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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: November 28, 1998
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02153
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
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COMMON STOCK 18,348,646
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$.10 PAR VALUE Outstanding January 11, 1999
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Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
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Page
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Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of
August 31, 1998 and November 28, 1998 3
Consolidated Condensed Statements of Operations
for the 13 week periods ended November 29, 1997
and November 28,1998 4
Consolidated Statements of Cash Flows for the
13 week periods ended November 29, 1997
and November 28,1998 5
Notes to Consolidated Condensed Financial
Statements for the 13 week periods ended
November 29, 1997 and November 28,1998 6-10
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11-15
Part II
Other Information:
Other Information 16
Signature 17
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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August 31, November 28,
1998 1998
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $10,978,176 $13,001,349
Marketable securities 21,969,524 20,366,647
Interest receivable 742,411 643,990
Unbilled costs and fees 150,299 211,987
Prepaid expenses and other current assets 721,239 598,256
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Total current assets 34,561,649 34,822,229
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 14,434,808 14,743,623
Leasehold improvements 7,872,336 7,965,527
Equipment and furniture 1,334,268 1,322,791
Construction-in-progress 41,234 87,648
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23,682,646 24,119,589
Less accumulated depreciation
and amortization 8,579,440 9,381,296
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15,103,206 14,738,293
Restricted cash 200,000 200,000
Long-term marketable securities 1,029,569 0
Note receivable from officer 160,000 160,000
Other assets 410,267 403,182
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Total assets $51,464,691 $50,323,704
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 977,610 $ 919,100
Accrued expenses 2,450,400 2,660,765
Deferred revenue 4,699,137 6,507,738
Current maturities of long-term obligations 5,611,186 5,252,087
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Total current liabilities 13,738,333 15,339,690
Long-term obligations, net of current maturities 8,478,558 8,102,927
Shareholders' equity 29,247,800 26,881,087
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Total liabilities and shareholders' equity $51,464,691 $50,323,704
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen Weeks Ended
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November 29, November 28,
1997 1998
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(Unaudited)
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Revenues:
Collaborative research, licenses, subscription fees and royalties $ 3,995,942 $ 4,837,009
Government research 261,371 273,248
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Total revenues 4,257,313 5,110,257
Costs and Expenses:
Research and development 6,630,915 6,539,754
Cost of government research 261,371 273,248
Selling, general and administrative 1,022,137 910,552
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Total cost and expenses 7,914,423 7,723,554
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Interest income 679,491 412,000
Interest expense (249,611) (270,345)
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Net interest income 429,880 141,655
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Net loss ($3,227,230) ($2,471,642)
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Basic/diluted net loss per common share ($0.18) ($0.13)
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Basic/diluted weighted average number of common
shares outstanding 18,055,877 18,317,843
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Thirteen Weeks Ended
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November 29, November 28,
1997 1998
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(Unaudited)
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Cash Flows from Operating Activities:
Net loss ($3,227,230) ($2,471,642)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 756,377 1,013,122
Loss on disposal of fixed assets 88,508 0
Deferred compensation 21,687 40,762
Changes in assets and liabilities:
Interest receivable (33,657) 98,421
Unbilled costs and fees 2,584 (61,688)
Prepaid expenses and other current assets (291,259) 122,983
Accounts payable 785,672 (58,510)
Accrued expenses 477,770 210,365
Deferred revenue 1,188,099 1,808,601
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Total adjustments 2,995,781 3,174,056
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Net cash (used in) provided by operating activities (231,449) 702,414
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Cash Flows from Investing Activities:
Purchases of marketable securities (6,252,023) (5,657,554)
Proceeds from sale of marketable securities 8,220,000 8,290,000
Purchases of equipment and leasehold improvements (2,722,862) (55,222)
(Increase) / decrease in other assets (22,511) 7,085
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Net cash (used in) provided by investing activities (777,396) 2,584,309
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options 765,882 64,167
Proceeds from long-term obligations 2,000,000 0
Payments on long-term obligations (937,489) (1,327,717)
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Net cash provided by (used in) financing activities 1,828,393 (1,263,550)
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Net Increase in Cash and Cash Equivalents 819,548 2,023,173
Cash and Cash Equivalents, at beginning of period 8,602,698 10,978,176
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Cash and Cash Equivalents, at end of period $9,422,246 $13,001,349
=========== ============
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $6,750 $7,200
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Interest paid during period $249,611 $270,345
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Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital lease obligations $880,101 $592,987
=========== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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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 28, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's Form 10-K which was filed with the Securities and
Exchange Commission on November 25, 1998.
