<PAGE>
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 March 31, 1998.
---------------
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 0-27976.
GalaGen Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1719104
---------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 Lexington Ave. North
Arden Hills, Minnesota 55126
-------------------------- --------
(Address of principal executive offices) (Zip Code)
(612) 481-2105
----------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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, $.01 par
value--7,992,795 shares as of May 1, 1998.
1
<PAGE>
INDEX
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1998 and December 31, 1997. . . . . . 3
Statements of Operations - Three months ended
March 31, 1998 and March 31, 1997 and for the period
November 17, 1987 (inception) through March 31, 1998. . . . . . 4
Statements of Cash Flows - Three months ended
March 31, 1998 and March 31, 1997 and for the period
November 17, 1987 (inception) through March 31, 1998. . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.. . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 749,020 $ 155,908
Available-for-sale securities. . . . . . . . . . . . . . . 5,923,556 7,511,619
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 45,519 196,672
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 6,718,095 7,864,199
Property, plant and equipment. . . . . . . . . . . . . . . . 1,895,097 1,869,974
Less accumulated depreciation. . . . . . . . . . . . . . . (471,831) (363,355)
------------ ------------
1,423,266 1,506,619
Deferred expenses. . . . . . . . . . . . . . . . . . . . . . 153,427 158,953
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 8,294,788 $ 9,529,771
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 364,786 $ 559,498
Note payable . . . . . . . . . . . . . . . . . . . . . . . 248,005 238,250
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 53,510 38,129
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . 666,301 835,877
Commitments
Convertible notes, net of discount . . . . . . . . . . . . . 722,908 1,071,818
Note payable, long term portion. . . . . . . . . . . . . . . 858,218 923,998
Other long-term liabilities. . . . . . . . . . . . . . . . . 45,000 45,000
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none. . . . . . . . . . - -
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 7,962,198 at
March 31, 1998; 7,234,974 in 1997. . . . . . . . . . . 79,622 72,350
Additional paid-in capital . . . . . . . . . . . . . . . . . 60,182,342 59,669,586
Deficit accumulated during the development stage . . . . . . (54,036,149) (52,819,054)
Deferred compensation. . . . . . . . . . . . . . . . . . . . (223,454) (269,804)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 6,002,361 6,653,078
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . $ 8,294,788 $ 9,529,771
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17, 1987
(INCEPTION) TO
THREE MONTHS ENDED MARCH 31 MARCH 31,
--------------------------------
1998 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales. . . . . . . . . . . . . . . . . . . . $ 3,050 $ - $ 1,452,643
Product royalties. . . . . . . . . . . . . . . . . . - - 62,747
Research and development revenues. . . . . . . . . . - - 396,350
------------ ------------ -------------
3,050 - 1,911,740
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . 1,525 - 3,470,236
Research and development . . . . . . . . . . . . . . 608,368 1,119,214 27,739,721
General and administrative . . . . . . . . . . . . . 514,911 573,996 16,529,507
------------ ------------ -------------
1,124,804 1,693,210 47,739,464
------------ ------------ -------------
Operating loss . . . . . . . . . . . . . . . . . . . . (1,121,754) (1,693,210) (45,827,724)
Interest income. . . . . . . . . . . . . . . . . . . . 124,549 116,282 1,330,223
Interest expense . . . . . . . . . . . . . . . . . . . (219,890) - (2,847,225)
------------ ------------ -------------
Net loss before extraordinary gain . . . . . . . . . . (1,217,095) (1,576,928) (47,344,726)
Extraordinary gain on extinguishment of debt . . . . . - - 605,421
Net loss for the period and deficit accumulated
during the development stage. . . . . . . . . . . . . (1,217,095) (1576,928) (46,739,305)
Less preferred stock dividends . . . . . . . . . . . . - - (7,296,844)
------------ ------------ --------------
Net loss applicable to common stockholders . . . . . . $ (1,217,095) $ (1,576,928) $ (54,036,149)
------------ ------------ -------------
------------ ------------ -------------
Net loss per share applicable to common stockholders
Basic and Diluted . . . . . . . . . . . . . . . . $ (0.16) $ (0.22) $ (19.87)
Weighted average number of common shares outstanding
Basic and Diluted . . . . . . . . . . . . . . . . 7,506,438 7,163,769 2,719,613
</TABLE>
See accompanying notes.
