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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: May 29, 1999
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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)
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 02453
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 18,457,421
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$.10 PAR VALUE Outstanding July 7, 1999
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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 3
August 31, 1998 and May 29, 1999
Consolidated Condensed Statements of Operations 4
for the 39 week periods ended May 30, 1998
and May 29, 1999
Consolidated Statements of Cash Flows for the 5
39 week periods ended May 30, 1998
and May 29, 1999
Notes to Consolidated Condensed Financial 6-11
Statements for the 39 week periods ended
May 30, 1998 and May 29, 1999
Management's Discussion and Analysis of Financial 12-18
Conditions and Results of Operations
Part II
Other Information:
Other Information 19
Signature 20
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
August 31, May 29,
1998 1999
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $10,978,176 $15,200,415
Marketable securities 21,969,524 13,874,776
Interest receivable 742,411 471,672
Unbilled costs and fees 150,299 85,770
Prepaid expenses and other current assets 721,239 475,603
----------- -----------
Total current assets 34,561,649 30,108,236
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 14,434,808 15,543,171
Leasehold improvements 7,872,336 8,016,585
Equipment and furniture 1,334,268 1,338,644
Construction-in-progress 41,234 136,927
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23,682,646 25,035,327
Less accumulated depreciation
and amortization 8,579,440 11,264,535
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15,103,206 13,770,792
Restricted cash 200,000 200,000
Long-term marketable securities 1,029,569 0
Note receivable from officer 160,000 160,000
Other assets 410,267 282,333
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Total assets $51,464,691 $44,521,361
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $977,610 $1,128,593
Accrued expenses 2,450,400 2,841,135
Deferred revenue 4,699,137 5,269,475
Current maturities of long-term obligations 5,611,186 4,214,039
----------- -----------
Total current liabilities 13,738,333 13,453,242
Long-term obligations, net of current maturities 8,478,558 6,842,710
Shareholders' equity 29,247,800 24,225,409
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Total liabilities and shareholders' equity $51,464,691 $44,521,361
----------- -----------
See Notes to Consolidated Condensed Financial Statements.
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<TABLE>
<CAPTION>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen Weeks Ended Thirty-nine Weeks Ended
May 30, May 29, May 30, May 29,
1998 1999 1998 1999
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Collaborative research, licenses, subscription fees and royalties $ 4,658,417 $ 6,211,669 $12,515,891 $17,349,896
Government research 351,896 90,806 815,499 465,579
----------- ----------- ----------- -----------
Total revenues 5,010,313 6,302,475 13,331,390 17,815,475
----------- ----------- ----------- -----------
Costs and Expenses:
Research and development 8,090,097 6,738,044 22,561,069 19,848,938
Cost of government research 351,896 90,806 815,499 465,579
Selling,general and administrative 1,178,187 1,219,241 3,313,133 3,281,664
----------- ----------- ----------- -----------
Total costs and expenses 9,620,180 8,048,091 26,689,701 23,596,181
----------- ----------- ----------- -----------
Interest income 552,037 379,217 1,881,023 1,253,622
Interest expense (307,068) (261,299) (846,055) (790,359)
----------- ----------- ----------- -----------
Net interest income 244,969 117,918 1,034,968 463,263
----------- ----------- ----------- -----------
Net loss $(4,364,898) $(1,627,698) $(12,323,343) $(5,317,443)
----------- ----------- ----------- -----------
Basic / diluted net loss per common share $ (0.24) $ (0.09) $ (0.68) $ (0.29)
----------- ----------- ----------- -----------
Basic / diluted weighted average number of common and
common equivalent shares outstanding: 18,274,085 18,367,746 18,181,749 18,345,954
----------- ----------- ----------- -----------
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Thirty-nine Weeks Ended
May 30, May 29,
1998 1999
(Unaudited)
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $(12,323,343) $(5,317,443)
Adjustments to reconcile net loss to net
cash povided by (used in) operating activities:
Depreciation and amortization 2,674,487 3,076,236
Loss on disposal of fixed assets 103,821 0
Deferred compensation 94,814 113,472
Changes in assets and liabilities:
Interest receivable 526,763 270,739
Unbilled costs and fees (691,632) 64,529
Prepaid expenses and other current assets (96,899) 245,636
Accounts payable (167,489) 150,983
Accrued expenses 664,156 390,735
Deferred revenue 3,944,947 570,338
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Total adjustments 7,052,968 4,882,668
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Net cash used in operating activities (5,270,375) (434,775)
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Cash Flows from Investing Activities:
