<PAGE>
- -------------------------------------------------------------------------------
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 June 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 14,489,019 as of July 31, 1996.
<PAGE>
SYSTEMIX, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets of the Company
as of June 30, 1996 and December 31, 1995 3
Consolidated statements of operations of the Company
for the three and six month periods ended June 30, 1996
and 1995 4
Condensed consolidated statements of cash flows of the
Company for the six months ended June 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 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 16
2
<PAGE>
SYSTEMIX, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
----------- -------------
CURRENT ASSETS
Cash and cash equivalents $34 $1,679
Short-term investments 59,252 65,836
Accounts receivable 264 256
Prepaid expenses and other current assets 1,118 1,336
----------- -------------
TOTAL CURRENT ASSETS 60,668 69,107
Net property and equipment 46,595 50,553
Deposits and other assets 568 542
----------- -------------
$107,831 $120,202
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $5,634 $6,681
Current portion of capital lease obligation 1,910 1,831
Deferred revenue from related party 11,410 3,097
Current portion of accrued rent 56 69
----------- -------------
TOTAL CURRENT LIABILITIES 19,010 11,678
Noncurrent portion of capital lease obligation 4,542 5,518
Accrued rent, less current portion 4,681 4,536
STOCKHOLDERS' EQUITY
Common stock 165 157
Additional paid in capital 246,684 246,536
Deferred compensation (329) (404)
Unrealized gain on short-term investments 264 390
Accumulated deficit (167,186) (148,209)
----------- -------------
TOTAL STOCKHOLDERS' EQUITY 79,598 98,470
----------- -------------
$107,831 $120,202
=========== =============
See accompanying notes.
3
<PAGE>
SYSTEMIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1996 1995 1996 1995
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Collaborative research from related party $2,534 $ 2 $ 3,860 $ 252
Collaborative research 130 -- 195 --
Research grants 34 601 64 681
Contract testing -- 67 -- 161
Other 29 -- 79 --
-------- ---------- ---------- ----------
TOTAL REVENUES 2,727 670 4,198 1,094
EXPENSES
Research and development:
Collaborative research 2,664 -- 4,690 506
Research grants 34 601 64 681
Gene therapy joint venture -- 999 -- 2,078
Company-sponsored 7,440 9,485 15,853 19,714
-------- ---------- ---------- ----------
Total research and development 10,138 11,085 20,607 22,979
General and administrative 1,823 2,143 3,809 3,907
-------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 11,961 13,228 24,416 26,886
-------- ---------- ---------- ----------
LOSS FROM OPERATIONS (9,234) (12,558) (20,218) (25,792)
Other income (net) 603 1,090 1,241 1,793
-------- ---------- ---------- ----------
NET LOSS ($8,631) ($11,468) ($18,977) ($23,999)
======== ========== ========== ==========
NET LOSS PER SHARE ($.60) ($.79) ($1.31) ($1.71)
======== ========== ========== ==========
SHARES USED IN COMPUTING NET LOSS
PER SHARE 14,475 14,426 14,471 14,016
======== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
SYSTEMIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($18,977) ($23,999)
ADJUSTMENTS TO RECONCILE NET CASH USED BY
OPERATING ACTIVITIES:
Depreciation and amortization 4,931 4,141
Changes in certain assets/liabilities:
Accounts receivable (8) (386)
Prepaid expenses and other current assets 218 253
Investment in gene therapy joint venture -- 408
Deposits and other assets (26) 3
Accounts payable and other liabilities (915) (2,753)
Deferred revenue 8,313 (252)
--------- ---------
Total adjustments 12,513 1,414
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (6,464) (22,585)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (898) (2,430)
Net change in investments 6,458 (24,488)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,560 (26,918)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (897) (822)
Net proceeds from issuance of common stock 156 79,564
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (741) 78,742
--------- ---------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (1,645) 29,239
Cash and cash equivalents at beginning of period 1,679 1,474
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $34 $30,713
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Deferred compensation related to the issuance
of stock options -- $292
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the period $303 $376
========= =========
See accompanying notes.
5
<PAGE>
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 June 30, 1996, the statements of operations
and cash flows for the three and six month periods ended June 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 pre-symptomatic 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 agreement, elected to have Sandoz fund all
of the Company's obligation, to be repaid out of future profits, if
any, of the project. As a result, the Sandoz funding is being
treated as collaborative research revenues. Revenue earned under
the HIV Gene Therapy Collaboration was $3.86 million for the six
months ended June 30, 1996.
Sandoz Biotech Holdings Corporation, an indirect wholly-owned
subsidiary of Sandoz Ltd., is a significant shareholder of the
Company.
