<PAGE> 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: May 25, 1996
------------
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 IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
--- ------ ------ ------- ------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (617) 893-5007
--------------
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
--- ---
<TABLE>
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<S> <C>
COMMON STOCK 17,385,403
- ------ ----- ------------------------
$.10 PAR VALUE Outstanding July 3, 1996
-- --- -----
SERIES B RESTRICTED STOCK 57,512
- ------ - ---------- ----- ------------------------
$.10 PAR VALUE Outstanding July 3, 1996
-- --- -----
</TABLE>
<PAGE> 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, 1995 and May 25, 1996
Consolidated Condensed Statements of Operations 4
for the 13 and 39 week periods ended
May 27, 1995 and May 25, 1996
Consolidated Statements of Cash Flows for the 5
39 week periods ended May 27, 1995
and May 25, 1996
Notes to Consolidated Condensed Financial 6-9
Statements for the 39 week periods ended
May 27, 1995 and May 25, 1996
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10-16
Part II
Other Information:
Other Information 17
Signature 18
2
<PAGE> 3
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------------
<CAPTION>
August 31, May 25,
1995 1996
(Unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 5,886,184 $21,431,343
Marketable Securities 2,340,592 12,581,261
Interest Receivable 79,889 804,179
Accounts Receivable (net of allowance
for doubtful accounts) 280,904 340,093
Unbilled Costs and Fees 259,005 383,979
Prepaid Expenses and Other Current Assets 50,140 118,578
----------- -----------
Total Current Assets 8,896,714 35,659,433
Equipment and Leasehold Improvements, at cost:
Laboratory and Scientific Equipment 1,464,987 2,807,647
Leasehold Improvements 1,597,069 1,664,879
Office Equipment and Furniture 903,946 2,005,218
Construction-in-Progress 206,103 88,531
----------- -----------
4,172,105 6,566,275
Less Accumulated Depreciation
and Amortization 2,451,632 2,981,513
----------- -----------
1,720,473 3,584,762
Long-term Marketable Securities 784,471 21,480,192
Other Assets 127,016 133,164
----------- -----------
Total Assets $11,528,674 $60,857,551
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 409,282 $ 683,531
Accrued Expenses 1,736,569 1,612,928
Deferred Contract Revenue 774,048 1,232,800
Current Maturities of Capital Lease Obligations 478,033 1,210,587
----------- -----------
Total Current Liabilities 3,397,932 4,739,846
----------- -----------
Capital Lease Obligations, net of Current Maturities 892,239 1,649,753
Shareholders' Equity 7,238,503 54,467,952
----------- -----------
Total Liabilities and Shareholders' Equity $11,528,674 $60,857,551
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
May 27, May 25, May 27, May 25,
1995 1996 1995 1996
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Government Research $ 1,832,999 $ 1,815,077 $ 5,141,143 $ 4,833,051
Collaborative Research, License Fees and Royalties 106,718 3,007,694 271,079 10,004,647
Interest Income and Other 79,941 718,069 190,879 1,046,006
----------- ----------- ----------- -----------
TOTAL REVENUES 2,019,658 5,540,840 5,603,101 15,883,704
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Government Research 1,582,431 1,563,861 4,496,842 4,483,965
Research and Development 342,968 2,076,438 950,054 4,685,563
General and Administrative 555,742 688,654 1,510,937 2,015,246
Noncash Charge for Stock Option Grants 6,489 370,400 19,467 1,949,816
----------- ----------- ----------- -----------
Total Costs and Expenses Including Provision
for Income Taxes 2,487,630 4,699,353 6,977,300 13,134,590
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (467,972) $ 841,487 $(1,374,199) $ 2,749,114
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (0.04) $ 0.04 $ (0.11) $ 0.16
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,470,154 20,022,584 12,009,349 17,565,343
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Thirty-nine Weeks Ended
May 27, May 25,
1995 1996
(Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $(1,374,199) $ 2,749,114
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 239,496 587,023
Noncash Charge for Compensation Expense 19,467 1,949,816
Changes in Assets and Liabilities:
Interest Receivable (33,132) (724,290)
Accounts Receivable 161,782 (59,189)
Unbilled Costs and Fees (58,962) (124,974)
Prepaid Expenses and Other Current Assets (89,070) (68,438)
Accounts Payable 97,061 274,249
Accrued Expenses (29,236) (123,641)
