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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 0-19358
SYSTEMIX, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0193369
------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3155 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices)
(415) 856-4901
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, was 14,498,969 as of October 31, 1996.
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1
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SYSTEMIX, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets of the Company
as of September 30, 1996 and December 31, 1995 3
Consolidated statements of operations of the Company
for the three and nine month periods ended
September 30, 1996 and 1995 4
Condensed consolidated statements of cash flows of the
Company for the nine months ended September 30, 1996
and 1995 5
Notes to condensed consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 14
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SYSTEMIX, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 1,995 $ 1,679
Short-term investments 48,373 65,836
Accounts receivable 259 256
Prepaid expenses and other current assets 1,164 1,336
------------- -------------
TOTAL CURRENT ASSETS 51,791 69,107
Net property and equipment 44,862 50,553
Deposits and other assets 617 542
------------- -------------
$97,270 $120,202
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 6,744 $ 6,681
Current portion of capital lease obligation 1,951 1,831
Deferred revenue from related party 8,400 3,097
Current portion of accrued rent 54 69
------------- -------------
TOTAL CURRENT LIABILITIES 17,149 11,678
Noncurrent portion of capital lease obligation 4,037 5,518
Accrued rent, less current portion 4,730 4,536
STOCKHOLDERS' EQUITY
Common stock 165 157
Additional paid in capital 246,827 246,536
Deferred compensation (293) (404)
Unrealized gain on short-term investments 688 390
Accumulated deficit (176,033) (148,209)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 71,354 98,470
------------- -------------
$ 97,270 $ 120,202
------------- -------------
------------- -------------
See accompanying notes.
3
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SYSTEMIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1996 1995 1996 1995
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES
Collaborative research from related party $ 2,975 $ 474 $ 6,835 $ 726
Collaborative research 32 -- 227 --
Research grants 15 117 79 798
Contract testing -- -- -- 161
Other 31 44 110 44
--------- ---------- ---------- ---------
TOTAL REVENUES 3,053 635 7,251 1,729
EXPENSES
Research and development:
Collaborative research 3,007 739 7,697 1,245
Research grants 15 117 79 798
Gene therapy joint venture -- 862 -- 2,940
Company-sponsored 7,462 9,280 23,315 28,994
--------- ---------- ---------- ---------
Total research and development 10,484 10,998 31,091 33,977
General and administrative 2,082 1,868 5,891 5,775
--------- ---------- ---------- ---------
TOTAL OPERATING EXPENSES 12,566 12,866 36,982 39,752
--------- ---------- ---------- ---------
LOSS FROM OPERATIONS
(9,513) (12,231) (29,731) (38,023)
Other income (net) 666 990 1,907 2,783
--------- ---------- ---------- ---------
NET LOSS
(8,847) ($11,241) (27,824) (35,240)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
NET LOSS PER SHARE ($.61) ($.78) ($1.92) ($2.54)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
SHARES USED IN COMPUTING NET LOSS
PER SHARE 14,493 14,434 14,479 13,880
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
See accompanying notes.
4
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SYSTEMIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
-------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($27,824) ($35,240)
ADJUSTMENTS TO RECONCILE NET CASH USED
BY OPERATING ACTIVITIES:
Depreciation and amortization 7,427 6,717
Changes in certain assets/liabilities:
Accounts receivable (3) (1,089)
Prepaid expenses and other current
assets 172 (18)
Investment in gene therapy joint
venture -- 365
Deposits and other assets (75) 109
Accounts payable and other liabilities 242 (1,813)
Deferred revenue 5,303 (247)
---------- ----------
Total adjustments 13,066 4,024
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES (14,758) (31,216)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,625) (3,795)
Net change in investments 17,761 (17,466)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 16,136 (21,261)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (1,361) (1,248)
Net proceeds from issuance of common stock 299 79,585
Net proceeds from dissolution of the joint
venture -- 1,431
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (1,062) 79,768
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 316 27,291
Cash and cash equivalents at beginning of period 1,679 1,474
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,995 $28,765
---------- ----------
---------- ----------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING
Deferred compensation related to the issuance
of stock options -- $42
---------- ----------
---------- ----------
Net assets transferred from dissolution of
the joint venture -- $2,248
---------- ----------
---------- ----------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the period $440 $551
---------- ----------
---------- ----------
See accompanying notes
5
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SYSTEMIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SyStemix, Inc. (the "Company"), incorporated in the State of Delaware on
May 13, 1988, is a biotechnology company focused on creating new cellular
and cell-based gene therapies for major disorders of the blood and immune
system, based on the use of the human hematopoietic stem cell.
INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1996, and the statements of
operations and cash flows for the three and nine month periods ended
September 30, 1996 and 1995 are unaudited but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such dates
and the operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain
information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). The
December 31, 1995 condensed consolidated balance sheet was derived from
audited financial statements included in the Company's Form 10-K. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995 as filed with the
SEC. Results for any interim period are not necessarily indicative of
results for any other interim period or for the entire year.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation as their effect is
antidilutive.
2. RESEARCH AND DEVELOPMENT COLLABORATION WITH SANDOZ PHARMACEUTICALS
CORPORATION
In April 1993, the Company and Sandoz Pharmaceuticals Corporation, a wholly
owned affiliate of Sandoz Pharma, Ltd. (collectively "Sandoz"), formed an
equally owned joint venture ("Progenesys") to research and develop
hematopoietic cell-based, somatic gene therapies against HIV infection.
The Company and Sandoz licensed their initial technologies within the field
to Progenesys. In addition, the Company and Sandoz were each obligated to
provide $5.0 million of funding annually to Progenesys through March 1996.
The Company accounted for its investment in Progenesys under the equity
method. On August 31, 1995, the Company and Sandoz dissolved Progenesys and
entered into a collaborative agreement for research and development of
hematopoietic cell-based somatic gene therapy designed to prevent
replication of HIV in symptomatic or asymptomatic patients (the "HIV Gene
Therapy Collaboration"). The terms and conditions of the HIV Gene Therapy
Collaboration agreement are substantially equivalent to those of the
partnership agreement of April 1993 which created Progenesys. Under the
terms of both agreements, the Company and Sandoz are obligated to fund the
project equally and share equally in the profits and losses of the project.
Commencing April 1996, the Company, pursuant to the terms of the HIV
Gene Theraphy Collaboration agreement, elected to have Sandoz fund
all of the Company's obligation, to be repaid out of future profits,
if any, of the project. The Sandoz funding is recognized as collaborative
research revenues as expenses are incurred. Revenue earned under the
HIV Gene Therapy Collaboration was $6.84 million for the nine months ended
September 30, 1996. Sandoz Biotech Holdings Corporation,
an indirect wholly-owned subsidiary of Sandoz Ltd., is a majority
shareholder of the Company.
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3. LEGAL PROCEEDINGS
The Company has been served notice or been informed of six stockholder
lawsuits with respect to the May 23, 1996 Sandoz proposal to acquire all of
the shares of the Company that Sandoz does not already own, at a proposed
price of $17.00 per share. The lawsuits have been filed in the Court of
Chancery of the State of Delaware in New Castle County, each suit asking
for class action status and naming the Company, Sandoz and its affiliated
entities, and the individual members of the Company's Board of Directors as
defendants. The suits have been consolidated into one action and generally
seek to enjoin consummation of the Sandoz proposal on the grounds that the
consideration to be paid to the public shareholders under the proposal is
unfair and inadequate. Pursuant to a court-approved stipulation, dated
July 15, 1996, no response to the suits will be made by the defendants
until 20 days after they receive notice that a response is required. The
litigation could result in substantial expense to the Company and
significant diversion of efforts of the Company's management team.
7
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SYSTEMIX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SyStemix, Inc. (the "Company") is a biotechnology company focused on
creating new cellular and cell-based gene therapies for major disorders of
the blood and immune system based on the use of the human hematopoietic
stem cell ("HSC"). The HSC is the only hematopoietic cell which is
pluripotent, capable of differentiating into all types of blood and immune
cells, and capable of self-renewal. The Company believes the special
properties of the HSC should produce long-lasting, highly efficient cell,
gene replacement and gene modification therapies for cancer, AIDS, genetic
and autoimmune diseases.
Many existing cancer therapies, such as chemotherapy and radiotherapy,
compromise the body's immune system and its ability to create new cells.
By reinfusing HSCs after these therapies, the Company believes that
patients will achieve timely recovery as well as sustained hematopoietic
function over the long term. The Company believes that in addition to the
importance of its patented cell population, a key competitive advantage for
the Company is its proprietary high speed cell sorting system that
separates viable and functional HSCs at higher speeds and levels of purity
than cell doses obtained with a number of other cell separation methods.