6
<PAGE>
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 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
<PAGE>
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 and other infectious
diseases and genetic 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.
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 late December 1995, the Company decided
to suspend patient accruals and transplants in this trial due to
concerns related to cell viability associated with procedures used
for handling and storage of cells at the clinical site, and notified
the Food and Drug Administration ("FDA") accordingly. The
engraftment results from transplants which had already occurred in
this study were unaffected by these issues. In July 1996, the
Company terminated this study at the University of Arkansas after
extensive review and evaluation of the site's records.
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. During 1996, the Company expects to initiate
additional clinical trials in cellular therapies for genetic
diseases, cancer, and possibly autoimmune disease, as well as file an
investigational new drug ("IND") application for cell-based gene
therapy for 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, including but not limited
to: the success of its R&D efforts; integration of new technologies
into its manufacturing operations; clinical trial results; the
lengthy and uncertain regulatory approval process for clinical trials
and products; uncertainties and costs associated with obtaining and
enforcing patents and protecting intellectual property important to
the Company's business; competition from other companies' products;
and the availability of capital to fund the Company's operations.
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 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,
8
<PAGE>
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 and will be sufficient
to allow the Company's products or therapies to be marketed on a
competitive basis.
When used in this discussion and in the overview section above, the
words '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 above, 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.
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. Per
the terms of the amended stock acquisition agreement, Sandoz Biotech
is prohibited until December 16, 1998 from increasing its
shareholding 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%. 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 approved by a majority of
the Company's independent directors.
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 is $17.00 per share. Sandoz Biotech currently holds
approximately 10,610,099 of the outstanding shares of the Company.
The proposal from Sandoz Biotech is subject to approval by a majority
of the independent members of the Company's Board of Directors.
Sandoz Biotech, at its discretion, can amend or withdraw the proposal
at any time; there is no required time as to receiving a response.
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 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)
9
<PAGE>
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
pre-symptomatic 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 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. As a result, the Sandoz funding is being treated as
collaborative research revenues. The Company expects to file an IND
for this program's first product candidate by the end of 1996.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Total revenues for the three months ended June 30, 1996 were $2.73
million compared to $670,000 in 1995. Collaborative research
revenues from related parties for the three months ended June 30,
1996 in the amount of $2.53 million were earned under the HIV Gene
Therapy Collaboration with Sandoz. 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. As a result, the Sandoz funding is treated as
collaborative research revenues. For the three months ended June 30,
1995, collaborative revenues of $2,000 were earned in conjunction
with the November 1993 agreement regarding the testing of therapeutic
anti-viral agents for HIV infection (the "Anti-virals
Collaboration"). In September 1995, the Company and Genentech, Inc.
("Genentech") entered into a one-year collaborative agreement whereby
the Company provides specified testing and analysis of clinical
samples. Revenue earned under the Company's collaboration with
Genentech agreement was $130,000 for the three months ended June 30,
1996. 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.
Research grant revenues were $34,000 for the three months ended June
30, 1996 as compared to $601,000 for the same period in 1995.
Revenues generated by research grants are determined by the timing of
the grant award from the issuing agency as well as the level of
effort dedicated to the research projects as determined by internal
staffing requirements. As a result, research grant revenues vary
considerably from period to period and are not predictive of research
grant revenues to be earned in future periods.
Contract testing revenues for the three months ended June 30, 1995
were $67,000. Contract testing revenues were earned under an
anti-HIV drug testing contract with the National Institutes of Health
(the "NIH"). In May 1995, the Company and the NIH mutually agreed to
terminate the contract. In July 1995, the Company licensed its
SCID-hu mouse model to the University of California, San Francisco,
the Gladstone Institute (the "Gladstone"), which will now perform the
tests for the NIH directly. In July 1995, the Company and the
Gladstone entered into a one-year supply agreement, which has been
extended through June 30, 1997, whereby the Company would supply the
Gladstone with the SCID-hu mouse model. Revenues earned under this
supply agreement for the three months ended June 30, 1996 were
$29,000. Future revenues are dependent upon the number of drug
candidates supplied by the NIH to the Gladstone and are therefore not
predictive from period to period.