Purchases of marketable securities (28,873,818) (13,848,683)
Proceeds from sale of marketable securities 40,814,125 22,973,000
Purchases of equipment and leasehold improvements (5,317,164) (395,866)
(Increase) / decrease in other assets (10,136) 127,934
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Net cash provided by investing activities 6,613,007 8,856,385
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options 914,810 181,581
Proceeds from long-term obligations 4,011,000 0
Payments on long-term obligations (2,934,566) (4,380,952)
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Net cash provided by (used in)
financing activities 1,991,244 (4,199,371)
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Net Increase in Cash and Cash Equivalents 3,333,876 4,222,239
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 $ 11,936,574 $15,200,415
------------ -----------
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 20,250 $ 20,250
------------ -----------
Interest paid during period $ 846,055 $ 790,360
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Supplemental Disclosure of Non-cash
Investing Activities:
Property and equipment acquired under capital
lease obligations $ 2,919,874 $ 1,347,956
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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 accruals) 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 39 week period ended May 29, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's Form 10-K, which was filed, with the Securities
and Exchange Commission on November 25, 1998.
2. REVENUE RECOGNITION
Research revenues are derived from collaborative agreements with
pharmaceutical companies as well as government grants and contract arrangements.
Research revenues are recognized as earned under government grants, which
consist of cost-plus fixed-fee contracts and fixed-price contracts. Revenues are
recognized under collaborative agreements as earned. Milestone payments from
collaborative research and development arrangements are recognized when they are
achieved. Subscription fee revenue from the PathoGenome(TM) database is
recognized ratably over the life of the subscription. License fees and royalties
from collaborative agreements are recognized as earned. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
3. NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (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 May 30,
1998 and May 29, 1999 as the effect of the potential common stock equivalents is
antidilutive. Potential common stock equivalents of 4,300,124 and 3,542,779 were
excluded from diluted loss per share at May 30, 1998 and May 29, 1999,
respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At May 29, 1999 and August 31, 1998, the Company's
cash equivalents and marketable securities are classified as held-to-maturity,
as the Company has the positive intent
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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
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 May 29, 1999 in connection with
certain long-term obligations (see Note 7).
5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6. COMPREHENSIVE INCOME
The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 requires disclosure of all components of comprehensive income on an annual
and interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's total comprehensive net loss
for the nine month periods ended May 30, 1998 and May 29, 1999 was 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 libor
(5% as of May 29, 1999) plus 2%. On March 9, 1998, the Company increased the
amount available under the equipment lease line of credit by $4,300,000 to
$10,300,000. The additional borrowings under the equipment lease line of credit
have been and will continue to be utilized to finance laboratory, computer and
office equipment and are payable in 16 quarterly installments commencing March
31, 1999 at a variable interest rate of libor plus 1.75%. At any time during the
term of this agreement, the Company may elect to convert to a fixed rate loan at
the prevailing interest rate. The Company is required to maintain a restricted
cash balance, as defined (see Note 4). In addition, the Company is required to
maintain certain financial ratios pertaining to minimum cash balances, tangible
net worth and debt service coverage. The Company had approximately $2,339,000
available under the modified line of credit at May 29, 1999.
On July 31, 1997, the Company entered into a financing arrangement with
another financial institution under which it financed $6,000,000 of laboratory
and office renovations at its Beaver Street facility. The principal amount of
the loan will be repaid over 48 consecutive months. The interest rates range
from 7.19% to 8.16%. The Company is required to maintain certain financial
ratios pertaining to minimum cash balances, debt to net worth and tangible net
worth. The Company has no additional availability under this financing
arrangement at May 29, 1999.
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The Company has other capital lease line arrangements under which it
financed approximately $9,750,000 of certain laboratory, computer and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 7.52% to 10.29%. The 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 May 29, 1999.