By using this system to achieve a highly pure dose of HSCs, the Company is
able to effectively eliminate certain types of tumor cells, providing a
cell population that is disease-free to the levels detectable by the most
sensitive methods currently available. In addition, the Company has
developed a proprietary enabling technology called the SCID-hu mouse, an
immunodeficient mouse into which human tissue is transplanted to create a
human immune system which serves as a preclinical testing model to
facilitate development of the Company's therapies.
When used in this discussion, the 'expect,' 'project,' 'estimate,'
'intend,' ' plan,' 'believe' and similar expressions are intended to
identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, including those discussed herein, that
could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes
no obligation to release publicly the fact or result of any revisions to
these forward-looking statements that may be made to reflect future events
or circumstances.
CLINICAL TRIALS
Since its inception, the Company has focused its research and development
("R&D") activities on the development of cell and cell-based gene therapies
based on the HSC. The Company initiated its first Phase I/II human
clinical trial of HSC transplants to support multiple myeloma patients
undergoing chemotherapy in June 1995 at the University of Arkansas.
Results presented in early December 1995 from the clinical trial showed
that blood-derived stem cell transplants processed by the Company's
proprietary purification process can engraft in multiple myeloma patients
within clinically relevant time intervals. In July 1996, the Company
terminated this study due to concerns related to cell viability associated
with procedures used for handling and storage of cells at the clinical
site. The engraftment results from transplants which had already occurred
in this study were unaffected by these issues.
In March 1996, the Company initiated its first European Phase I/II human
clinical trials in cancer at its Lyon facility, beginning with multiple
myeloma. In September 1996, the Company initiated additional clinical
trials in cellular therapies for stage IV breast cancer and indolent non-
Hodgkin's lymphoma at Stanford University Medical Center and the University
of Nebraska Medical Center, respectively. In October 1996, the Company
filed an investigational new drug ("IND") application for cell-based gene
therapy for treatment of HIV. There can be no assurance that the results
from any such trials will be favorable or that the Company can complete
these trials on a timely basis, if at all.
Although the Company has initiated human clinical trials, full
commercialization of its R&D programs will not occur for several years and
is subject to significant risks. There can be no assurance that the
Company will be able to obtain regulatory approval of any of its products
on a timely basis, if at all. The Company uses multiple technologies in
developing its cellular and gene therapies. No assurance can be given that
8
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these technologies will continue to be viable or that commercially viable
products or therapies will ultimately be developed by the Company. The
Company's potential products or therapies will require significant
additional R&D, including process development and extensive clinical
testing prior to commercial use. There can be no assurance that these
potential products or therapies will be successfully developed for human
use or that such products or related therapies will prove to be safe and
effective in clinical trials or cost-effective to manufacture. These
potential products and therapies may prove to have undesirable side effects
and, in some cases, may have limitations on their commercial use.
Technological development and discoveries may require the Company to change
its R&D strategies. Competitors with greater resources than the Company
may have financial and technological flexibility to respond to such changes
which may not be available to the Company. If the Company succeeds in
bringing one or more products or therapies to market, there can be no
assurance that such products or therapies will be viewed as cost-effective
or that reimbursement will be available to consumers or, if available, will
be sufficient to allow the Company's products or therapies to be marketed
on a competitive basis.
SANDOZ LTD. INVESTMENT
On January 30, 1995, the Company, Sandoz Ltd., and Sandoz Biotech Holdings
Corporation, an indirect wholly-owned subsidiary of Sandoz Ltd.
(collectively with Sandoz Ltd. "Sandoz Biotech"), amended the December 1991
stock acquisition agreement allowing Sandoz Biotech to increase its
ownership of the Company to 71.6% on a fully diluted basis, and entered
into a stock and warrant purchase agreement. On February 2, 1995, the
Company issued to Sandoz Biotech 4,616,272 shares of common stock plus
warrants to purchase an additional 1,367,600 shares of common stock in
exchange for proceeds of $80.0 million. Per the terms of the amended stock
acquisition agreement, Sandoz Biotech is prohibited until December 16, 1998
from increasing its shareholding on a fully diluted basis above 71.6%
before the exercise of any warrants, and above 73.9% if the warrants are
exercised. From December 17, 1998 to February 18, 2002, Sandoz Biotech is
prohibited from increasing its shareholding above 75% on a fully diluted
basis. Sandoz Biotech is, however, permitted to make a tender offer or
merger or acquisition proposal for 100% of the Company at any time,
provided such offer is at a price that is fair to the stockholders of the
Company and is approved by a majority of the Company's Independent
Directors.