Total operating expenses for the three months ended June 30, 1996
were $11.96 million compared to $13.23 million for the same period in
1995. R&D expenses, including pilot manufacturing and cell
processing operations, were $10.14 million for the three months ended
June 30, 1996 as compared to $11.09 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 be maintained at the current
spending level or slightly increase as clinical development efforts
progress and pilot manufacturing and clinical trials activities
increase. General and administrative ("G&A") expenses were $1.82
million for the three months ended June 30,
10
<PAGE>
1996 as compared to $2.14 million in 1995. 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 $603,000 for the three months ended June
30, 1996 compared to $1.09 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 three months ended June 30, 1996, the Company incurred a net
loss of $8.63 million compared to $11.47 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Total revenues for the six months ended June 30, 1996 were $4.20
million compared to $1.09 million in 1995. Collaborative research
revenues from related parties for the six months ended June 30, 1996
in the amount of $3.86 million were earned under the HIV Gene Therapy
Collaboration with Sandoz. 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. As a result, the Sandoz funding is treated as
collaborative research revenues. For the six months ended June 30,
1995, collaborative revenues of $252,000 were earned in conjunction
with the Anti-virals Collaboration. The Anti-virals Collaboration
was terminated by mutual agreement March 31, 1995. In September
1995, the Company and Genentech entered into a one-year collaborative
agreement whereby the Company provides specified testing and analysis
of clinical samples. Revenue earned under this agreement was
$195,000 for the six months ended June 30, 1996. 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.
Research grant revenues were $64,000 for the six months ended June
30, 1996 as compared to $681,000 for the same period in 1995.
Revenues generated by research grants are determined by the timing of
the grant award from the issuing agency as well as the level of
effort dedicated to the research projects as determined by internal
staffing requirements. As a result, research grant revenues vary
considerably from period to period and are not predictive of research
grant revenues to be earned in future periods.
Contract testing revenues for the six months ended June 30, 1995 were
$161,000. Contract testing revenues were earned under an anti-HIV
drug testing contract with the NIH. In May 1995, the Company and the
NIH mutually agreed to terminate the contract. In July, 1995, the
Company licensed its SCID-hu mouse model to the Gladstone, which now
performs the tests for the NIH directly. In July 1995, the Company
and the Gladstone entered into a one-year supply agreement, which has
been extended through June 30, 1997, whereby the Company would supply
the Gladstone with the SCID-hu mouse model. Revenues earned under
this supply agreement for the six months ended June 30, 1996 were
$79,000. Future revenues are dependent upon the number of drug
candidates supplied by the NIH to the Gladstone and are therefore not
predictive from period to period.
Total operating expenses for the six months ended June 30, 1996 were
$24.42 million compared to $26.89 million for the same period in
1995. R&D expenses, including pilot manufacturing and cell
processing operations, were $20.61 million for the six months ended
June 30, 1996 as compared to $22.98 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 be maintained at the current
spending level or slightly increase as clinical development efforts
progress and pilot manufacturing and clinical trials activities
increase. G&A expenses were $3.81 million for the six months ended
June 30, 1996 as compared to $3.91 million in 1995. Prior to the
conversion of Progenesys into an R&D collaboration in August 1995,
the Company was able to allocate a portion
11
<PAGE>
of its G&A expenses to Progenesys. As a result of the conversion to
an R&D collaboration, G&A expenses attributable to the HIV Gene
Therapy Collaboration are recognized as collaborative research
revenues. 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 $1.24 for the six months ended June 30,
1996 compared to $1.79 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 six months ended June 30, 1996, the Company incurred a net
loss of $18.98 million compared to $24.00 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 June 30, 1996,
cash, cash equivalents and investments, which consist primarily of
U.S. Government obligations and corporate debt securities were $59.29
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
$6.46 million for the six months ended June 30, 1996, compared to
$22.59 million for the six months ended June 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 six months ended June 30, 1996, the Company
invested $898,000 in facility improvements and capital equipment
compared to $2.43 million for the six months ended June 30, 1995.
As of June 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.
12
<PAGE>
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.
The suits 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 captions,
civil action numbers and filing dates of the lawsuits are as follows:
Gwen Werbowsky v. Sandoz Ltd. et al., C.A. No. 15014, May 24, 1996;
James Vosler v. SyStemix, Inc. et al., C.A. No. 15016, May 24, 1996;
Joseph Cincotta v. Sandox Ltd. et al., C.A. No. 15018, May 28, 1996
Crandon Capital Partners v. Joseph J. Ruvane, Jr. et al., C.A. No.
15019, May 28, 1996;
David Rosenberg v. Joseph J. Ruvane, Jr. et al., C.A. No. 15020,
May 28, 1996; and
Kevin Tracy v. Urs Barlocher et al., C.A. No. 15024, May 30,
1996.
The litigation could result in substantial expense to the Company and
significant diversion of efforts of the Company's management team.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 1996, the Company conducted its 1996 Annual Meeting
of Shareholders pursuant to due notice. A quorum being present
either in person or by proxy, the stockholders voted on the
following matters:
1. To elect four directors to hold office as Class II directors
for three-year terms expiring on the date of the 1999 Annual
Meeting of Stockholders and, in each case, until their successors
are duly elected and qualified.