Deferred Contract Revenue (28,454) 458,752
----------- ------------
Total Adjustments 278,952 2,169,308
----------- ------------
Net Cash Provided by (Used in) Operating Activities (1,095,247) 4,918,422
----------- ------------
Cash Flows from Investing Activities:
Purchases of Marketable Securities (5,926,350) (38,820,098)
Proceeds from Sale of Marketable Securities 5,500,000 7,883,708
Purchases of Equipment and Leasehold Improvements (113,309) (424,232)
Increase in Other Assets (26,102) (42,944)
----------- ------------
Net Cash Used in Investing Activities (565,761) (31,403,566)
----------- ------------
Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock 2,030,477 41,522,123
Proceeds from Exercise of Stock Options and Warrants 265,361 1,008,396
Payments on Capital Lease Obligations (244,535) (500,216)
----------- ------------
Net Cash Provided by Financing Activities 2,051,303 42,030,303
----------- ------------
Net Increase in Cash and Cash Equivalents 390,295 15,545,159
Cash and Cash Equivalents, at Beginning of Period 1,208,836 5,886,184
----------- ------------
Cash and Cash Equivalents, at End of Period $ 1,599,131 $ 21,431,343
=========== ============
Supplemental Disclosure of Cash Flow Information:
Interest Paid during Period $ 39,373 $ 175,793
=========== ============
Supplemental Schedule of Non-cash Investing Activities:
Property and Equipment Acquired under Capital Leases $ 830,974 $ 1,990,283
=========== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 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 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 13 and 39 week period ended May 25, 1996 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 29, 1995 and as amended
on Form 10-K/A on January 10, 1996.
2. Net Income (Loss) Per Share
---------------------------
Net Income per common and common equivalent share is computed by dividing
net income by the weighted average number of common and common equivalent
shares outstanding during the period using the treasury stock method. Net
loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Common share
equivalents have not been included in the calculation of net loss per
share, as their effects would be anti-dilutive.
3. Cash, Cash Equivalents and Marketable Securities
------------------------------------------------
The Company applies Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
Company's cash equivalents and marketable securities are classified as
held-to-maturity. Cash equivalents are short-term, highly liquid
investments with original maturities of less than three months. Marketable
securities are investments with original maturities of greater than three
months. Cash equivalents are carried at cost which approximates fair 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
6
<PAGE> 7
recorded any realized holding gains or losses on its marketable securities.
Marketable securities consist of commercial paper, euro dollar bonds and
medium term notes with an average maturity of fourteen months. The Company
has $784,471 and $700,763 in restricted cash at August 31, 1995 and May 25,
1996, respectively, in connection with certain capital lease obligations.
4. 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.
5. Capital Lease Obligations
-------------------------
The Company has various capital lease line arrangements under which it can
finance up to $9,000,000 of certain office and laboratory equipment. These
leases are payable in 36 monthly installments. The interest rate ranges
from prime (8.25% at May 25, 1996) less .7% to 11.42%. The Company is
required to maintain certain restricted cash balances, as defined (see Note
3). In addition, the Company is required to maintain certain financial
ratios pertaining to minimum cash balances, tangible net worth, debt to
tangible net worth and maximum loss. The Company has $5,000,000 available
under these various capital lease agreements at May 25, 1996.
Additionally, in connection with its facilities lease, the Company issued a
$100,000 note payable in September 1994 to its lessor to finance leasehold
improvements. The note bears interest at 9% and is payable in 60 monthly
payments of $2,076.
7
<PAGE> 8
6. Public Offering
---------------
In February 1996, the Company closed a public offering of 3,000,000 shares
of its Common Stock at $13.00 per share, resulting in proceeds of
approximately $36,007,000, net of issuance costs. In March 1996, the
Company sold an additional 450,000 shares of its Common Stock in the
underwriter's over-allotment, resulting in proceeds of $5,515,000, net of
issuance costs.