4
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17, 1987
THREE MONTHS ENDED MARCH 31 (INCEPTION) TO
------------------------------- MARCH 31,
1998 1997 1997
--------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (1,217,095) $ (1,576,928) $ (54,036,149)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . 384,197 87,410 2,774,954
Preferred stock dividend . . . . . . . . . . . . . . - - 7,296,844
Warrants issued, net . . . . . . . . . . . . . . . . - - 907,064
Extraordinary gain on extinguishment of debt . . . . - - (605,421)
Equity/debt issued for services. . . . . . . . . . . - - 2,990,615
Changes in operating assets and liabilities. . . . . (67,387) (672,688) 1,283,731
------------ ------------ -------------
Net cash used in operating activities. . . . . . . . . ( 900,285) (2,162,206) (39,388,362)
------------ ------------ -------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment. . . . . . . (25,122) (283,862) (3,748,011)
Change in available-for-sale securities, net . . . . . 1,588,063 1,130,696 (5,923,556)
------------ ------------ -------------
Net cash provided (used) by investing activities . . 1,562,941 846,834 (9,671,567)
------------ ------------ -------------
FINANCING ACTIVITIES:
Proceeds from sale of stock, net of offering costs . . 11,867 - 32,353,970
Proceeds/payment from/on note payable. . . . . . . . . (81,411) - 17,454,979
------------ ------------ -------------
Net cash provided by financing activities. . . . . . . (69,544) - 49,808,949
------------ ------------ -------------
Increase (decrease) in cash. . . . . . . . . . . . . . 593,112 (1,315,372) 749,020
Cash and cash equivalents at beginning of period . . . 155,908 3,869,549 -
------------ ------------ -------------
Cash and cash equivalents at end of period . . . . . . $ 749,020 $ 2,554,177 $ 749,020
------------ ------------ -------------
------------ ------------ -------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Discount valuation for convertible debentures. . . . . $ - $ - $ 500,182
Valuation of issued options and warrants. . . . . . . - 33,333 287,583
Deferred compensation recognized for employee options. - - 1,657,000
Deferred compensation adjustment for canceled options. - - 297,000
Conversion of convertible promissory notes plus related
accrued interest, net of financing costs. . . . . . . 508,161 - 9,372,986
</TABLE>
See accompanying notes.
5
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal, recurring accruals) considered necessary
for fair presentation have been included. Operating results for the three
months ended March 31, 1998, are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These financial
statements should be read in conjunction with the audited financial
statements and accompanying notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
2. CASH AND CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments
purchased at cost, which approximate market, with original maturities of
three months or less.
3. INVESTMENTS
Investments in debt securities with a remaining maturity of more
than three months at the date of purchase are classified as marketable
securities. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as
available-for-sale as of March 31, 1998. The book value of the investments
approximates their estimated market value. The estimated market value of
investments by security type is as follows:
<TABLE>
<CAPTION>
ESTIMATED MARKET VALUE
AS OF MARCH 31, 1998
<S> <C>
U.S. Treasury securities $ 4,220,377
Corporate debt securities 1,193,945
U.S. Government agency securities 509,234
-----------
$ 5,923,556
-----------
-----------
</TABLE>
All investments have a contractual maturity of one year or less.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation
and amortization are provided for on the straight line method.
6
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformance
with Financial Accounting Standards Board Statement No. 128.
6. COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Statement No. 130,
REPORTING COMPREHENSIVE INCOME. Statement No. 130 established new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or shareholder's equity.
7. CONVERTIBLE DEBENTURES
In November 1997, the Company raised $1,500,000 through the
private placement sale of 6% convertible debentures (the "Debentures") to
three institutional investors pursuant to Regulation D under the Securities
Act of 1933. The principal and interest of the Debentures can be converted
into shares of the Company's common stock at 82.5% of the lowest closing
bid price of the Company's common stock three days prior to conversion.
One-third of the Debentures can convert to common stock upon the effective
date of registration, one-third after five months from the closing date and
the remaining one third twelve months after the closing date or nine months
if the price of the common stock does not average at least $2.00 per share
in the eighth month after closing. An aggregate maximum of 1,400,000
discounted shares of common stock (the "Discounted Shares") can be issued
upon the conversion of the Debentures, with each investor owning at any
given time a maximum of 4.99% of the then issued and outstanding shares of
common stock. If there remains any unconverted principal and accrued
interest due to all the Discounted Shares being issued, the Company has the
obligation to repay the investors, in the aggregate, a maximum principal of
$500,000. The Debentures automatically convert into the Discounted Shares
eighteen months from the closing date. Five-year warrants were issued to
the investors to purchase, in the aggregate, 200,000 shares of common stock
at 110% of the market value of the common stock on the closing date. The
value of the warrants plus the value of the discount of the Discounted
Shares was $500,182, which the Company is amortizing to interest expense
over the term of the Debentures. A deferred expense was recorded for
$144,467, which represents costs associated with closing the Debentures.