2. REVENUE RECOGNITION
Research revenues are derived from collaborative agreements with
pharmaceutical companies as well as government grants and contract arrangements.
Research revenues are recognized as earned under government grants, which
consist of cost-plus fixed-fee contracts and fixed-price contracts. Revenues are
recognized under collaborative agreements as earned. Milestone payments from
collaborative research and development arrangements are recognized when they are
achieved. Subscription fee revenue from the PathoGenome(TM) database is
recognized ratably over the life of the subscription. License fees and royalties
from collaborative agreements are recognized as earned. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
3. NET LOSS PER COMMON SHARE
The Company applies SFAS No. 128, Earnings per Share. This statement
established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
Basic earnings per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted earnings per share
was determined by dividing net loss by diluted weighted average shares
outstanding. Diluted weighted average shares reflects the dilutive effect, if
any, of potential common stock, which include common stock options and warrants,
based on the treasury stock method. Diluted loss per share is the same as basic
loss per share for the periods ended November 29, 1997 and November 28, 1998 as
the effect of the potential common stock is antidilutive.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. At November 28, 1998 and August 31, 1998, the Company's
cash equivalents and marketable securities are classified as held-to-maturity,
as the Company has the positive intent and ability to hold these securities to
maturity. Cash equivalents are short-term, highly liquid investments with
original maturities of less than three months. Marketable securities are
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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 gains or losses on its
marketable securities. Marketable securities consist of commercial paper and
U.S. government debt securities. The Company has $200,000 in restricted cash at
August 31, 1998 and November 28, 1998 in connection with certain long-term
obligations (see Note 7).
5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6. NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
Company's total comprehensive net loss for the three month periods ended
November 28, 1998 and November 29, 1997 were the same as reported net loss for
those periods.
7. LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment lease line of
credit with a certain financial institution under which it financed $6,000,000
of laboratory, computer and office equipment. The lease is payable in 48 monthly
installments from the point of takedown, at a variable interest rate of prime
(7.75% as of November 28, 1998) plus 1/4 of 1%. At any time during the term of
this agreement, the Company may elect to convert to a fixed rate loan at the
prevailing interest rate. On March 9, 1998, the Company increased the amount
available under the equipment lease line of credit by $4,300,000 to $10,300,000.
The additional borrowings under the equipment lease line of credit have been and
will continue to be utilized to finance laboratory, computer and office
equipment and are payable in 16 quarterly installments commencing March 31,
1999. The Company is required to maintain certain restricted cash balances, as
defined (see Note 4). In addition, the Company is required to maintain certain
financial ratios pertaining to minimum cash balances, tangible net worth and
debt service coverage. The Company had approximately $3,054,000 available under
the modified line of credit at November 28, 1998.
On July 31, 1997, the Company entered into a financing arrangement with
another financial institution under which it financed $6,000,000 of laboratory
and office renovations at its Beaver Street facility. The principal amount of
the loan will be repaid over 48 consecutive months commencing on July 1, 1998 at
the prevailing 12-month Eurodollar rate (12-month Eurodollar rate was 5.1% as of
November 28, 1998) plus 1 1/2%. The Company is required to maintain certain
financial ratios pertaining to minimum cash balances, debt to net worth and
tangible net worth. The Company has no additional availability under this
financing arrangement at November 28, 1998.
The Company has entered into other capital lease line arrangements under
which it financed
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approximately $9,725,000 of certain laboratory, computer and office equipment.
These leases are payable in 36 monthly installments. The interest rates range
from 7.52% to 10.29%. The Company is required to maintain certain financial
ratios pertaining to minimum cash balances, tangible net worth, debt to tangible
net worth and debt service coverage. The Company has no additional borrowing
capacity under these capital lease agreements at November 28, 1998.