7. Collaborative Agreements
------------------------
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 a specified pathogen the Company is sequencing to identify new
gene targets for development of antibiotics effective against
drug-resistant infectious organisms. As part of this agreement, the Company
granted Schering-Plough exclusive access to certain of the Company's
genomic sequence databases. The Company also granted Schering-Plough a
non-exclusive license to use the Company's bioinformatics systems for
Schering-Plough's internal use in connection with the genomic databases
licensed to Schering-Plough under the agreement and other genomic databases
Schering-Plough develops or acquires. The Company also agreed to undertake
certain research efforts to identify bacteria-specific genes essential to
microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to
identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and
milestone payments. Subject to the achievement of additional product
development milestones and Schering-Plough's election to extend the
research collaboration, Schering-Plough has agreed to pay the Company up to
an additional approximately $40.5 million (inclusive of the $10.3 million
referred to in the previous sentence) in expense allowances, research
funding and milestone payments.
The agreement grants Schering-Plough exclusive world wide rights to make,
use and sell pharmaceutical and vaccine products based on the Company's
genomic database of specified pathogen and on the technology developed in
the course of the research program. The Company has also granted
8
<PAGE> 9
Schering-Plough a right of first negotiation if during the term of the
research plan the Company desires to enter into a collaboration with a
third party with respect to the development or sale of any compounds which
are targeted against, as their primary indication, the pathogen that is the
principal subject of the Company's agreement with Schering-Plough. The
Company will be entitled to receive royalties on Schering-Plough's sale of
therapeutic products and vaccines developed using the technology licensed
from the Company. Subject to certain limitations, the Company retained the
rights to make, use and sell diagnostic products developed based on the
Company's database licensed to Schering-Plough or the technology developed
in the course of the research program.
In the 13 week period ended May 25, 1996, the Company recorded $2.2 million
in collaborative revenue under this agreement, which consisted of a $1.8
million milestone payment and $.4 million of collaborative research
funding. In the 39 week period ended May 25, 1996, the Company recorded
$6.2 million in collaborative revenue under this agreement, which consisted
of a $3.0 million up-front license fee, $2.8 million in milestone payments
and $.4 million of collaborative research funding.
Astra 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. Under the terms of the agreement, the Company granted
Astra exclusive access to its H. pylori genomic sequence database and
agreed to undertake certain research efforts in exchange for a minimum of
approximately $11 million and up to $22 million in license fees, expense
allowances, research funding and milestone payments. The agreement granted
Astra exclusive worldwide rights to make, use and sell products based on
the Company's H. pylori technology and requires Astra to provide research
funding to the Company over a minimum period of two and one- half years to
further develop and annotate the Company's H. pylori genomic sequence
database, identify therapeutic and vaccine targets and develop appropriate
biological assays. The Company will also be entitled to receive royalties
on Astra's sale of any products (i) protected by claims of patents licensed
exclusively to Astra by the Company pursuant to the agreement, or (ii) the
discovery of which were enabled in a significant manner by the genomic
database licensed to Astra by the Company.
In the 13 week period ended May 25, 1996, the Company recorded $.8 million
in collaborative revenue under this agreement, which consisted of
collaborative research funding. In the 39 week period ended May 25, 1996,
the Company recorded $3.7 million in collaborative revenue under this
agreement, which consisted of $2.2 million of collaborative research
funding and a $1.5 million milestone payment.
9
<PAGE> 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
- --------
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues has been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the genomic sequence of a specific pathogen that the Company
is sequencing to identify new gene targets for the development of novel
antibiotics.
The Company will not receive significant product revenues on a sustained basis
until such time, if any, at which products based on the Company's research
efforts are commercialized. The Company's product development strategy is to
enter into collaborations with pharmaceutical and biotechnology companies
whereby these corporate partners will provide most of or all of the financial
and other resources required to complete the development and to commercialize
products based on the Company's genomics research in exchange for a variety of
license and milestone payments, research support and royalties. In order for a
product to be commercialized based on the Company's research, it will be
necessary for the collaboration to conduct pre-clinical trials, obtain
regulatory clearances and make manufacturing, distribution and marketing
arrangements. Accordingly, the Company does not expect to receive royalties
based on product revenues for many years.