These deferred expenses are being amortized until the Debentures are
converted into Discounted Shares. For the four months ended April 30,
1998, $559,500 of Debenture principal plus accrued interest was converted
into 749,140 shares of common stock. The net carrying value of the
Debentures approximates fair market value. In connection with this
private placement, the Company has reserved 1,129,062 shares of common
stock for issuance.
7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Item contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Risk Factors" below,
that could cause actual results to differ materially from those projected.
Because actual results may differ, readers are cautioned not to place undue
reliance on these forward-looking statements. Certain forward-looking
statements are indicated below by an asterisk.
GENERAL
GalaGen is focusing its emphasis on nutritional products and is utilizing
its expertise in its platform antibody technology to develop a portfolio of
proprietary nutritional products, including dietary supplements, which
incorporate its Proventra-TM- Brand Natural Immune Components. These products
will target needs of both consumers and healthcare professionals. These
antibodies used in nutritional products are food proteins that are derived from
the milk collected in the first few milkings of a dairy cow after its calf is
born. Using its proprietary procedures, the Company has produced antibodies
that target specific pathogens infecting the human gastrointestinal tract,
including bacteria and their toxins, parasites, fungi and viruses. Because the
Company's antibodies are derived from cows' milk, they do not represent new
chemical compounds with uncertain toxicity, but rather their components are
commonly found in dairy foods that are already widely consumed.
RECENT DEVELOPMENTS
In December 1997, the Company introduced Basics Plus, a dietary supplement
product, in conjunction with its marketing and manufacturing partner, Lifeway
Foods. Basics Plus is the first product to emerge from the collaboration with
Lifeway Foods, Inc. and contains active beneficial kefir cultures and GalaGen's
Proventra-TM- Brand Natural Immune Components ("Proventra").
In March 1998, the Company and Land O'Lakes, Inc. ("LAND O'LAKES"), the
large food and agricultural cooperative from which GalaGen was spun-out in
1992, signed an amended and restated license agreement (the "Restated
License") in which the Company has significantly broadened its rights to
develop and market functional foods, which include nutritional products.
Under the Restated License, the Company can use, improve, exploit, license or
share existing Procor Technologies, Inc. (the Company's predecessor,
"Procor") technology, Procor technology improvements and new technologies, as
defined, in all areas of functional foods except under certain "reserved food
product" and "first refusal food product" categories, as defined. If the
Company intends to engage in manufacturing or marketing any "first refusal
food product", the Company must give Land O'Lakes notice of its intent, in
which case Land O'Lakes can negotiate with the Company, in good faith and
within a defined period of time, to undertake any part of the manufacturing
or marketing areas. If the Company intends to engage in manufacturing or
marketing any "reserved food product", the Company must give Land O'Lakes
notice of its intent and must only work with Land O'Lakes to undertake the
manufacturing or marketing of such products.
In May 1998, the Company announced that it is entering into a consumer
product development agreement with Land O'Lakes. Under terms of the
agreement, the two companies will collaborate on the development of yogurt
products containing GalaGen's Proventra-TM-. This collaboration will
initially focus on developing a yogurt product with unique benefits for
women. GalaGen will supply its Proventra-TM- and possibly other active
components, for this product.* The Company expects to be in regional test
8
<PAGE>
markets with this yogurt in late 1998 or early 1999, with Land O'Lakes providing
the product development, manufacturing, sales, distribution and marketing of the
product.* From this collaboration with Land O'Lakes, the Company expects to
incur increased marketing research expenses and increased marketing consulting
expenses.* The Company also expects to incur further product development and
marketing research expenses and outside legal expenses in 1998 associated with
the further development of certain consumer nutritional and clinical nutritional
beverage products.* The Company anticipates that two products, including its
yogurt product in conjunction with Land O'Lakes, will be introduced in regional
test markets in late 1998 or early 1999.*
In August 1997, the Company announced that it was placing its Sporidin-G
pharmaceutical clinical trial on hold due to continuing decline in the patient
population for the product's initial indication, AIDS-related CRYPTOSPORIDIUM
PARVUM infection. The decline was brought about by the effectiveness and
increased use of new AIDS therapies, including protease inhibitors and earlier
administration of combination therapy. In May 1998, the Company also
announced that it would limit further spending on development of
pharmaceutical products this year, believing that applying its technology