SANDOZ ACQUISITION PROPOSAL
On May 24, 1996, the Company announced it had received an unsolicited
proposal from Sandoz Biotech, to acquire all the outstanding shares of the
Company that are not owned by Sandoz Biotech. The proposed purchase price
was $17.00 per share. Sandoz Biotech currently holds approximately
10,610,099 of the outstanding shares of the Company. On October 29, 1996,
the Company announced that its Independent Directors had rejected the
unsolicited offer by Sandoz Biotech. The decision by the Independent
Directors was that the offer was inadequate and not fair to the minority
shareholders from a financial point of view and was based, in part, on the
advice of Lehman Brothers, the investment banking firm retained to assist
the Independent Directors in analyzing the Sandoz offer. However, the
Independent Directors remain willing to discuss an acquisition by Sandoz at
an appropriate price. (SEE PART II/ITEM 5. OTHER INFORMATION)
The Company has been served notice or been informed of six stockholder
lawsuits with respect to the May 23, 1996 Sandoz proposal to acquire all of
the shares of the Company that Sandoz does not already own, at a proposed
price of $17.00 per share. The lawsuits have been filed in the Court of
Chancery of the State of Delaware in New Castle County, each suit asking
for class action status and naming the Company, Sandoz and its affiliated
entities, and the individual members of the Company's Board of Directors as
defendants. The suits have been consolidated into one action and generally
seek to enjoin consummation of the Sandoz proposal on the grounds that the
consideration to be paid to the public shareholders under the proposal is
unfair and inadequate. Pursuant to a court-approved stipulation, dated
July 15, 1996, no response to the suits will be made by the defendants
until 20 days after they receive notice that a response is required. The
litigation could result in substantial expense to the Company and
significant diversion of efforts of the Company's management team. (SEE
PART II/ITEM 1. LEGAL PROCEEDINGS)
RESEARCH AND DEVELOPMENT COLLABORATION WITH SANDOZ PHARMACEUTICALS CORPORATION
On August 31, 1995, the Company and Sandoz Pharmaceuticals Corporation, a
wholly-owned affiliate of Sandoz Pharma, Ltd. (collectively "Sandoz")
entered into a collaborative agreement for the research and development of
hematopoietic cell-based somatic gene therapy designed to prevent
replication of HIV in symptomatic or asymptomatic patients (the "HIV Gene
Therapy Collaboration"). The previous April 1993 partnership agreement,
which created the joint venture Progenesys, was dissolved and replaced by
the HIV
9
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Gene Therapy Collaboration. The terms and conditions of the HIV Gene
Therapy Collaboration are substantially equivalent to those of the
partnership agreement. Under the terms of the HIV Gene Therapy
Collaboration agreement, the Company and Sandoz are obligated to fund the
project equally and share equally in the profits and losses of the project.
Commencing April 1996, the Company, pursuant to the agreement, elected to
have Sandoz fund all of the Company's obligation, to be repaid out of
future profits, if any, of the project. The Sandoz funding is recognized
as collaborative research revenues as expenses are incurred. The Company
filed an IND for this program's first product candidate in October 1996.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Total revenues for the three months ended September 30, 1996 were $3.05
million compared to $635,000 for the same period in 1995. Collaborative
research revenues from related parties for the three months ended September
30, 1996 in the amount of $2.98 million were earned under the HIV Gene
Therapy Collaboration with Sandoz compared to $474,000 for the same period
in 1995. Commencing April 1996, the Company, pursuant to the HIV Gene
Therapy Collaboration, elected to have Sandoz fund all of the Company's
obligation, to be repaid out of future profits, if any, of the project.
The Sandoz funding is recognized as collaborative research revenues as
expenses are incurred. Collaborative research revenues are dependent upon
the level of effort expended on the research program and therefore may vary
considerably from period to period. Collaborative research revenues earned
in one period are not predictive of collaborative research revenues to be
earned in future periods.
