. These suits purport to allege claims on behalf of all
purchasers of PathoGenesis common stock during the period January 15, 1999 to
March 22, 1999. The suits allege violations of Sections 10(b), 20(a) and 20A of
the Securities Exchange Act of 1934, and Rule 10b-5 under that Act, in
connection with certain announcements by the company regarding its expected 1999
results, and seek unspecified damages. We intend to defend the lawsuits
vigorously.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements. You may identify these forward-looking
statements by the use of such words as "believe," "anticipate," "expect," "plan"
and "intend," among others. Since these statements are based on factors that
involve risks and uncertainties, they do not necessarily indicate what our
actual future results will be, and results may vary from quarter to quarter.
Important factors that could cause or contribute to material differences between
our actual results and the results expressed or implied by the forward-looking
statements include, but are not limited to, those discussed in "Item 1.
Business," "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our annual report on Form 10-K for 1998, and in
Exhibit 99.1 to the Form 10-K. These factors include, but are not limited to,
uncertainties related to the fact that PathoGenesis began commercial operations
only recently, its dependence on TOBI (tobramycin solution for inhalation), the
degree of penetration of its markets, the frequency of TOBI's use by patients,
third party reimbursement and product pricing, seasonal impacts on
hospitalizations or exacerbations experienced by cystic fibrosis patients,
variability in wholesaler ordering patterns, government regulation, drug
development and clinical trials, competition and alternative therapies, and the
potential impact of litigation. We cannot assure you that TOBI -- which is
currently our only product -- will penetrate markets as planned, that our
development of TOBI for other uses will succeed or occur within anticipated time
frames, or that we will develop any of our other drug candidates successfully.
Overview
In the third quarter of 1999, we continued to make progress in expanding
the market for TOBI. During the quarter, our expanded sales force continued to
call frequently upon the U.S. cystic fibrosis centers. We also continued to
sponsor seminars and telephone conference calls, allowing members of our
physician advisory board to discuss TOBI and related issues with their peers. In
fact, more than 500 physicians attended our symposium at the North American
Cystic Fibrosis Conference in October 1999 to hear presentations on additional
long-term TOBI data. These data show that TOBI continues to help patients live
better, breathe better and enjoy improved nutritional status after two years on
the drug. A reduction in the number of days patients were hospitalized was among
the key findings presented. TOBI produced the largest effect during the fall
season, the time of year when CF patients are most frequently hospitalized for
exacerbations or flare-ups of pulmonary symptoms. Study results showed a 62
percent reduction in the number of days patients on TOBI (versus placebo) were
hospitalized in October, November and December. In addition, teenagers in the
TOBI clinical trial dramatically demonstrated the benefits of improved infection
control. After six months of TOBI therapy, adolescent patients had a mean weight
gain of about five pounds, while placebo patients only gained about two pounds.
After 18 months of TOBI therapy, adolescent patients had a mean weight gain of
nearly 10 pounds above baseline. Weight gain is an important indicator of
nutritional status and is associated with improved prognosis in cystic fibrosis
patients.
We continue to make progress toward obtaining regulatory approval of TOBI
in the United Kingdom, the lead country for the drug's approval in the European
Union. The U.K.'s Committee on Safety of Medicines recently advised us that it
is prepared to recommend the authorization of TOBI for marketing, subject to
agreement on the final product labeling and related materials. As a result, our
U.K. company, PathoGenesis Limited, expects to launch TOBI in the first quarter
of next year. Its sales force is on board and ready to begin marketing to the
44 cystic fibrosis specialist centers that serve 7,000 patients in the U.K.
After TOBI is approved in the U.K., the other European Union countries will be
asked to approve our inhaled drug through a mutual recognition process.
In the third quarter of 1999, we were awarded a two-year grant totaling
$1.5 million from the Cystic Fibrosis Foundation's Therapeutics Development
Grants Program. This money will be used to identify novel classes of
antibiotics and potential drug candidates to treat serious lung infections,
particularly those caused by Pseudomonas aeruginosa. Our scientists will work
on this discovery program in partnership with Duke University, the University of
Washington and other researchers.