2. To ratify the selection of Ernst and Young LLP as the
Company's independent auditors for the fiscal year
ending December 31, 1996.
No other matters were voted on. The number of votes cast as to each
above matter was:
FOR WITHHOLD AUTHORITY
------------ --------------------
1. Election of Directors:
Class II:
Harold Edgar 12,561,678 6,664
Paul L. Herrling 12,557,310 11,032
Ulrich Oppikofer 12,561,110 7,232
Irving L. Weissman 12,561,678 6,664
13
<PAGE>
In addition, Edgar J. Fullagar, Daniel L. Vasella, and Edgar Schollmaier
serve as Class III directors, to serve until the 1997 Annual Meeting of
Stockholders, and Joseph J. Ruvane, Jr., John J. Schwartz, Stephen
Guttman, and Fred Meyer serve as Class I directors until the 1998
Annual Meeting of Shareholders.
FOR AGAINST ABSTAIN
------------ --------- -----------
2. Ratification of Ernst &
Young LLP as independent
auditors for the fiscal
year ending December 31,
1996 12,559,624 3,839 4,879
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 May 13, 1988 (A)
4.4 Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the State of
Delaware on August 24, 1988 (A)
4.5 Certificate of Designation of Preferences of Series A
and Series B Preferred Stock of the Company filed with
the State of Delaware on August 26, 1988 (A)
4.6 Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the State of
Delaware on December 9, 1988 (A)
4.7 Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the State of
Delaware on February 16, 1990 (A)
4.8 Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the State of
Delaware on June 7, 1990 (A)
4.9 Certificate of Designation of Preferences of Series C
Preferred Stock of the Company filed with the State of
Delaware on June 7, 1990 (A)
4.10 Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the State of
Delaware on July 9, 1991 (A)
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 (G)
10.3 Acquisition Agreement, dated as of December 16, 1991,
among Sandoz Ltd., Sandoz Biotech Holdings Corporation
and SyStemix, Inc. (D)
10.6 Registration Rights Agreement, dated as of December 16,
1991, among SyStemix, Inc., and Eli S. Jacobs, The Aetna
Casualty and Surety Company and The Standard Fire
Insurance Company (D)
10.7 Confidentiality Agreement, dated as of September 30, 1991,
between Sandoz Pharma Ltd. and SyStemix, Inc. (D)
10.8 Confidentiality Agreement, dated as of December 2, 1991,
between Sandoz Pharma Ltd. and SyStemix, Inc. (D)
10.11 Consulting Agreement, dated as of December 16, 1991,
between SyStemix, Inc. and Irving L. Weissman (D)
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
14
<PAGE>
SyStemix, Inc. and Linda D. Sonntag, Ph.D.
10.16 Stock and Warrant Purchase Agreement, dated as of
January 30, 1995 between SyStemix, Inc., Sandoz Ltd.
and Sandoz Biotech Holding Corporation (B)
10.17 Employment Agreement, dated as of March 29, 1995, between
SyStemix, Inc. and John Schwartz (F)
10.18 Declaration of Dissolution of Sandoz-SyStemix Gene
Therapy of HIV Partnership, dated September 14, 1995 (H)
10.19 Research and Development Collaboration Agreement, dated
as of August 31, 1995, between SyStemix, Inc. and Sandoz
Pharmaceuticals Corporation (H)
27 Financial Data Schedule
(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-Q for the
quarter ended March 31, 1995, filed on May 11, 1995.
(G) Incorporated by reference to the Company's Form S-8
Registration Statement (Registration No. 33-93906)
filed on June 23, 1995.
(H) 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
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on May 31,1996, which reported under Item 5, the
unsolicited proposal from Sandoz Ltd. to aquire all of the outstanding
shares of the Company that are not owned by Sandoz. The proposed
purchase price is $17 per share.
15
<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: August 8, 1996 SYSTEMIX, INC.
By: /s/ JAMES T. DEPALMA
---------------------------
James T. DePalma
Controller (Principle Accounting
Officer) and Duly Authorized Officer
16
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 34
<SECURITIES> 59,252
<RECEIVABLES> 264
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,668
<PP&E> 72,650
<DEPRECIATION> 26,055
<TOTAL-ASSETS> 107,831
<CURRENT-LIABILITIES> 19,010
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 79,433
<TOTAL-LIABILITY-AND-EQUITY> 107,831
<SALES> 0
<TOTAL-REVENUES> 4,198
<CGS> 0
<TOTAL-COSTS> 24,416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,241)
<INCOME-PRETAX> (20,218)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,977)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