Total operating expenses for the three months ended September 30, 1996 were
$12.57 million compared to $12.87 million for the same period in 1995. R&D
expenses, including pilot manufacturing and cell processing operations,
were $10.48 million for the three months ended September 30, 1996 as
compared to $11.00 million for the same period in 1995. R&D expenses
decreased primarily as a result of the restructuring of workforce in the
fall of 1995 which resulted in the transfer of resources to clinical,
development and operations functions and the deferral or streamlining of
certain R&D projects. The Company expects R&D expenses to slightly
increase as clinical development efforts progress and pilot manufacturing
and clinical trials activities increase. General and administrative ("G&A")
expenses were $2.08 million for the three months ended September 30, 1996
as compared to $1.87 million for the same period in 1995. Prior to the
conversion of Progenesys into a HIV Gene Therapy Collaboration in August
1995, the Company was able to allocate a portion of its G&A expenses to
Progenesys. As a result of the conversion to a HIV Gene Therapy
Collaboration, G&A expenses attributable to the HIV Gene Therapy
Collaboration are recognized as collaborative research revenues as
incurred. G&A expenses are expected to remain at their current level in
order to support the Company's administrative requirements.
Other income, representing primarily interest earned on the Company's
investment portfolio, was $666,000 for the three months ended September
30, 1996 compared to $990,000 for the same period in 1995. Other income is
expected to decrease in future periods due to a reduction of the Company's
investment portfolio as a result of cash operating needs.
For the three months ended September 30, 1996, the Company incurred a net
loss of $8.85 million compared to $11.24 million for the same period in
1995. The Company expects to incur substantial operating losses over the
next several or more years as a result of the expenditures described above.
The Company's results for any interim period are not necessarily
indicative of results for any other period or for the entire year.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Total revenues for the nine months ended September 30, 1996 were $7.25
million compared to $1.73 million for the same period in 1995.
Collaborative research revenues from related parties for the nine months
ended September 30, 1996 in the amount of $6.84 million were earned
under the HIV Gene Therapy Collaboration with Sandoz. Commencing April
1996, the Company, pursuant to the terms of the HIV Gene Therapy
Collaboration agreement, elected to have Sandoz fund all of the Company's
obligation, to be repaid out of future profits, if any, of the project.
The Sandoz funding is recognized as collaborative research revenues as
expenses are incurred. For the nine months ended September 30, 1995,
collaborative research revenues from Sandoz were $726,000, of which
$474,000 were earned under the HIV Gene Therapy Collaboration and $252,000
were earned in conjunction with the Anti-virals Collaboration which was
terminated by mutual agreement March 31, 1995. Collaborative research
revenues are dependent upon the level of effort expended on the research
program and therefore may vary considerably from period to period.
Collaborative research revenues earned in one period are not predictive of
collaborative research revenues to be earned in future periods.
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Total operating expenses for the nine months ended September 30, 1996 were
$36.98 million compared to $39.75 million for the same period in 1995. R&D
expenses, including pilot manufacturing and cell processing operations,
were $31.09 million for the nine months ended September 30, 1996 as
compared to $33.98 million for the same period in 1995. R&D expenses
decreased primarily as a result of the restructuring of workforce in the
fall of 1995 which resulted in the transfer of resources to clinical,
development and operations functions and the deferral or streamlining of
certain R&D projects. The Company expects R&D expenses to slightly
increase as clinical development efforts progress and pilot manufacturing
and clinical trials activities increase. G&A expenses were $5.89 million
for the nine months ended September 30, 1996 as compared to $5.78 million
for the same period in 1995. Prior to the conversion of Progenesys into
the HIV Gene Therapy Collaboration in August 1995, the Company was able to
allocate a portion of its G&A expenses to Progenesys. As a result of the
conversion to the HIV Gene Therapy Collaboration, G&A expenses attributable
to the HIV Gene Therapy Collaboration are recognized as collaborative
research revenues as incurred. G&A expenses are expected to remain at
their current level in order to support the Company's administrative
requirements.
Other income, representing primarily interest earned on the Company's
investment portfolio, was $1.91 million for the nine months ended
September 30, 1996 compared to $2.78 million for the same period in 1995.
Other income is expected to decrease in future periods due to a reduction
of the Company's investment portfolio as a result of cash operating needs.
For the nine months ended September 30, 1996, the Company incurred a net
loss of $27.82 million compared to $35.24 million for the same period in
1995. The Company expects to incur substantial operating losses over the
next several or more years as a result of the expenditures described above.