8. COLLABORATIVE AGREEMENTS
(a) Astra Hassle AB
In August 1995, the Company entered into a collaboration agreement with
Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infection or any other disease
caused by H. pylori. The Company granted Astra exclusive access to the Company's
H. pylori genomic sequence database and exclusive worldwide rights to make, use
and sell products based on the Company's H. pylori technology. The agreement
also provides for a four-year research collaboration to further develop and
annotate the Company's H. pylori genomic sequence database, identify therapeutic
and vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representatives from both parties.
Under this agreement, Astra agreed to pay an initial license fee, expense
allowance, milestone payments, and fund a research program for a minimum of two
and a half years with an option to extend. On June 4, 1998, Astra exercised its
option to extend the research program for a second time which will carry the
agreement through at least August 1999. Under this agreement as extended, Astra
agreed to pay the Company a minimum of approximately $13.4 million and, subject
to the achievement of certain product development milestones, up to
approximately $23 million (and possibly a greater amount if more than one
product is developed under the agreement) in license fees, expense allowances,
research funding and milestone payments. Of such fees, $500,000 are creditable
against any future royalties payable to the Company by Astra under the
agreement.
The Company will also be entitled to receive royalties on Astra's sale of
products (i) protected by the claims of patents licensed exclusively to Astra by
the Company pursuant to the agreement, or (ii) the discovery of which was
enabled in a significant manner by the genomic database licensed to Astra by the
Company. The Company has the right, under certain circumstances, to convert
Astra's license to a nonexclusive license in the event Astra is not actively
pursuing commercialization of the technology.
For the 13 week period ended November 28, 1998, the Company recorded revenue
of $251,000 under this agreement, which consisted of sponsored research funding.
For the 13 week period ended November 29, 1997, the Company recorded revenue of
$710,000 under this agreement, which consisted of sponsored research funding and
a milestone payment.
(b) Schering-Plough
In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd. (collectively
Schering-Plough) providing for the use by Schering-Plough of the genomic
sequence of Staph. aureus. The Company is identifying 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
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certain of the Company's genomic sequence databases. The Company also granted
Schering-Plough a nonexclusive license to use the Company's bioinformatics
systems for Schering-Plough's internal use in connection with the genomic
databases licensed to Schering-Plough under the agreement and other genomic
databases Schering-Plough develops or acquires. The Company also agreed to
undertake certain research efforts to identify bacteria-specific genes essential
to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and fund a research program for a minimum number of years with an option to
extend. On March 4, 1998, Schering-Plough elected to extend the research program
to the full term of the agreement which expires on March 31, 2000. Under the
agreement as extended, Schering-Plough has agreed to pay the Company a minimum
of $18.5 million in an up-front license fee, research funding and milestone
payments. Subject to the achievement of additional product development
milestones, Schering-Plough has agreed to pay the Company up to an additional
$24 million in milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds that are targeted against,
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 genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
For the 13 week period ended November 28, 1998, the Company recorded revenue
of $711,000 under this agreement, which consisted of sponsored research funding.
For the 13 week period ended November 29, 1997, the Company recorded revenue of
$1,336,000 under this agreement, which consisted of sponsored research funding
and milestone payments.
In December 1996, the Company entered into its second research collaboration
and license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third-party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In July 1998, Schering-Plough amended the original agreement in order to
accelerate the research effort being undertaken. In addition, upon completion of
certain scientific developments, Schering-Plough will make milestone payments to
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the Company, as well as pay royalties to the Company based on sales of
therapeutics products developed from this collaboration. If all milestones are
met and the research program continues for its full term, total payments to the
Company will approximate $67 million, excluding royalties. Of the total
potential payments, approximately $22.5 million represents license fees and
research payments, and $44.5 million represents milestone payments based on
achievement of research and product development milestones.
For the 13 week periods ended November 28, 1998 and November 29, 1997, the
Company recorded revenue of $1,944,000 and $1,152,000, respectively, under this
agreement, which consisted of sponsored research funding and subcontract
activity.
On September 24, 1997, the Company entered into a third research
collaboration and license agreement with Schering-Plough to use genomics to
discover and develop new pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the collaboration related to two fungal pathogens, Candida albicans
and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed in the
course of the research program. In return, Schering-Plough has agreed to fund a
research program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $34 million, excluding royalties. Of
the total potential payments, approximately $11 million represents research
payments and $23 million represents milestone payments based on achievement of
research and product development milestones. Additionally, the Company entered
into a subscription agreement with Schering-Plough to provide Schering-Plough
with nonexclusive access to the Company's proprietary PathoGenome(TM) database
and associated information relating to microbial organisms (see Note 9).
