<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: November 30, 1996
-----------------
Commission File No: 0-10824
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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) 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 17,546,489
-------------- ----------------------------
$.10 PAR VALUE Outstanding January 10, 1997
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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
August 31, 1996 and November 30, 1996 3
Consolidated Condensed Statements of Operations
for the 13 week period ended November 30, 1996
and November 25, 1995 4
Consolidated Statements of Cash Flows for the
13 week period ended November 30, 1996
and November 25, 1995 5
Notes to Consolidated Condensed Financial
Statements for the 13 week period ended
November 30, 1996 and November 25, 1995 6-9
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10-14
Part II
Other Information:
Other Information 15
Signature 16
2
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
- --------------------------------------------------------------------------------------------
August 31, November 30,
1996 1996
(Unaudited)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $10,679,287 $10,449,632
Marketable securities 17,429,488 22,445,778
Interest receivable 1,296,657 1,229,010
Accounts receivable 1,338,418 262,727
Unbilled costs and fees 345,773 509,587
Prepaid expenses and other current assets 552,903 434,831
----------- -----------
Total current assets 31,642,526 35,331,565
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 6,403,221 8,139,174
Leasehold improvements 1,939,545 1,940,547
Office equipment and furniture 581,533 734,261
Construction-in-progress 77,027 82,062
----------- -----------
9,001,326 10,896,044
Less accumulated depreciation
and amortization 3,266,068 3,624,231
----------- -----------
5,735,258 7,271,813
Restricted cash 195,500 195,500
Long-term marketable securities 25,464,287 19,718,395
Other assets 241,446 227,510
----------- -----------
Total assets $63,279,017 $62,744,783
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 864,279 $ 448,525
Accrued expenses 1,731,220 2,036,370
Deferred contract revenue 1,035,504 941,552
Current maturities of capital lease obligations 2,106,882 2,611,728
----------- -----------
Total current liabilities 5,737,885 6,038,175
----------- -----------
Capital lease obligations, net of current maturities 3,228,374 4,006,750
Shareholders' equity 54,312,758 52,699,858
----------- -----------
Total liabilities and shareholders' equity $63,279,017 $62,744,783
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
November 25, November 30,
1995 1996
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Collaborative research, license fees and royalties $ 729,101 $ 2,041,037
Government research 1,365,893 1,974,410
Interest income 118,385 773,080
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TOTAL REVENUES 2,213,379 4,788,527
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COSTS AND EXPENSES:
Research and development 1,079,501 3,733,164
Cost of government research 1,282,178 1,847,646
General, selling and administrative 472,891 876,157
Interest expense 40,558 125,926
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Total costs and expenses 2,875,128 6,582,893
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NET LOSS $ (661,749) $(1,794,366)
========== ===========
NET LOSS PER COMMON SHARE $ (0.05) $ (0.10)
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,539,632 17,476,170
========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
- -------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
November 25, November 30,
1995 1996
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (661,749) $(1,794,366)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 132,375 437,913
Deferred compensation 1,817 18,525
Changes in assets and liabilities:
Interest receivable (43,873) 67,647
Accounts receivable 5,597 1,075,691
Unbilled costs and fees 87,625 (163,814)
Prepaid expenses and other current assets (30,247) 118,072
Accounts payable (81,470) (415,754)
Accrued expenses (119,398) 305,150
Deferred contract revenue 173,153 (93,952)
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Total adjustments 125,579 1,349,478
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Net cash used in operating activities (536,170) (444,888)
----------- -----------
Cash Flows from Investing Activities:
Purchases of marketable securities (3,864,233) (1,070,398)
Proceeds from sale of marketable securities 500,000 1,800,000
Purchases of equipment and leasehold improvements (15,876) (18,384)
Decrease in other assets 0 10,235
----------- -----------
Net cash provided by (used in) investing activities (3,380,109) 721,453
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 17,520 0
Proceeds from exercise of stock options and warrants 404,356 162,941
Payments on capital lease obligations (115,133) (669,161)
----------- -----------
Net cash provided by (used in) financing activities 306,743 (506,220)
----------- -----------
Net Increase in Cash and Cash Equivalents (3,609,536) (229,655)
Cash and Cash Equivalents, at beginning of period 5,886,184 10,679,287
----------- -----------
Cash and Cash Equivalents, at end of period $ 2,276,648 $10,449,632
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 0 $ 14,400
=========== ===========
Interest paid during period $ 40,740 $ 125,926
=========== ===========
Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital leases $ 591,853 $ 1,876,334
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
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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 13 week period ended November 30, 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 27, 1996 and as amended
on Form 10-K/A on December 4, 1996.