The Company's results for any interim period are not necessarily indicative
of results for any other period or for the entire year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities through the sale of equity
securities, research grants, collaborative funding arrangements and
equipment lease financing. In February 1995, the Company received $79.50
million, net of transaction costs, as a result of the additional equity
investment by Sandoz Biotech. At September 30, 1996, cash, cash
equivalents and investments, which consist primarily of U.S. Government
obligations and corporate debt securities were $50.37 million (of which
approximately $8.22 million is pledged as security on the Company's capital
lease obligation) compared to $67.52 million at December 31, 1995. Net
cash used by operating activities was $14.76 million for the nine months
ended September 30, 1996, compared to $31.22 million for the nine months
ended September 30, 1995. The reduction in cash used by operating
activities was due primarily to the advance receipt of funds relating to
the HIV Gene Therapy Collaboration, reduction of operating loss, and the
timing of payments to vendors. The Company expects to incur substantial
costs over the next several years, including costs of clinical trials and
pilot manufacturing activities. For the nine months ended September 30,
1996, the Company invested $1.63 million in facility improvements and
capital equipment compared to $3.80 million for the nine months ended
September 30, 1995.
As of September 30, 1996, the Company believes it has adequate capital
resources to fund its operations through at least the second quarter of
1997. However, the Company's capital requirements may change depending on
numerous factors, including but not limited to, the progress of the
Company's clinical trials and continuing R&D activities, technological
advances, and the status of competitors. In addition, substantial expenses
may be incurred related to the filing, prosecution, defense and
enforcement of patent and other intellectual property claims. The
development of the Company's products and processes will require a
commitment of substantial resources to conduct the research, preclinical
development and clinical trials that are necessary to bring its products to
market and to establish production and marketing capabilities. Additional
funding will need to be raised through the issuance of additional equity,
debt, the entering into one or more corporate associations with
pharmaceutical or biotechnology companies, additional capital lease
financing or other financing arrangements. However, no assurance can be
given that such funding will be available on favorable terms, if at all.
In such event, the Company may need to delay or curtail its R&D activities
to a significant extent.
11
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SYSTEMIX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been served notice or been informed of six stockholder
lawsuits with respect to the May 23, 1996 Sandoz proposal to acquire all of
the shares of the Company that Sandoz does not already own, at a proposed
price of $17.00 per share. The lawsuits have been filed in the Court of
Chancery of the State of Delaware in New Castle County, each suit asking
for class action status and naming the Company, Sandoz and its affiliated
entities, and the individual members of the Company's Board of Directors as
defendants. By court order dated August 20, 1996, the six lawsuits have
been consolidated into one action, captioned In Re SyStemix, Inc.
Shareholders Litigation, Consolidated C.A. No. 15014. The plaintiffs
generally seek to enjoin consummation of the Sandoz proposal on the grounds
that the consideration to be paid to the public shareholders under the
proposal is unfair and inadequate. Pursuant to a court-approved
stipulation, dated July 15, 1996, no response to the action will be made by
the defendants until 20 days after they receive notice that a response is
required. The litigation could result in substantial expense to the Company
and significant diversion of efforts of the Company's management team.