and resources toward nutritional product development will provide superior
shareholder value.* The Phase II dose ranging study for Diffistat-G, a
pharmaceutical treatment for antibiotic-associated diarrhea, has now provided
sufficient data for the design of future studies necessary for approval by
the U.S. Food and Drug Administration. As previously announced, subsequent
studies will only be implemented in collaboration with a corporate partner.*
The Company remains positive about the long-term value of its pharmaceutical
program and products, but believes that pharmaceutical development can be
best supported from corporate alliances.* The Company will continue to seek
partners for all of its pharmaceutical development products.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL. The net loss applicable to common stockholders decreased by
$359,833, or 22.8%, for the three months ended March 31, 1998, to $1,217,095
from $1,576,928 for the same period in 1997. The decrease was due primarily to
decreased spending on research and development associated with the Sporidin-G
clinical trial offset by increased interest expense from a line-of-credit and
outstanding convertible debentures, as discussed below. Historical spending
levels may not be indicative of future spending levels because the Company is
continuing its nutritional product development activity, which is planned to
include costs relating to product development activity, small-scale
manufacturing, clinical trial activity and market research.* For these reasons,
the Company believes its expenses and losses will increase before any material
product revenues are generated.* As discussed above, the Company will focus its
resources primarily on nutritional product development.*
REVENUES. For the three months ended March 31, 1998 revenues consisted
of $3,050 from sales of the Company's Proventra-TM- for use in Basics Plus.
The Company expects sales of Proventra-TM- to increase over the next three
quarters.*
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and development
decreased $510,846, or 45.6%, for the three months ended March 31, 1998 to
$608,368 from $1,119,214 for the three months ended March 31, 1997. Expenses
associated with research, development and clinical expenses for Sporidin-G,
Diffistat-G and other pharmaceutical products decreased approximately $450,000,
associated personnel expense decreased approximately $190,000 and quality
validation and procurement expenses decreased approximately $50,000 for the
three months ended March 31, 1998. These decreases were offset by increased
pilot plant depreciation expenses from the completion of the Company's pilot
plant facility in July 1997 of approximately $91,000 and increased nutritional
product development expense of approximately $88,000.
9
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $59,085, or 10.3%, for the three months ended March 31, 1998 to
$514,911 from $573,996 for the first quarter of 1997. Approximately $50,000 of
the decrease was from decreased legal counsel services.
INTEREST INCOME. Interest income was $124,549 for the three months ended
March 31, 1998 and $116,282 for the same period in 1997. The $8,267 increase in
interest income was from increased investment returns.
INTEREST EXPENSE. Interest expense was $219,890 for the three months
ended March 31, 1998 and zero for the same period in 1997. Interest expense
for the first quarter of 1998 consisted of approximately $151,000 of
amortization expense associated with Company's convertible debentures (see
Note 7 in Notes to Financial Statements), approximately $19,000 of accrued
interest expense on the outstanding convertible debentures and approximately
$50,000 of interest expense associated with the Company's line-of-credit
which was established in June 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company was incorporated in March 1992. On July 24, 1992, Procor was
merged with and into the Company (the "Procor-GalaGen Merger"). At the time of
the Procor-GalaGen Merger, Procor was a wholly-owned subsidiary of Land O'Lakes.
Since the Company's inception through March 31, 1998 investments in the Company
have totaled approximately $53.1 million, including approximately $7.1 million
of inter-company obligations payable to Land O'Lakes which were forgiven and
recorded as contributed capital at the time of the Procor-GalaGen Merger, $17.9
million from the Company's initial public offering (the "Offering") after
deducting underwriting discounts and offering expenses and approximately $28.1
million from private placements of equity and convertible debt and from
conversion of accrued interest on such debt and the exercise of stock options
and warrants. The Company has invested funds received in the Offering and these
private placements in investment-grade, interest-bearing obligations.
Cash used in operating activities decreased by $1,261,921 or 58.4%, for the
three months ended March 31, 1998 to $900,285 from $2,162,206 for the same
period in 1997. Cash used in operations for the three month period ended March
31, 1998 went primarily to fund operating losses. For the three month period
ended March 31, 1997 cash used in operations went primarily to fund operating
losses and for repayment of certain current liabilities.