For the 13 week periods ended November 28, 1998 and November 29, 1997, the
Company recorded revenue of $689,000 and $436,000, respectively, under this
agreement, which consisted of sponsored research funding.
(9) DATABASE SUBSCRIPTIONS
The Company has entered into PathoGenome(TM) database subscriptions with
Bayer AG, Bristol-Meyers Squibb, Scriptgen Pharmaceuticals, Inc., Hoechst Marion
Roussel and Schering-Plough (see Note 8). The database subscription provides
nonexclusive access to the Company's proprietary PathoGenome(TM) database and
associated information relating to microbial organisms. The subscription
agreement calls for the Company to provide periodic data updates, analysis tools
and software support. Under the subscription agreements, the customer has agreed
to pay an annual subscription fee and royalties on any molecules developed as a
result of access to the information provided by PathoGenome(TM) database. The
Company retains all rights associated with protein therapeutic, diagnostic and
vaccine use of bacterial genes or gene products.
The Company has recognized $1,242,000 and $375,000 in revenue under these
subscription agreements for the 13 week periods ended November 28, 1998 and
November 29, 1997, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leader in the field of genomics-based drug targets
discovery -- the identification and functional characterization of genes. The
Company has over ten years of experience in the field of genomics, having served
as one of the primary researchers under genome programs sponsored by the United
States government, and has developed numerous techniques and tools that are
widely used in the field. The Company's commercial gene discovery strategy
capitalizes on its pioneering work in genomics by applying its high-throughput
sequencing technology and positional cloning, its experience and skills in
functional genomics and its bioinformatics capabilities. The two areas of focus
are: the discovery and characterization of (i) genes of pathogens that are
responsible for many serious diseases and (ii) human disease genes. The Company
believes that its genomic discoveries may lead to the development of novel
therapeutics, vaccines and diagnostic products by it and its strategic partners.
The Company has entered into numerous corporate collaborations in connection
with its pathogen and human gene discovery programs.
The Company does not anticipate revenues on a sustained basis until such
time that therapeutic, vaccine and diagnostic products based on the Company's
research efforts are commercialized, if at all. The Company's product
development strategy is to form collaborations with pharmaceutical and
biotechnology companies accessing drug discovery and clinical development
capabilities that currently do not exist at the Company. In the pharmaceutical
alliances, the Company generates revenues from licensing fees, sponsored
research and milestone payments during the term of the collaboration. Once a
product resulting from the research collaboration is commercialized, the Company
is entitled to receive royalty payments based upon product revenues.
Additionally, the Company will sell nonexclusive access to its proprietary
PathoGenome(TM) database. These collaborations are expected to result in the
discovery and commercialization of novel therapeutics, vaccines and diagnostics.
The sale of the genetic database generates subscription revenue over the term of
the subscription and royalty payments to the Company from product sales
downstream. In order for a product to be commercialized based on the Company's
research, it will be necessary for the collaborators to conduct preclinical
tests and clinical trials, obtain regulatory clearances and make manufacturing,
distribution and marketing arrangements. Accordingly, the Company does not
expect to receive royalties based upon product revenues for many years.
The Company's primary sources of revenue are collaborative agreements with
pharmaceutical company partners, subscription agreements to the Company's
proprietary PathoGenome(TM) database and government research grants and
contracts. As of November 28, 1998, the Company had four collaborative research
agreements and five subscribers to its proprietary PathoGenome(TM) database. The
Company entered into corporate collaborations with Astra Hassle AB ("Astra")
relating to H. Pylori in August 1995 and with Schering Corporation and
Schering-Plough, Ltd. (collectively, "Schering-Plough") in December 1995
providing for the use by Schering-Plough of the Company's Staph. aureus genomic
database to identify new gene targets for the development of novel antibiotics.
In December 1996, the Company entered into its second research collaboration
with Schering-Plough to identify genes and associated proteins that can be
utilized by Schering-Plough to develop new pharmaceuticals for treating asthma.
In September 1997, the Company entered into its third research collaboration
with Schering-Plough to use genomics to discover and develop new pharmaceutical
products to treat fungal infections.