8. COLLABORATIVE AGREEMENTS
(a) Astra Hassle AB
In August 1995, the Company entered into a collaboration agreement with
Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infection or any other disease
caused by H. pylori. The Company granted Astra exclusive access to the Company's
H. pylori genomic sequence database and exclusive worldwide rights to make, use
and sell products based on the Company's H. pylori technology. The agreement
also provides for a four-year research collaboration to further develop and
annotate the Company's H. pylori genomic sequence database, identify therapeutic
and vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representatives from both parties.
Under this agreement, Astra agreed to pay an initial license fee, expense
allowance, milestone payments, and fund a research program for a minimum of two
and a half years with an option to extend. On June 4, 1998, Astra exercised its
option to extend the research program for a second time which will carry the
agreement through at least August 1999. Under this agreement as extended, Astra
agreed to pay the Company a minimum of approximately $13.4 million and, subject
to the achievement of certain product development milestones, up to
approximately $23 million (and possibly a greater amount if more than one
product is developed under the agreement) in license fees, expense allowances,
research funding and milestone payments. Of such fees, $500,000 are creditable
against any future royalties payable to the Company by Astra under the
agreement.
The Company will also be entitled to receive royalties on Astra's sale of
products (i) protected by the claims of patents licensed exclusively to Astra by
the Company pursuant to the agreement, or (ii) the discovery of which was
enabled in a significant manner by the genomic database licensed to Astra by the
Company. The Company has the right, under certain circumstances, to convert
Astra's license to a nonexclusive license in the event Astra is not actively
pursuing commercialization of the technology.
For the 13 week periods ended May 29, 1999 and May 30, 1998, the Company
recorded revenue of $201,000 and $336,000, respectively, under this agreement,
which consisted of sponsored research funding.
For the 39 week period ended May 29, 1999, the Company recorded revenue of
$624,000 under this agreement, which consisted of sponsored research funding.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$1,405,000 under this agreement, which consisted of sponsored research funding
and a milestone payment.
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(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 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
extended agreement, Schering-Plough 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 agreed to pay the Company up to an additional $24 million in
milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds that are targeted against
Staph. aureus, as their primary indication. The Company will be entitled to
receive royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, the Company retained the rights to make, use and sell diagnostic
products developed based on the Company's genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
For the 13 week periods ended May 29, 1999 and May 30, 1998, the Company
recorded revenue of $570,000 and $733,000, respectively, under this agreement,
which consisted of sponsored research funding.
For the 39 week period ended May 29, 1999, the Company recorded revenue of
$1,902,000 under this agreement, which consisted of sponsored research funding.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$2,645,000 under this agreement, which consisted of sponsored research funding
and milestone payments.
In December 1996, the Company entered into its second research
collaboration and license agreement with Schering-Plough. This agreement calls
for the use of genomics to discover new genes to be used as targets in the
development of therapeutics for treating asthma. As part of the agreement, the
Company will employ its high-throughput positional cloning, bioinformatics, and
genomics sequencing capabilities to identify genes and associated proteins that
can be utilized by Schering-Plough to develop new pharmaceuticals. Under this
agreement, the Company has granted Schering-Plough exclusive access to (i)
certain gene sequence databases made available
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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
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 May 29, 1999 and May 30, 1998, the Company
recorded revenue of $2,280,000 and $2,212,000, respectively, under this
agreement, which consisted of sponsored research funding and subcontract
activity.
For the 39 week periods ended May 29, 1999 and May 30, 1998, the Company
recorded revenue of $7,065,000 and $5,164,000, respectively, under this
agreement, which consisted of sponsored research funding, subcontract activity
and milestone payments.
On September 24, 1997, the Company entered into a third research
collaboration and license agreement with Schering-Plough to use genomics to
discover and develop new pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the collaboration related to two fungal pathogens, Candida albicans
and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed in the
course of the research program. In return, Schering-Plough has agreed to fund a
research program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $34 million, excluding royalties. Of
the total potential payments, approximately $11 million represents research
payments and $23 million represents milestone payments based on achievement of
research and product development milestones. Additionally, the Company entered
into a subscription agreement with Schering-Plough to provide Schering-Plough
with nonexclusive access to the Company's proprietary PathoGenome(TM) database
and associated information relating to microbial organisms (see Note 9).