We continue our discussions with the U.S. Food and Drug Administration on
additional clinical testing of TOBI in bronchiectasis patients. However, the
key pulmonologists are asking for a series of small trials to answer specific
questions, rather than a single large clinical trial. We currently plan to
conduct smaller trials in
6
<PAGE>
collaboration with these key pulmonologists before pursuing a study that would
give TOBI a label indication for use in bronchiectasis patients.
Results of Operations
Three Months Ended September 30, 1999 and 1998
Revenues. Revenues in the third quarter of 1999 totaled $16.5 million,
including $16.3 million from TOBI sales. Research grants and royalties generated
the balance of $182,000. Revenues for the corresponding period in 1998 were
$14.9 million, including $14.8 million from TOBI sales. Research grants and
royalties generated the balance of $68,000 in the third quarter of 1998. The
increase in TOBI sales is primarily a result of further penetration of the U.S.
cystic fibrosis market, initial international sales and use in other patients
with serious lung infections. As we continue to further penetrate the cystic
fibrosis market, fourth quarter sales are expected to exceed those of the third
quarter. However, there can be no assurance that actual sales of TOBI will meet
our expectations.
Operating Expenses. We incurred total operating expenses of $17.7 million
in the third quarter of 1999. This represents a decrease of $1.0 million from
$18.7 million in the third quarter of 1998, which included a $4.0 million charge
for the licensing of PA-1806 from Bristol-Myers Squibb. Excluding the initial
license fee for the aerosolized drug candidate, total operating expenses
increased $3.0 million from the corresponding period in 1998. The increase was
due primarily to increased sales and marketing costs in the U.S., Europe, Canada
and other international markets. We expect operating expenses to continue to
rise moderately in the fourth quarter of 1999 as TOBI sales increase and
research and development efforts progress.
Cost of sales was $3.0 million in the third quarter of 1999, an increase of
$850,000 from $2.2 million in the third quarter of 1998. This increase was a
result of higher TOBI sales and an increase in our fixed manufacturing costs
from the corresponding period in 1998. Our research and development expenses
for the third quarter of 1999 decreased by $705,000 to $7.1 million from $7.8
million for the corresponding period in 1998. The decrease in these costs is
due to reduced clinical trial activity as compared to the corresponding period
in 1998. Research and development costs are expected to increase over the next
several quarters as our current programs progress. Selling, general and
administrative expenses increased to $7.5 million in the third quarter of 1999
from $4.6 million for the corresponding period in 1998. The increase in
selling, general and administrative expenses is due primarily to increased sales
and marketing costs in the U.S., Europe, Canada and other international markets.
We expect this growth in costs to moderate in the fourth quarter of 1999.
Net Loss. We had an operating loss of $1.2 million in the third quarter of
1999, compared to an operating loss of $3.8 million for the corresponding period
in 1998. Excluding the charge for the $4.0 million license fee, we would have
reported operating income of $249,000 for the corresponding period in 1998.
This decline in operating results was due to the increase in third quarter 1999
operating expenses. Including net other income (primarily income from
investment securities), our net loss for the third quarter of 1999 was $783,000,
compared to $3.0 million for the third quarter of 1998. In the third quarter of
1999, net investment income decreased by $428,000 to $575,000 from $1.0 million
for the corresponding period in 1998. The decrease was mainly due to lower
average invested cash balances. Interest expense, most of which represents the
amortization of the discount on the remaining installments of our obligation to
the Cystic Fibrosis Foundation, totaled $114,000 and $233,000 in the third
quarters of 1999 and 1998, respectively.
Nine Months Ended September 30, 1999 and 1998
Revenues. Revenues in the first nine months of 1999 totaled $41.0 million,
including $40.4 million from TOBI sales. Research grants and royalties
generated the balance of $622,000. Revenues for the corresponding period in
1998 were $43.2 million, including $42.9 million from TOBI sales in the first
nine months of the drug's launch year. This included initial purchases of stock
to fill distributors' shelves. Research grants and royalties generated the
balance of $294,000 in the first nine months of 1998.
7
<PAGE>
Operating Expenses. We incurred total operating expenses of $50.5 million
in the first nine months of 1999, an increase of $3.4 million from $47.1 million
in the first nine months of 1998. Increased sales and marketing costs in the
U.S., Europe, Canada and other international markets accounted for the majority
of the increase.