As of May 25, 1996, the Company had outstanding approximately $8,667,000 of
government grants and research contracts under which services had yet to be
performed over approximately the next 15 to 21 months. The Company's government
grants and contracts are typically funded annually and are subject to
appropriation by the United States Congress each year. Funding may be
discontinued or reduced at any time by the United States Congress. As of May 25,
1996, the funded portion of these grants and contracts was $3,442,000. For the
39 week period ended May 27, 1995 and May 25, 1996, revenue recognized pursuant
to United States government grants and research accounted for approximately 92%
and 30%, respectively, of the Company's total revenues. The decrease in
government research revenue, as a percentage of total revenues, for the 39 week
period ended May 25, 1996 reflects a substantial increase in revenue derived
from the Company's collaborative partnerships. The Company plans to continue to
seek government grants and
10
<PAGE> 11
contracts in the genomics field and to enter into additional corporate
partnering arrangements with the goal of advancing the Company's genomic
technologies and gene discovery programs and of obtaining revenues sufficient to
cover a portion of the Company's cash requirements. There can be no assurance
that the Company will be able successfully to pursue this strategy.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $32,425,000 at May 25, 1996. The Company's
results of operations have fluctuated from period to period and may continue to
fluctuate in the future based upon the timing and composition of funding under
existing and new government grants and contracts and collaboration agreements.
The Company is subject to risks common to companies in its industry including
unproven technology and business strategy, availability of, and competition for,
family resources, reliance upon collaborative partners and others, reliance on
United States government funding, history of operating losses, need for future
capital, competition, patent and proprietary rights, dependence on key
personnel, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, health care reform and related matters, product liability exposure, and
volatility of the Company's stock price.
Results of Operations
- ---------------------
Thirteen Week Period Ended May 25, 1996 and May 27, 1995
- --------------------------------------------------------
Revenue
- -------
Total revenues increased 174% from $2,020,000 for the 13 week period ended May
27, 1995 to $5,541,000 for the 13 week period ended May 25, 1996. Government
research revenue decreased slightly from $1,833,000 for the 13 week period ended
May 27, 1995 to $1,815,000 for the 13 week period ended May 25, 1996. The
decrease in government research revenue for the 13 week period ended May 25,
1996 was primarily attributable to a change in the mix of government grants and
contracts under which services were performed to grants and contracts which
contain provisions for lower overhead reimbursement rates. Revenue derived from
government research grants and contracts is generally based upon direct cost
such as labor, laboratory supplies as well as an allocation for reimbursement of
a portion of overhead.
Collaborative research, license fees and royalties increased from $107,000 for
the 13 week period ended May 27, 1995 to $3,008,000 for the 13 week period ended
May 25, 1996, primarily due to $790,000 and $2,168,000 in milestone payments and
sponsored research revenues received under the Company's collaborations with
Astra and Schering-Plough, respectively.
11
<PAGE> 12
Interest and other income increased 798% from $80,000 for the 13 week period
ended May 27, 1995 to $718,000 for the 13 week period ended May 25, 1996
reflecting the increase in funds available for investment as a result of
proceeds received from the Company's public offering as well as payments
received under the Astra and Schering-Plough collaborations.
Cost and Expenses
- -----------------
Total cost and expenses, excluding a $370,400 noncash charge for stock option
grants, increased 75% from $2,481,000 for the 13 week period ended May 27, 1995
to $4,329,000 for the 13 week period ended May 25, 1996. Cost of government and
collaborative research consists of payroll and related costs, laboratory
supplies and overhead expenses (including facilities and equipment expenses).
The cost of government research decreased slightly from $1,582,000 for the 13
week period ended May 27, 1995 to $1,564,000 for the 13 week period ended May
25, 1996. Cost of government research, as a percentage of government research
revenue, was 86% for both 13 week period ended May 25, 1996 and May 27, 1995.
Cost of government research, as a percentage of government research revenue,
fluctuates based upon the nature of the government contracts and grants, the
overhead reimbursement rates under such contracts and grants, as well as changes
in the Company's overhead structure.
Research and development expense, which includes both company-sponsored research
and development and research funded pursuant to arrangements with the Company's
corporate collaborators, increased 505% from $343,000 for the 13 week period
ended May 27, 1995 to $2,076,000 for the 13 week period ended May 25, 1996. This
increase was primarily related to increased expenses related to the Company's
pathogen and human gene discovery programs. The increase consisted primarily of
increases in payroll and related expenses, laboratory supplies and overhead
expenses. The Company expects to continue to increase research and development
expenditures in fiscal 1996, particularly with respect to its human gene
discovery programs.