For the 13 week period ended May 29, 1999, the Company recorded revenue of
$1,872,000 under this agreement, which consisted of sponsored research funding
and a milestone payment. For the 13 week period ended May 30, 1998, the Company
recorded revenue of $613,000 under this agreement, which consisted of sponsored
research funding.
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For the 39 week period ended May 29, 1999, the Company recorded revenue of
$3,897,000 under this agreement, which consisted of sponsored research funding
and milestone payments. For the 39 week period ended May 30, 1998, the Company
recorded revenue of $1,619,000 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-Myers Squibb Co., 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 $1,230,000 and $750,000 in revenue under these
subscription agreements for the 13 week periods ended May 29, 1999 and May 30,
1998, respectively.
The Company has recognized $3,784,000 and $1,668,000 in revenue under these
subscription agreements for the 39 week periods ended May 29, 1999 and May 30,
1998, 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 sells 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 May 29, 1999, the Company had four collaborative research
agreements and five subscribers to its proprietary PathoGenome(TM) database. The
Company entered into corporate collaborations with Astra Hassle AB ("Astra")
relating to H. Pylori in August 1995 and with Schering Corporation and
Schering-Plough, Ltd. (collectively, "Schering-Plough") in December 1995
providing for the use by Schering-Plough of the Company's Staph. aureus genomic
database to identify new gene targets for the development of novel antibiotics.
In December 1996, the Company entered into its second research collaboration
with Schering-Plough to identify genes and associated proteins that can be
utilized by Schering-Plough to develop new pharmaceuticals for treating asthma.
In September 1997, the Company entered into its third research collaboration
with Schering-Plough to use genomics to discover and develop new pharmaceutical
products to treat fungal infections.
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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 May 29, 1999,
the United States government awarded the Company grants and contracts providing
for the aggregate payments over their terms of approximately $37 million. As of
May 29, 1999, the Company had outstanding approximately $560,000 of government
grants under which services were yet to be performed. In July 1999, the Company
was named as one of the nationally funded DNA sequencing centers of the
international Human Genome Project. The Company will participate in an
international consortium in a full-scale effort to sequence the human genome.
The Company will receive funding from the National Human Genome Research
Institute (NHGRI) of up to $15.6 million over a 3 year period of which $5
million is guaranteed over the next twelve months. The Company is subject to
annual appropriations by the government based upon the availability of
government funds and the achievement by the Company of certain scientific
milestones.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $65,687,000 at May 29, 1999. The Company's
results of operations have fluctuated from period to period and may continue to
fluctuate in the future based upon the timing and composition of funding under
existing and new collaborative agreements and government research grants and
contracts. The Company is subject to risks common to companies in its industry
including unproven technology and business strategy, availability of, and
competition for family resources, reliance upon collaborative partners and
others, history of operating losses, need for future capital, competition,
patent and proprietary rights, dependence on key personnel, uncertainty of
regulatory approval, uncertainty of pharmaceutical pricing, health care reform
and related matters, product liability exposure, and volatility of the Company's
stock price.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MAY 30, 1998 AND MAY 29, 1999
REVENUE
Total revenues increased 26% from $5,010,000 for the 13 week period ended
May 30, 1998 to $6,302,000 for the 13 week period ended May 29, 1999.
Collaborative research, licenses, subscription fees and royalties increased 33%
from $4,658,000 for the 13 week period ended May 30, 1998 to $6,212,000 for the
13 week period ended May 29, 1999. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to
increased revenue recognized under the Company's collaborative research
agreements with
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<PAGE> 14
Schering-Plough, as well as increased subscription fees earned in fiscal 1999
under the Company's subscription agreements with Bayer, Scriptgen and HMR to
access the Company's proprietary PathoGenome(TM) database.