Cost of sales was $7.8 million in the first nine months of 1999, an
increase of $816,000 from $6.9 million in the first nine months of 1998. This
rise in the cost of sales was a result of increased fixed manufacturing costs
from the corresponding period in 1998. Our research and development expenses
were $21.5 million for the first nine months of both 1999 and 1998. Selling,
general and administrative expenses increased to $21.3 million in the first nine
months of 1999 from $14.6 million for the corresponding period in 1998 due to
increased sales and marketing costs in the U.S., Europe, Canada and other
international markets.
Net Loss. We had an operating loss of $9.5 million in the first nine
months of 1999, an increase of $5.6 million from the operating loss of $3.9
million for the corresponding period in 1998. This increase in operating loss
was due primarily to lower sales and higher operating expenses in the first nine
months of 1999. Including net other income (primarily income from investment
securities), our net loss for the first nine months of 1999 was $8.0 million,
compared to $1.0 million for the first nine months of 1998. In the first nine
months of 1999, net investment income decreased by $1.1 million to $2.1 million
from $3.2 million for the corresponding period in 1998. The decrease was mainly
due to lower average invested cash balances. Interest expense totaled $515,000
and $281,000 in the first nine months of 1999 and 1998, respectively.
Liquidity and Capital Resources
Our combined cash, cash equivalents and investment securities totaled $40.2
million at September 30, 1999, a decrease of $14.8 million from the balance of
$55.0 million at December 31, 1998. We expect that these funds, in combination
with expected revenues from sales of TOBI, should be sufficient to meet our
operating expenses and capital requirements for the foreseeable future. In
addition, on February 22, 1999, we secured a $10.0 million revolving line of
credit from Harris Trust and Savings Bank. During the nine months ended
September 30, 1999, the primary uses of cash and investments were to finance our
operations, purchase property and equipment and make an installment payment on
our long-term liability. Net cash used in operating activities totaled $6.1
million for the first nine months of the year, compared to $8.0 million in the
nine months ended September 30, 1998. We experienced an $8.0 million net loss
for the nine months ended September 30, 1999, compared to a net loss of $1.0
million in the first nine months of 1998. Significant changes in working
capital components included a $4.0 million decrease in accounts receivable and
$5.1 million increase in inventory, compared to increases of $7.5 million and
$5.0 million, respectively, in the same period a year ago. Also, license
payable decreased $2.0 million in the nine months ended September 30, 1999,
compared to an increase of $4.0 million in the corresponding period in 1998. In
addition, during the first nine months of 1999 we purchased $3.0 million in
property and equipment and made our second installment payment of $5.3 million
for the rights in TOBI acquired from the Cystic Fibrosis Foundation. At
September 30, 1999, our working capital was $52.8 million and current ratio was
5.40 to 1.
We plan to continue our policy of investing excess funds in government
securities and investment grade, interest-bearing securities, primarily those
with an expected maturity of one-and-one-half years or less.
Certain purported class action lawsuits have been filed against
PathoGenesis and certain of its officers, alleging claims on behalf of all
purchasers of PathoGenesis common stock during the period January 15, 1999 to
March 22, 1999 (see "Item 1. Legal Proceedings" in Part II of this report on
Form 10-Q for further information). We intend to vigorously defend the actions.
Although we cannot ascertain the ultimate outcome of these actions at this time
or predict with certainty the results of legal proceedings, we currently believe
that the resolution of those actions will not have a material adverse effect on
the company's financial position or results of operations.
8
<PAGE>
YEAR 2000
Many computer systems may experience difficulty processing dates beyond the
year 1999 and will need to be modified before the year 2000. Failure to make
such modifications could result in system failures or miscalculations,
disrupting operations. Most of our information technology purchases were made
after January 1997. Since our systems are relatively new and there were no
legacy systems to integrate, and based on the program described below, we
believe our internal software and hardware systems will function properly when
the year 2000 arrives.
Our ongoing compliance program includes verification testing of our
internal information technology and information systems. According to the
vendors of those systems, all the systems purchased after January 1997 are year
2000-compliant (i.e., they support proper processing of date-sensitive
transactions after 1999). The existing systems that were not year 2000-
compliant represented a small percentage of our systems. Almost all
noncompliant systems were replaced as part of normal technology upgrades in
1999. The remaining systems were evaluated on an individual basis, and upgraded
or replaced as necessary. Our total year 2000 compliance costs were
approximately $50,000 in 1999, excluding the costs of technology upgrades made
in the ordinary course of business.