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In May 1997, the Company introduced its proprietary PathoGenome(TM) database
and sold its first subscription to Bayer AG ("Bayer"). In September 1997, the
Company sold subscriptions to Bristol-Myers Squibb and Schering-Plough. In May
1998, the Company sold a subscription to Scriptgen Pharmaceuticals, Inc.
("Scriptgen"). In September 1998, the Company sold a subscription to Hoechst
Marion Roussel ("HMR"). Under these agreements, the subscribers will receive
nonexclusive access to the Company's PathoGenome(TM) database and associated
information relating to microbial organisms.
Since 1989, the Company has been awarded a number of research grants and
contracts by various agencies of the United States government pursuant to the
government genomics programs. The scope of the research covered by grants and
contracts encompasses technology development, sequencing production, technology
automation projects and positional cloning projects. These programs strengthened
the Company's genomics technology base and increased the number and enhanced the
expertise of its scientific personnel. From January 1991 through November 1998,
the United States government awarded the Company grants and contracts providing
for the aggregate payments over their terms of approximately $37 million.
However, over the last two years, the Company has substantially reduced its
reliance on government research grants and contracts as the Company focuses its
resources more toward drug discovery in collaboration with pharmaceutical
partners.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $62,841,000 at November 28, 1998. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new collaborative agreements and government research
grants and contracts. The Company is subject to risks common to companies in its
industry including unproven technology and business strategy, availability of,
and competition for, family resources, reliance upon collaborative partners and
others, history of operating losses, need for future capital, competition,
patent and proprietary rights, dependence on key personnel, uncertainty of
regulatory approval, uncertainty of pharmaceutical pricing, health care reform
and related matters, product liability exposure, and volatility of the Company's
stock price.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 29, 1997 AND NOVEMBER 28, 1998
REVENUE
Total revenues increased 20% from $4,257,000 for the 13 week period ended
November 29, 1997 to $5,110,000 for the 13 week period ended November 28, 1998.
Collaborative research, licenses, subscription fees and royalties increased 21%
from $3,996,000 for the 13 week period ended November 29, 1997 to $4,837,000 for
the 13 week period ended November 28, 1998. The increase in collaborative
research, licenses, subscription fees and royalties was primarily attributable
to increased revenue recognized under the Company's collaborative research
agreements with Schering-Plough as well as increased subscription fees earned in
fiscal 1999 under the Company's subscription agreements with Bristol-Myers
Squibb, Schering-Plough, Scriptgen and HMR to access the Company's proprietary
PathoGenome(TM) database.
12
<PAGE> 13
COST AND EXPENSES
Total cost and expenses decreased 2% from $7,914,000 for the 13 week period
ended November 29, 1997 to $7,724,000 for the 13 week period ended November 28,
1998. Research and development expense, which includes company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators decreased slightly by 1% from $6,631,000 for
the 13 week period ended November 29, 1997 to $6,540,000 for the 13 week period
ended November 28, 1998.
Selling, general and administrative expenses decreased 11% from $1,022,000 for
the 13 week period ended November 29, 1997 to $911,000 for the 13 week period
ended November 28, 1998. The decrease in selling, general and administrative
expenses was primarily due to decreases in payroll and related expenses and
legal fees.
Interest income decreased 39% from $679,000 for the 13 week period ended
November 29, 1997 to $412,000 for the 13 week period ended November 28, 1998
reflecting a decrease in funds available for investment during fiscal 1999 as a
result of cash being utilized to fund operations.
Interest expense increased 8% from $250,000 for the 13 week period ended
November 29, 1997 to $270,000 for the 13 week period ended November 28, 1998.
The increase in interest expense was attributable to increases in the Company's
outstanding balance under its long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash have been revenue from collaborative
research agreements and subscription fees, revenue from government grants and
contract, borrowings under equipment lending facilities and capital leases and
proceeds from sale of equity securities.
As of November 28, 1998, the Company had cash, cash equivalents, restricted
cash and long and short-term marketable securities of approximately $33,568,000.
The Company has various arrangements under which it can finance certain office
and laboratory equipment and leasehold improvements. Under these arrangements,
the Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, debt service coverage and minimum restricted cash balances. At November
28, 1998, the Company had approximately $3,054,000 available under these
arrangements for future borrowings. The Company has an aggregate of
approximately $13,355,000 outstanding under its borrowing arrangements at
November 28, 1998, which is repayable over the four year period ending December
2002.