COST AND EXPENSES
Total cost and expenses decreased 16% from $9,620,000 for the 13 week
period ended May 30, 1998 to $8,048,000 for the 13 week period ended May 29,
1999. Research and development expense, which includes company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators decreased by 17% from $8,090,000 for the 13
week period ended May 30, 1998 to $6,738,000 for the 13 week period ended May
29, 1999. The reduction in research and development expenses was primarily
attributable to the Company's expenses returning to more historical levels after
being elevated for much of fiscal 1998 as new research programs and capabilities
were being established specifically in the area of microbial genetics, human
gene discovery and functional genomics. The reduction consisted primarily of
decreases in payroll and related expenses, laboratory supplies and overhead
expenses.
INTEREST INCOME AND EXPENSE
Interest income decreased 31% from $552,000 for the 13 week period ended
May 30, 1998 to $379,000 for the 13 week period ended May 29, 1999 reflecting a
decrease in funds available for investment during fiscal 1999 as a result of
cash being utilized to fund operations.
Interest expense decreased 15% from $307,000 for the 13 week period ended
May 30, 1998 to $261,000 for the 13 week period ended May 29, 1999. The decrease
in interest expense was attributable to the scheduled repayment of the Company's
long-term obligations.
THIRTY-NINE WEEK PERIOD ENDED MAY 30, 1998 AND MAY 29, 1999
REVENUE
Total revenues increased 34% from $13,331,000 for the 39 week period ended
May 30, 1998 to $17,815,000 for the 13 week period ended May 29, 1999.
Collaborative research, licenses, subscription fees and royalties increased 39%
from $12,516,000 for the 39 week period ended May 30, 1998 to $17,350,000 for
the 39 week period ended May 29, 1999. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to
increased revenue recognized under the Company's collaborative research
agreements with Schering-Plough as well as increased subscription fees earned in
fiscal 1999 under the Company's subscription agreements with Bayer,
Bristol-Myers Squibb, Schering-Plough, Scriptgen and HMR to access the Company's
proprietary PathoGenome(TM) database.
COST AND EXPENSES
Total cost and expenses decreased 12% from $26,690,000 for the 39 week
period ended May 30, 1998 to $23,596,000 for the 39 week period ended May 29,
1999. Research and development expense, which includes company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators decreased by 12% from $22,561,000 for the 39
week period ended May 30, 1998 to $19,849,000 for the 39 week period
14
<PAGE> 15
ended May 29, 1999. The reduction in research and development expenses was
primarily attributable to the Company's expenses returning to more historical
levels after being elevated for much of fiscal 1998 as new research programs and
capabilities were being established specifically in the area of microbial
genetics, human gene discovery and functional genomics. The reduction consisted
primarily of decreases in payroll and related expenses, laboratory supplies and
overhead expenses.
INTEREST INCOME AND EXPENSE
Interest income decreased 33% from $1,881,000 for the 39 week period ended
May 30, 1998 to $1,254,000 for the 39 week period ended May 29, 1999 reflecting
a decrease in funds available for investment during fiscal 1999 as a result of
cash being utilized to fund operations.
Interest expense decreased by 7% from $846,000 for the 39 week period ended
May 30, 1998 to $790,000 for the 39 week period ended May 29, 1999. The decrease
in interest expense was attributable to the scheduled repayment of the Company's
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
contracts, borrowings under equipment lending facilities and capital leases and
proceeds from sale of equity securities.
As of May 29, 1999, the Company had cash, cash equivalents, restricted cash
and long and short-term marketable securities of approximately $29,275,000. 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, minimum
cash level, debt service coverage and minimum restricted cash balances. At May
29, 1999, the Company had approximately $2,339,000 available under these
arrangements for future borrowings. At May 29, 1999, the Company had an
aggregate of approximately $11,057,000 outstanding under its borrowing
arrangements which is repayable over the next 40 months, of which $4,214,000 is
repayable within the next 12 months.
The Company's operating activities used cash of approximately $5,270,000
and $435,000 for the 39 week period ended May 30, 1998 and May 29, 1999,
respectively, to fund the Company's operating loss which was partially offset by
increases in deferred revenue, interest receivable, and accrued liabilities.
For the 39 week periods ending May 30, 1998 and May 29, 1999, the Company's
investing activities provided cash of approximately $6,613,000 and $8,856,000,
respectively, from the sale of marketable securities, partially offset by the
purchases of equipment and leasehold improvements.