We have contacted key third parties, such as suppliers, customers and
financial institutions, to assure no interruption of our business relationships
will occur due to year 2000 compliance issues. However, if the needed
conversions or modifications to computer or other systems are not made, or are
not completed in a timely way by these third parties, the year 2000 issue could
have a material impact on our operations.
While we believe that our hardware and software applications are year 2000-
compliant, there can be no assurance that all systems will function adequately
when the year 2000 arrives, nor can there be any assurance that we will not be
adversely affected by the year 2000 problems of third parties. In the case of
internal system malfunctions, or in the event our suppliers and vendors are not
year 2000-compliant, we have developed manual backup procedures to mitigate the
risk of loss associated with the year 2000 issue.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our exposure to market risk for changes in
interest rates relates primarily to debt securities included in our investment
portfolio. We do not hold any derivative financial instruments. We invest in
government securities and high-quality corporate obligations. Investments in
both fixed rate and floating rate interest-earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in prevailing interest rates, while floating
rate securities may produce less income than expected if prevailing interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates. At September 30, 1999, we owned $4.0 million
in government debt instruments and $32.9 million in corporate debt securities.
Our exposure to losses as a result of interest rate changes is managed through
investing in securities predominantly with maturities of one-and-one-half years
or less.
9
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PART II
OTHER INFORMATION
Item 1 Legal Proceedings
PathoGenesis Corporation, its chief executive officer and its chief
financial officer are named as defendants in eight consolidated putative class
action lawsuits pending in the United States District Court for the Western
District of Washington: Lipton v. PathoGenesis et al., C99-0419, filed on March
24, 1999; Green v. PathoGenesis et al., C99-0439, filed on March 26, 1999;
Gellert v. PathoGenesis et al., C99-0452, filed on March 29, 1999; May v.
PathoGenesis et al., C99-0453, filed on March 29, 1999; Shapiro v. PathoGenesis
et al., C99-0455, filed on March 29, 1999; Bassin v. PathoGenesis et al., C99-
0469, filed on March 30, 1999; Barker v. PathoGenesis et al., C99-0503, filed on
April 6, 1999; and Kralovk v. PathoGenesis et al., C99-0506, filed on April 6,
1999. These suits purport to allege claims on behalf of all purchasers of
PathoGenesis common stock during the period January 15, 1999 to March 22, 1999.
The suits allege violations of Sections 10(b), 20(a) and 20A of the Securities
Exchange Act of 1934, and Rule 10b-5 under that Act, in connection with certain
announcements by the company regarding its expected 1999 results and seek
unspecified damages. The company intends to defend the lawsuits vigorously.
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 Number Description of Exhibit
-------------- ----------------------
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
NONE
10
<PAGE>
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, thereunto duly authorized, on November 12, 1999.
PathoGenesis Corporation
By: /s/ Wilbur H. Gantz
-------------------
Wilbur H. Gantz
Chairman and Chief Executive Officer
By: /s/ Alan R. Meyer
-------------------
Alan R. Meyer
Executive Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PATHOGENESIS CORPORATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,277,265
<SECURITIES> 36,904,446
<RECEIVABLES> 6,952,554
<ALLOWANCES> 0<F1>
<INVENTORY> 14,983,140
<CURRENT-ASSETS> 64,763,608
<PP&E> 30,005,813
<DEPRECIATION> 12,085,487
<TOTAL-ASSETS> 98,189,555
<CURRENT-LIABILITIES> 12,002,604
<BONDS> 0
0
0
<COMMON> 16,407
<OTHER-SE> 86,170,544
<TOTAL-LIABILITY-AND-EQUITY> 98,189,555
<SALES> 40,400,926
<TOTAL-REVENUES> 41,022,789
<CGS> 7,762,206
<TOTAL-COSTS> 50,482,382
<OTHER-EXPENSES> 144,013
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 515,243
<INCOME-PRETAX> (8,020,368)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,020,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,020,368)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
<FN>
<F1>THE AMOUNT OF RECEIVABLES REPORTED IS NET OF $2,203,611 OF ALLOWANCES.
<F2>THE TOTAL COSTS INCLUDE LOSS PROVISION OF $111,450.
</FN>
</TABLE>