2. NET LOSS PER SHARE
------------------
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. NEW ACCOUNTING STANDARD
-----------------------
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. The Company has
determined that it will continue to account for stock-based compensation
for employees under Accounting Principles Board (APB) Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company will
be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair-value-based
method at year ending August 31, 1997, with comparable disclosures for the
year ended August 31, 1996. The Company has not determined the impact of
these pro forma adjustments.
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4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
------------------------------------------------
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company's cash equivalents and marketable
securities are classified as held-to-maturity, as the Company has the
positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original
maturities of less than three months. Marketable securities are investment
securities with original maturities of greater than three months. Cash
equivalents are carried at cost, which approximates market value, and
consist of money market funds, repurchase agreements and debt securities.
Marketable securities are recorded at amortized cost which approximates
market value. The Company has not recorded any realized holding gains or
losses on its marketable securities. Marketable securities consist of
commercial paper and U.S. Government debt securities. The Company has
$195,500 in restricted cash at August 31, 1996 and November 30, 1996 in
connection with certain capital lease obligations.
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. CAPITAL LEASE OBLIGATIONS
-------------------------
The Company has various capital lease line arrangements under which it can
finance certain office and laboratory equipment. These leases are payable
in 36 monthly installments. The interest rates range from 7.52% to 11.42%.
The Company is required to maintain certain restricted cash balances, as
defined (see Note 4). 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
approximately $984,000 available under these capital lease agreements at
November 30, 1996.
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
Company's Staph. aureus genomic database to identify new gene targets for
development of antibiotics effective against drug resistant infectious
organisms. As
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part of this agreement, the Company granted Schering-Plough exclusive
access to certain of the Company's genomic sequence databases. The Company
also granted Schering-Plough a non-exclusive license to use the Company's
bioinformatics systems for Schering-Plough's internal use in connection
with the genomic databases licensed to Schering-Plough under the agreement
and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to microbial survival and to develop
biological assays to be used by Schering-Plough in screening natural
product and compound libraries to identify antibiotics with new mechanisms
of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and
milestone payments. Subject to the achievement of additional product
development milestones and Schering-Plough's election to extend the
research collaboration, Schering-Plough has agreed to pay the Company up to
an additional approximately $40.5 million (inclusive of the $10.3 million
referred to in the previous sentence) in expense allowances, research
funding and milestone payments.
The agreement grants Schering-Plough exclusive world wide rights to make,
use and sell pharmaceutical and vaccine products based on the Company's
Staph. aureus genomic database and on the technology developed in the
course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the
research plan the Company desires to enter into a collaboration with a
third party with respect to the development or sale of any compounds which
are targeted against Staph. aureus. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to
certain limitations, the Company retained the rights to make, use and sell
diagnostic products developed based on the Company's database licensed to
Schering-Plough or the technology developed in the course of the research
program.
For the 13 week period ended November 30, 1996, the Company recorded
$817,000 in collaborative revenue under this agreement, which consisted of
sponsored research funding.
SUBSEQUENT EVENT
----------------
The Company entered into a second research collaboration agreement with
Schering-Plough in December 1996. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted
Schering-Plough exclusive access to (i) certain gene sequence databases
made available under this research program, (ii) information made
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available to the Company under certain third party research agreements,
(iii) an exclusive worldwide right and license to make, use and sell
pharmaceutical and vaccine products based on the technology developed in
the course of the research program. The Company will retain all rights to
develop and commercialize diagnostic products that may result from this
collaboration.
Under the agreement, Schering-Plough paid an upfront license fee and
expense allowance and will fund a research program for a minimum of three
years, make milestone payments and 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
objectives.