12
<PAGE> 13
General and administrative expenses increased 24% from $556,000 for the 13 week
period ended May 27, 1995 to $689,000 for the 13 week period ended May 25, 1996.
The increase in general and administrative expenses for the 13 week period ended
May 25, 1996 was primarily due to an increase in payroll and related expenses,
interest expense and other corporate expenses.
In November and December 1995, the Company's Board of Directors granted certain
employees, officers, and directors options to purchase an aggregate of 440,000
shares of Common Stock which were subject to shareholder approval. The options
were granted at exercise prices ranging from $7.25 to $9.56 per share, in each
case, the fair market value of the Common Stock on the date the Company's Board
of Directors granted the option. The Company recorded deferred compensation of
$2,565,000 which represents an amount equal to the difference between the fair
market value of the Common Stock on February 16, 1996, the date of shareholder
approval, and the per share exercise price of the options. The Company recorded
$1,578,000 and $370,000 of the $2,565,000, as compensation expense in the 13
week period ended February 24, 1996 and the 13 week period ended May 25, 1996,
respectively.
Thirty-nine Week Period Ended May 25, 1996 and May 27, 1995
- ------------------------------------------------------------
Revenue
- -------
Total revenues increased 184% from $5,603,000 for the 39 week period ended May
27, 1995 to $15,884,000 for the 39 week period ended May 25, 1996. Government
research revenue decreased approximately 6% from $5,141,000 for the 39 week
period ended May 27, 1995 to $4,833,000 for the 39 week period ended May 25,
1996. The decrease in government research revenue for the 39 week period ended
May 25, 1996 was primarily attributable to a change in the mix of government
grants and contracts under which services were performed to grants and contracts
which contain provisions for lower overhead reimbursement rates as well as
reduced purchases of equipment.
Collaborative research, license fees and royalties increased from $271,000 for
the 39 week period ended May 27, 1995 to $10,005,000 for the 39 week period
ended May 25, 1996, primarily due to $3,735,000 and $6,168,000 in milestone
payments, license fee and sponsored research revenues received under the
Company's collaboration with Astra and Schering-Plough which began in August
1995 and December 1995, respectively.
Interest and other income increased 448% from $191,000 for the 39 week period
ended May 27, 1995 to $1,046,000 for the 39 week period ended May 25, 1996
reflecting the increase in funds available for investment as a result of
proceeds received from the Company's public offering in the 13 week period
13
<PAGE> 14
ended February 24, 1996, as well as payments received under Astra and
Schering-Plough collaboration agreements.
Cost and Expenses
- -----------------
Total cost and expenses, excluding a $1,950,000 noncash charge for stock option
grants, increased 61% from $6,958,000 for the 39 week period ended May 27, 1995
to $11,185,000 for the 39 week period ended May 25, 1996. The cost of government
research decreased slightly from $4,497,000 for the 39 week period ended May 27,
1995 to $4,484,000 for the 39 week period ended May 25, 1996. Cost of government
research, as a percentage of government research revenue, was 93% for the 39
week period ended May 25, 1996 and 87% for the 39 week period ended May 27,
1995. This increase was primarily due to a change in the mix of government
grants and contracts under which services were performed during the 39 week
period ended May 25, 1996 to grants and contracts which contain provisions for
lower overhead reimbursement rates.
Research and development expense, which includes both company-sponsored research
and development and research funded pursuant to arrangements with the Company's
corporate collaborators, increased 393% from $950,000 for the 39 week period
ended May 27, 1995 to $4,686,000 for the 39 week period ended May 25, 1996. This
increase was primarily due to increased expenses related to the Company's
pathogen and human gene discovery programs. The increase consisted primarily of
increases in payroll and related expenses, laboratory supplies and overhead
expenses.
General and administrative expenses increased 33% from $1,511,000 for the 39
week period ended May 27, 1995 to $2,015,000 for the 39 week period ended May
25, 1996. The increase in general and administrative expenses for the 39 week
period ended May 25, 1996 was primarily due to an increase in payroll and
related expenses, interest expense, legal fees and other corporate expenses.