The Company's operating activities used cash of approximately $231,000 for
the 13 week period ended November 29, 1997 to fund the Company's operating loss
which was partially offset by increases in deferred revenue, accounts payable
and accrued liabilities. The Company's operating activities provided cash of
approximately $702,000 for the 13 week period ended November 28, 1998 which
consisted primarily of increases in deferred revenue and accrued expenses
partially offset by cash operating loss.
The Company's investing activities used cash of approximately $777,000 for
the 13 week period ended November 29, 1997 for purchases of equipment and
leasehold improvements partially offset by the sale of marketable securities.
The Company's investing activities provided
13
<PAGE> 14
cash of approximately $2,584,000 for the 13 week period ended November 28, 1998
from the sale of marketable securities.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $648,000 for the 13 week period ended November 28, 1998
consisting primarily of laboratory, computer and office equipment. The Company
currently estimates that it will acquire an additional $1,400,000 in capital
equipment in fiscal 1999 consisting of primarily computer and laboratory
equipment which it intends to finance under existing equipment financing
arrangements.
The Company's financing activities provided cash of approximately
$1,828,000 for the 13 week period ended November 29, 1997 primarily from
proceeds from long-term obligations, exercise of stock options, net of payments
of long-term obligations. Financing activities used cash of approximately
$1,264,000 for the 13 week period ended November 28 1998 primarily for payments
of long-term obligations.
At August 31, 1998, the Company had net operating loss and tax credit
carryforwards of approximately $62,908,000 and $1,658,000, respectively, and
certain of these net operating losses will expire in the next few years. These
net operating losses and tax credits are available to reduce federal taxable
income and federal income taxes, respectively, in future years, if any, are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in ownership interests
of significant shareholders over a three-year period in excess of 50%. The
Company does not believe it has experienced a cumulative ownership change in
excess of 50%. However, there can be no assurance that ownership changes will
not occur in future periods which will limit the Company's ability to utilize
the losses and tax credits.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for at least two years under its current rate of
investment in research and development. There is no assurance, however, that
changes in the Company's plans or events affecting the Company's operations will
not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing
and expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issue, issuer, and type of instrument. The Company does not expect any material
loss with respect to its investment portfolio.
Many currently installed computer systems and software applications are
designed to accept only two digit entries in the date code field used to
identify years. These date code fields require modification to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with the
year 2000 requirements. Significant uncertainty exists concerning the potential
effects of failure to comply with such requirements.
14
<PAGE> 15
The Company is currently performing an extensive review of its computer
systems, software applications, and genomic database storage and retrieval
systems used both internally and sold to its customers to identify which systems
may be impacted by Year 2000. The Company plans to develop a comprehensive
compliance program, using internal and, if necessary , external resources to
address Year 2000 issues. The program would include an evaluation of its
internally developed operating systems and internally used financial and
administration systems. Externally, the program will include soliciting and
obtaining compliance certificates from third party software vendors as well as
determining the readiness of its major suppliers. At this time, given that the
Company's internal financial and administrative systems have been installed
within the last few years and the internally developed software-based systems
are not generally date sensitive, the Company does not expect the cost of
addressing the Year 2000 Issue to have a material impact on the Company's
business, results of operations or financial condition.
If such modifications, conversions, and/or replacements are not completed in
a timely manner, or if any of the Company's suppliers or customers do not
successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company's research and
development efforts could be significantly interrupted resulting in delays in
meeting its scientific obligations to existing collaborations, delays in
progress of its internal drug discovery programs and, consequently, delays in
attracting new collaborative partners.
After evaluating its internal compliance efforts as well as the compliance
effort of third parties with which the Company does business, the Company will
develop appropriate contingency plans in fiscal 1999 to address situations in
which various systems of the Company, or of third parties are not yet year 2000
compliant. If there are unidentified dependencies on systems to operate the
business or, if any required modifications are not completed on a timely basis
or are more costly to implement than anticipated, the Company's business,
financial condition or results of operations could be materially affected.
Statements in this Form 10K that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment.
15
<PAGE> 16
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.
16
<PAGE> 17
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Fenel M. Eloi
-------------------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: January 12, 1999
17
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