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.
For the 13 week period ended November 30,1996 and November 25, 1995, the
Company recorded revenue of $606,000 and $692,000, respectively, under this
agreement, which consisted of sponsored research funding.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues have been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the Company's Staph. aureus genomic database to identify new
gene targets for the development of novel antibiotics. In December 1996, the
Company entered into its second research collaboration with Schering-Plough to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals for treating asthma.
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 collaborators to conduct preclinical tests and clinical
trials, obtain regulatory clearances and make manufacturing, distribution and
marketing arrangements. Accordingly, the Company does not expect to receive
royalties based on product revenues for many years.
As of November 30, 1996, the Company had outstanding approximately $6,355,000 of
government grants and research contracts under which services were yet to be
performed. These grants and contracts call for services to be performed over
approximately the next 2 to 33 months. The Company's government grants and
contracts are typically funded annually and are subject to appropriation by the
United States Congress each year. Funding may be discontinued or reduced at any
time by the Congress. As of November 30, 1996, the funded portion of these
grants and contracts was $5,054,000. For the thirteen week period ended November
30, 1996 and November 25, 1995, revenue recognized pursuant to United States
government grants and research accounted for approximately 41% and 62%,
respectively, of the Company's total revenues. The decrease in government
research revenue, as a percentage of total revenues, reflects a substantial
increase in revenue derived from the Company's collaborative partnerships. The
Company plans to continue to seek government grants
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and 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 $35,048,000 at November 30, 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 collaborative
agreements. The Company is subject to risks common to companies in its industry
including unproven technology and business strategy, availability of, and
competition for, family resources, reliance upon collaborative partners and
others, reliance on United States government funding, history of operating
losses, need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty of
pharmaceutical pricing, health care reform and related matters, product
liability exposure, and volatility of the Company's stock price.
RESULTS OF OPERATIONS
- ---------------------
THIRTEEN WEEK PERIOD ENDED NOVEMBER 25, 1995 AND NOVEMBER 30, 1996
- ------------------------------------------------------------------
REVENUE
- -------
Total revenues increased 116% from $2,213,000 for the 13 week period ended
November 25, 1995 to $4,789,000 for the 13 week period ended November 30, 1996.
Collaborative research, license fees and royalties increased 180% from $729,000
for the 13 week period ended November 25, 1995 to $2,041,000 for the 13 week
period ended November 30, 1996. The increase was primarily due to sponsored
research revenue of $817,000 received in the current quarter under the Company's
collaboration agreement with Schering-Plough which began in December 1995. The
increase in collaborative research, license fees and royalties was also due to
increased royalty revenue of $587,000 due to an assignment of the Company's
rights to its rennin patent to Pfizer, Inc. for $671,000 in October 1996. No
further royalty payments will be received under this agreement.
Government research revenue increased 45% from $1,366,000 for the 13 week period
ended November 25, 1995 to $1,974,000 for the 13 week period ended November 30,
1996. The increase in government research revenue was primarily attributable to
an increase in work performed on existing government grants and contracts,
particularly, the Company's 3-year, $3 million Microbial Genome Sequencing grant
from the U.S. Department of Energy and the Company's 3-year, $10 million Genome
Sequencing Center grant from the National Institutes of Health. 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.
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Interest income increased from $118,000 for the 13 week period ended November
25, 1995 to $773,000 for the 13 week period ended November 30, 1996 reflecting
the increase in funds available for investment as a result of proceeds received
from the sale of common stock through a public offering in February 1996, as
well as payments received under the Astra and Schering-Plough collaborations.
COST AND EXPENSES
- -----------------
Total cost and expenses increased 129% from $2,875,000 for the 13 week period
ended November 25, 1995 to $6,583,000 for the 13 week period ended November 30,
1996. Research and development expense, which includes company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators increased 246% from $1,080,000 for the 13 week
period ended November 25, 1995 to $3,733,000 for the 13 week period ended
November 30, 1996. The increase in research and development cost was primarily
related to the Company's expansion of its pathogen and 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, particularly with respect to its
human gene discovery programs.