15
<PAGE> 16
Capital expenditures, including property and equipment acquired under capital
leases, totaled $1,744,000 for the 39 week period ended May 29, 1999 consisting
primarily of laboratory, computer and office equipment. The Company currently
estimates that it will acquire an additional $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 used cash of approximately $4,199,000
for the 39 week period ended May 29, 1999 primarily for payments of long-term
obligations. Financing activities provided cash of approximately $1,991,000 for
the 39 week period ended May 30, 1998 primarily from proceeds from long-term
obligations, exercise of stock options, net of 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. 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 eighteen months 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.
IMPACT OF YEAR 2000
Many currently installed computer systems and software applications are
designed to accept only two-digit entries in the date code field used to
identify years. These date code fields require modification to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with the
Year 2000 requirements. Significant uncertainty exists concerning the potential
effects of failure to comply with such requirements.
16
<PAGE> 17
The Company has performed an extensive inventory and initial testing of its
electronic equipment, computer systems, software applications, and genomic
database storage and retrieval systems used both internally and sold to its
customers, to identify which systems may be impacted by Year 2000. The Company
formed a Y2K Task Force with coordinators from every department, which
identified the Company's mission-critical systems. The Company has completed its
assessment and developed a comprehensive compliance program, using internal and
external resources to address Year 2000 issues. The compliance program
incorporates best practices from such sources as the General Services
Administration and the Government Accounting Office (see WWW.Y2K.GOV). The
program includes an evaluation and testing of its internally developed operating
systems and internally used financial and administration systems. The Company
has begun testing its mission critical systems and plans to have all mission
critical systems fully tested and in compliance by September 1999. Externally,
the Company has solicited and continues to obtain compliance certificates from
third-party software and equipment vendors as well as statements of readiness
from major suppliers.
At this time, given that the Company's internal financial, administrative,
and scientific systems have been installed within the last few years and the
internally developed software-based systems are not generally date sensitive,
the Company does not expect the cost of addressing the Year 2000 Issue to have a
material impact on the Company's business, results of operations or financial
condition. The Company has incurred approximately $118,000 to date on the year
2000 initiative consisting of labor and outside contracting. The Company has not
had to defer any other projects, and does not anticipate having to do so.
If such modifications, conversions, and/or replacements are not completed
in a timely manner, or if any of the Company's suppliers or collaborators do not
successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company's research and
development efforts could be significantly interrupted resulting in delays in
meeting its scientific obligations to existing collaborations, delays in
progress of its internal drug discovery programs and, consequently, delays in
attracting new collaborative partners. However, the Company expects cash inflow
from its existing corporate partners to be unaffected by Year 2000 issues for at
least the first two months of 2000 since the first quarterly research payments
for 2000 will be made prior to the start of the year.
The Company's reasonable worst case internal scenario includes greater date
sensitivity than presently indicated, which may require additional remediation
and/or porting of software and databases to compliant platforms, user interface
modifications preventing erroneous date entry, and redefining internal
file-naming conventions. The Company's reasonable worst case external scenario
includes a) prolonged loss of electrical power which could compromise critical
biological samples, and b) vendor fixes that are either unavailable or delayed,
which would require the purchase of replacement systems or force a delay in the
Company's compliance schedule.
After periodic reviews of its internal compliance efforts as well as the
compliance efforts of third parties with which the Company does business, the
Company will continue to modify as appropriate its contingency plans to address
situations in which various systems of the Company, or of third parties are not
yet Year 2000 compliant or who have become Year 2000 compliant. Contingency
plans for each department will continue to be incorporated into a Company-wide
contingency plan. Some departments already stockpile one month's supply of
consumables, and the existing emergency power generator has a one-day fuel
supply. If there are unidentified dependencies on systems to operate the
business, or if any required modifications are not
17
<PAGE> 18
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.
18
<PAGE> 19
PART II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
19
<PAGE> 20
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Philip V. Holberton
-----------------------
Philip V. Holberton
(Principal Financial Officer)
Date: July 12, 1999
20
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