ITEM 5. OTHER INFORMATION
On October 29, 1996, the Company announced that its Independent Directors
had rejected the unsolicited offer by Sandoz Biotech to acquire, at $17.00
per share, the outstanding shares of the Company that Sandoz does not
already own. The decision by the Independent Directors was that the offer
was inadequate and not fair to the minority shareholders from a financial
point of view and was based, in part, on the advice of Lehman Brothers, the
investment banking firm retained to assist the Independent Directors in
analyzing the Sandoz offer. However, the Independent Directors remain
willing to discuss an acquisition by Sandoz at an appropriate price. The
Independent Directors informed the Company that they had offered to share
in negotiations with Sandoz the data analysis that formed Lehman Brothers'
and the Independent Directors' view of the Company's value. They stated
that Sandoz had declined this invitation to negotiate, and had further
declined to provide them with any analysis of its own of the value of the
Company's technology, clinical program or market prospects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- --------------- ------------
4.3 Certificate of Incorporation of the Company
filed with the State of Delaware on (A)
May 13, 1988
4.4 Certificate of Amendment of the Certificate of
Incorporation of the Company (A)
filed with the State of Delaware on
August 24, 1988
4.5 Certificate of Designation of Preferences of
Series A and Series B Preferred (A)
Stock of the Company filed with the State of
Delaware on August 26, 1988
4.6 Certificate of Amendment of the Certificate of
Incorporation of the Company (A)
filed with the State of Delaware on
December 9, 1988
4.7 Certificate of Amendment of the Certificate of
Incorporation of the Company (A)
filed with the State of Delaware on
February 16, 1990
4.8 Certificate of Amendment of the Certificate
of Incorporation of the Company (A)
filed with the State of Delaware on June 7, 1990
4.9 Certificate of Designation of Preferences of
Series C Preferred Stock of the (A)
Company filed with the State of Delaware on
June 7, 1990
4.10 Certificate of Amendment of the Certificate
of Incorporation of the Company (A)
filed with the State of Delaware on July 9, 1991
12
<PAGE>
4.11 By-laws of the Company, as currently in effect (A)
4.1 Form of SyStemix, Inc. Non-Negotiable Convertible
Subordinated Note (A)
4.2 Form of Warrant (B)
10.1 SyStemix, Inc. 1988 Stock Option Plan, as amended (C)
10.2 SyStemix, Inc. 1991 Stock Option and Incentive
Plan, as amended(H)
10.3 Acquisition Agreement, dated as of
December 16, 1991, among Sandoz Ltd., (D)
Sandoz Biotech Holdings Corporation and SyStemix,
Inc.
10.6 Registration Rights Agreement, dated as of
December 16, 1991, among SyStemix, (D)
Inc., and Eli S. Jacobs, The Aetna Casualty and
Surety Company and The Standard
Fire Insurance Company
10.7 Confidentiality Agreement, dated as of
September 30, 1991, between Sandoz Pharma (D)
Ltd. and SyStemix, Inc.
10.8 Confidentiality Agreement, dated as of
December 2, 1991, between Sandoz Pharma (D)
Ltd. and SyStemix, Inc.
10.11 Consulting Agreement, dated as of
December 16, 1991, between SyStemix, Inc. and (D)
Irving L. Weissman
10.13 SyStemix-Sandoz Partnership Agreement, dated as
of April 13, 1993 (E)
10.15 Separation Agreement and General Release, dated
October 18, 1994, between (F)
SyStemix, Inc. and Linda D. Sonntag, Ph.D.
10.16 Stock and Warrant Purchase Agreement, dated as of
January 30, 1995 between (B)
SyStemix, Inc., Sandoz Ltd. and Sandoz Biotech
Holding Corporation
10.17 Employment Agreement, dated as of March 29, 1995,
between SyStemix, Inc. and (G)
John Schwartz
10.18 Declaration of Dissolution of Sandoz-SyStemix
Gene Therapy of HIV Partnership, (I)
dated September 14, 1995
10.19 Research and Development Collaboration
Agreement, dated as of August 31, 1995, (I)
between SyStemix, Inc. and Sandoz Pharmaceuticals
Corporation
27 Financial Data Schedule
99.01 Press Release
99.02 Letter from Independent Directors
(A) Incorporated by reference to designated Exhibit included with the
Company's Form S-1 Registration Statement (Registration No. 33-41180)
filed on August 6, 1991, as amended.
(B) Incorporated by reference to the Company's Form 8-K filed on February
16, 1995.
(C) Incorporated by reference to the Company's Form S-8 Registration
Statement (Registration No. 33-44040) filed on November 19, 1991.
(D) Incorporated by reference to the Company's Schedule 14D-9 filed on
December 20, 1991.
(E) Incorporated by reference to the Company's Form 10-Q for the quarter
ended January 30, 1993, filed on August 3, 1993.
(F) Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1994, filed on March 28, 1995.
(G) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1995, filed on May 11, 1995.
(H) Incorporated by reference to the Company's Form S-8 Registration
Statement (Registration No. 33-93906) filed on June 23, 1995.
(I) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 31, 1995, Filed on November 14, 1995.
b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1996.
13
<PAGE>
SYSTEMIX, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:November 8, 1996 SYSTEMIX, INC.