In November and December 1995, the Company's Board of Directors granted certain
employees, officers, and directors options to purchase an aggregate of 440,000
shares of Common Stock which were subject to shareholder approval. The options
were granted at exercise prices ranging from $7.25 to $9.56 per share, in each
case, the fair market value of the Common Stock on the date the Company's Board
of Directors granted the option. The Company recorded deferred compensation of
$2,565,000 which represents an amount equal to the difference between the fair
market value of the Common Stock on February 16, 1996, the date of shareholder
approval, and the per share exercise price of the options. The Company recorded
$1,948,000 of the $2,565,000 as compensation expense in the 39 week period ended
May 25, 1996.
14
<PAGE> 15
Liquidity and Capital Resources
- -------------------------------
Since September 1, 1992, the Company's primarily sources of cash have been
government grants and contract revenue, revenue from collaborative research
agreements, borrowing under capital leases and proceeds from sale of equity
securities. In fiscal 1995, the Company received net proceeds of approximately
$2,403,000 from the private sale of Common Stock and warrants and the exercise
of stock options. The Company also entered into a collaborative agreement in
August 1995 under which it received $3,500,000 from Astra.
In December 1995, the Company entered into a collaborative agreement with
Schering-Plough under which it received an up-front license fee of $3,000,000 in
December 1995 and $2,750,000 milestone payments through May 1996.
In February 1996, the Company closed a public offering of 3,000,000 shares of
its Common Stock at $13.00 per share, resulting in proceeds of approximately
$36,007,000, net of issuance costs. In March 1996, the Company sold an
additional 450,000 shares of its Common Stock in the underwriter's
over-allotment, resulting in proceeds of $5,515,000, net of issuance costs. In
the 39 week period ended May 25, 1996, the Company received proceeds of
$1,008,000 from the issuance of 428,018 shares of Common Stock resulting from
the exercise of stock options and warrants.
As of May 25, 1996, the Company had cash, cash equivalents and long and
short-term marketable securities of approximately $55,493,000 (of which
approximately $701,000 is restricted in connection with certain capital lease
obligations). The Company has various arrangements under which it can finance up
to $9,000,000 of certain office and laboratory equipment and leasehold
improvements. Under these arrangements, the Company is required to maintain
certain financial ratios, including minimum levels of tangible net worth, total
indebtedness to tangible net worth, maximum loss, and minimum restricted cash
balances. At May 25, 1996, the Company had approximately $5,000,000 available
under these arrangements and had an outstanding balance of approximately
$2,860,000 which is repayable over the three year period ending June 1999.
The Company's operating activities provided cash of approximately $4,918,000 for
the 39 week period ended May 25, 1996 reflecting primarily the up-front license
fee from Schering-Plough of $3,000,000 as well as milestone payments from both
Astra and Schering-Plough totaling $4,250,000. These payments were partially
offset by cash used to fund the Company's operations. The Company's operating
activities used cash of approximately $1,095,000 for the 39 week period ended
May 27, 1995 primarily to fund the Company's operating losses.
The Company's investing activities used cash of approximately $31,404,000 for
the 39 week period ended May 25, 1996 primarily for the purchases of
15
<PAGE> 16
marketable securities and to a lesser extent the purchase of equipment and
leasehold improvements.
The Company's financing activities provided cash of approximately $42,030,000
for the 39 week period ended May 25, 1996 from the sale of equity securities and
the exercise of stock options and warrants, net of payments of capital lease
obligations.
The Company estimates that it will acquire $2,500,000 of capital equipment
during the next three months, consisting primarily of computer systems,
laboratory equipment and office equipment. The Company plans to utilize capital
lease arrangements to finance the acquisition of this equipment.
At August 31, 1995, the Company had net operating loss and tax credit
carryforwards of approximately $35,007,000 and $1,120,000 respectfully. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period excess
of 50%. The Company does not believe that it has experienced cumulative
ownership changes in excess of 50% or that the consummation of this offering
will result in 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 the next 60 months. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing and
expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance , however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10-Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment, described more fully in the Company's
Annual Report on Form 10-K for the year ended August 31, 1995, filed with the
Securities and Exchange Commission.
16
<PAGE> 17
Part II
-------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
---------
None.
b) Reports on Form 8-K
-------------------
None.
17
<PAGE> 18
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 Corporation
/s/ Fenel M. Eloi
-----------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: July 9, 1996
18
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