The cost of government research increased 44% from $1,282,000 for the 13 week
period ended November 25, 1995 to $1,848,000 for the 13 week period ended
November 30, 1996. The increase in cost of government research was due to an
increase in work performed on existing government research programs. Cost of
government research, as a percentage of government research revenue, was 94% for
both 13 week period ended November 25, 1995 and November 30, 1996.
General, selling, and administrative expenses increased 85% from $473,000 for
the 13 week period ended November 25, 1995 to $876,000 for the 13 week period
ended November 30, 1996. The increase in general, selling, and administrative
expenses was primarily due to increases in payroll and related expenses,
consulting and facility expenses.
Interest expense increased from $41,000 for the 13 week period ended November
25, 1995 to $126,000 for the 13 week period ended November 30, 1996 reflecting
an increase in the Company's capital lease obligations from year to year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of cash have been revenue from government grants
and contract, revenue from collaborative research agreements, borrowing under
capital leases and proceeds from sale of equity securities. In August 1995, the
Company entered into a collaborative agreement with Astra under which it
received $3,500,000.
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In fiscal 1996, the Company received $4,421,000 in collaborative payments from
Astra consisting of a $1,500,000 milestone payment and $2,921,000 in sponsored
research. In December 1995, the Company entered into a collaborative agreement
with Schering-Plough under which it received a $3,000,000 up-front license fee,
$2,750,000 in milestone payments and $1,500,000 in sponsored research through
August 31, 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.
Additionally, the Company received proceeds of $1,311,000 from the issuance of
534,831 shares of common stock resulting from the exercise of stock options and
warrants during fiscal 1996.
As of November 30, 1996, the Company had cash, cash equivalents, restricted cash
and long and short-term marketable securities of approximately $52,809,000. The
Company has various arrangements under which it can finance certain office and
laboratory equipment and leasehold improvements. Under these arrangements, the
Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, and minimum restricted cash balances. At November 30, 1996, the Company
had approximately $984,000 available under these arrangements and had an
outstanding balance of approximately $6,618,000 which is repayable over the
three year period ending November 1999.
The Company's operating activities used cash of approximately $536,000 and
$445,000 for the thirteen week period ended November 25, 1995 and November 30,
1996, respectively, primarily to fund operating losses.
The Company's investing activities provided cash of approximately $721,000 for
the 13 week period ended November 30, 1996 and used cash of approximately
$3,380,000 for the 13 week period ended November 25, 1995. The Company used cash
primarily for purchases of marketable securities and to a lesser extent the
purchase of equipment and leasehold improvements. In addition, the Company
acquired $592,000 and $1,876,000 of property and equipment for the 13 week
periods ended November 30, 1996 and November 25, 1995, respectively, under
capital lease arrangements.
Financing activities used cash of approximately $506,000 for the 13 week period
ended November 30, 1996 primarily for payments of capital lease obligations,
partially offset by the exercise of stock options. Financing activities provided
cash of approximately $307,000 for the 13 week period ended November 25, 1995
primarily from the exercise of stock options, partially offset by the payments
of capital lease obligations.
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Capital expenditures totaled $1,895,000 during the 13 week period ended November
30, 1996. The Company currently estimates that it will acquire an additional
$3,900,000 of capital equipment, consisting primarily of computer systems,
laboratory equipment and office equipment in fiscal 1997. The Company plans to
utilize capital lease arrangements to finance the acquisition of this equipment.
At August 31, 1996, the Company had net operating loss and tax credit
carryforwards of approximately $33,968,000 and $1,128,000 respectfully. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period in
excess of 50%. The Company does not believe it has experienced a cumulative
ownership change in excess of 50%. However, there can be no assurance that
ownership changes will not occur in future periods which will limit the
Company's ability to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing and
expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment, described more fully in the Company's
Annual Report on Forms 10-K and 10-K/A for the year ended August 31, 1996, filed
with the Securities and Exchange Commission.
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Part II
-------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
---------
None.
b) Reports on Form 8-K
-------------------
None.
15
<PAGE> 16
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: January 10, 1997
16
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