----------------
By: /s/ JAMES T. DEPALMA
--------------------
James T. DePalma
Controller (Principle Accounting
Officer) and Duly Authorized Officer
14
<PAGE>
SYSTEMIX, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ -----------
99.01 SyStemix' Press Release re: SyStemix' Independent Directors not
approving Sandoz Offer
99.02 Letter to the Company from Independent Directors
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000876428
<NAME> SYSTEMIX, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,995
<SECURITIES> 48,373
<RECEIVABLES> 259
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,791
<PP&E> 73,424
<DEPRECIATION> 28,562
<TOTAL-ASSETS> 97,270
<CURRENT-LIABILITIES> 17,149
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 71,189
<TOTAL-LIABILITY-AND-EQUITY> 97,270
<SALES> 0
<TOTAL-REVENUES> 7,251
<CGS> 0
<TOTAL-COSTS> 36,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,907)
<INCOME-PRETAX> (29,731)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,824)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,824)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
<PAGE>
SYSTEMIX, INC
EXHIBIT 99.01
SYSTEMIX' PRESS RELEASE RE: SYSTEMIX' INDEPENDENT DIRECTORS
NOT APPROVING SANDOZ OFFER
16
<PAGE>
3155 Porter Drive 415.856.4901
Palo Alto, California 94304 FAX 415.856-4919
SYSTEMIX
(LOGO)
Contact: Wendy R. Hitchcock Justin Jackson
Chief Financial Officer Reagan Codner
SyStemix, Inc. Burns McClellan
(415) 813-4108 (212) 505-1919
FOR IMMEDIATE RELEASE
SYSTEMIX' INDEPENDENT DIRECTORS DETERMINE NOT TO APPROVE SANDOZ OFFER
Palo Alto, California, October 29, 1996 -- SyStemix, Inc. (NASDAQ: STMX)
announced today that its Independent Directors have informed the Company that
they have rejected the unsolicited offer by Sandoz Ltd. to acquire, at $17.00
per share, the outstanding shares of SyStemix that Sandoz does not already own.
The Independent Directors stated that their decision was based in part on the
advice of Lehman Brothers that the offer is inadequate and not fair to the
minority shareholders from a financial point of view, and that they remain
"willing to discuss an acquisition by Sandoz at an appropriate price." Lehman
Brothers, the investment banking firm, was retained to assist the Independent
Directors in analyzing the Sandoz offer.
The agreement by which Sandoz first acquired an interest in SyStemix
provides that the Board's membership shall include three independent members
(the "Independent Directors"), and that "any tender offer or merger or
acquisition proposal must be at a price that is fair to the stockholders of the
Company, and must be approved by a majority of the Independent Directors."
Sandoz currently owns approximately 73 percent of SyStemix' outstanding stock.
The proposal to purchase the remaining shares was made on May 23, 1996.
The Independent Directors informed SyStemix that they had offered to share
in negotiations with Sandoz the data and analysis that inform Lehman Brothers'
and the Independent Directors' view of SyStemix' value. They stated that Sandoz
had declined this invitation to negotiate, and had further declined to provide
them with any analysis of its own of the value of the Company's technology,
clinical program or market prospects.
SyStemix, Inc., is engaged in the development of cellular and cell-based
gene therapies for cancer, AIDS and genetic diseases based on the use of
isolated, expanded and gene-modified hematopoietic stem cells.
###
17
<PAGE>
SYSTEMIX, INC
EXHIBIT 99.02
LETTER TO THE COMPANY FROM INDEPENDENT DIRECTORS
18
<PAGE>
October 25, 1996
SyStemix, Inc.
3155 Porter Drive
Palo Alto, CA 94304
Attention: John Schwartz
The Independent Directors have determined not to approve the unsolicited
offer by Sandoz Ltd. to acquire, at $17.00 per share, the approximately 27% of
SyStemix that Sandoz does not currently own (the "Offer"). The Independent
Directors' decision is based, in part, on the advice of Lehman Brothers that the
Offer is inadequate and not fair to the minority shareholders from a financial
point of view. The Independent Directors had retained Lehman Brothers, an
investment banking firm, to assist them in analyzing the Offer.
The Independent Directors have offered to share in negotiations with Sandoz
the data and analysis that inform Lehman Brothers' and the Independent
Directors' view of SyStemix' value. Sandoz has declined this invitation to
negotiate, and has further declined to provide any analysis of its own of the
value of the Company's technology, its clinical program or its market prospects.
Under these circumstances, the Independent Directors believe that they had no
alternative but to reject the Offer.
The Independent Directors remain willing to discuss an acquisition by
Sandoz at an appropriate price.
THE INDEPENDENT DIRECTORS
19