For the three months ended March 31, 1998 the Company redeemed $1,588,063
of its available-for-sale securities and invested $25,122 in equipment related
to the Company's pilot plant manufacturing facility. For the same period in
1997 the Company invested $249,797 in the pilot plant manufacturing facility and
$34,065 in lab equipment, computer equipment and software and furniture used to
support the Company's operations.
The Company anticipates that its existing resources and interest thereon
will be sufficient to satisfy its anticipated cash requirements through
approximately the first quarter of 1999.* The Company's working capital and
capital requirements will depend upon numerous factors, including the
progress of the Company's market research, product development and ability to
obtain partners with the appropriate manufacturing, sales, distribution and
marketing capabilities.* The Company's capital requirements also will depend
on the levels of resources devoted to the development of manufacturing
capabilities, technological advances, the status of competitive products and
the ability of the Company to establish partners or strategic alliances to
provide funding to the Company for certain manufacturing, sales, product
development and marketing activities.*
10
<PAGE>
The Company expects to incur substantial additional product development
and other costs, including costs related to clinical studies and marketing
activities.* Capital expenditures may be necessary to obtain licensure of the
existing pilot plant facility and to establish additional commercial scale
manufacturing facilities. The Company will need to raise substantial
additional funds for longer-term product development, manufacturing and
marketing activities that may be required in the future. The Company's
ability to continue funding its planned operations beyond the first quarter
of 1999 is dependent upon its ability to generate product revenues or to
obtain additional funds through equity or debt financing, strategic
alliances, license agreements or from other financing sources.* A lack of
adequate revenues or funding could eventually result in the insolvency or
bankruptcy of the Company.* At a minimum, if adequate funds are not
available, the Company may be required to delay or to eliminate expenditures
for certain of its product development efforts or to license to third parties
the rights to commercialize products or technologies that the Company would
otherwise seek to develop itself. Because of the Company's significant
long-term capital requirements, it may seek to raise funds when conditions
are favorable, even if it does not have an immediate need for such additional
capital at such time. If the Company has not raised funds prior to such time
as the Company's needs for funding become immediate, the Company may be
forced to raise funds when conditions are unfavorable which could result in
substantial dilution to the Company's current stockholders.*
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the first quarter ended March 31, 1998 contains
certain forward looking statements within the meaning of Section 21E of the
Exchange Act. Such forward-looking statements are based on the beliefs of
the Company's management as well as on assumptions made by and information
currently available to the Company at the time such statements were made.
When used in this Form 10-Q, the words "anticipate", "believe", "estimate",
"expect", "intend" and similar expressions, as they relate to the Company,
are intended to identify such forward-looking statements. Although the
Company believes these statements are reasonable, readers of this Form 10-Q
should be aware that actual results could differ materially from those
projected by such forward-looking statements as a result of the risk factors
listed below and set forth in the Company's Annual Report on Form 10-K for
1997 ("Form 10-K") under the caption "Risk Factors." Readers of this Form
10-Q should consider carefully the factors listed below and under the caption
"Risk Factors" in the Company's Form 10-K, as well as the other information
and data contained in this Form 10-Q. The Company cautions the reader,
however, that such list of factors under the caption "Risk Factors" in the
Company's Form 10-K may not be exhaustive and that those or other factors,
many of which are outside of the Company's control, could have a material
adverse effect on the Company and its results of operations. Factors that
could cause actual results to differ include, without limitation, the
Company's ability to generate sufficient working capital and obtain necessary
financing, the Company's ability to form strategic alliances with marketing
and distribution partners, the Company's exposure to product liability
claims, consumers' perception of product safety and quality, the Company's
reliance on flawed market research, potential competitors that are larger and
financially stronger, the Company's ability to receive regulatory approval
for its products and the Company's ability to manufacture an acceptable
product on a commercial scale. All forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in
their entirety by the cautionary statements set forth hereunder and under the
caption "Risk Factors" in the Company's Form 10-K.
RISK FACTORS
Certain statements made above, including those indicated by an asterisk
(some of which are summarized below), are forward-looking statements that
involve risks and uncertainties, and actual results may differ. Factors that
could cause actual results to differ include those identified below.
EXPECTATION THAT TWO ADDITIONAL PRODUCTS WILL BE IN REGIONAL TEST MARKETS
IN LATE 1998 OR EARLY 1999. The timing of product introduction into test markets
is dependent upon the Company's ability to successfully finalize market research
and product development, with or without a partner or strategic alliance, and to
obtain a partner that has the ability to either provide final product
manufacturing,
11
<PAGE>
marketing, sales and distribution activities or the ability to provide the
funding necessary to obtain those activities. The inability of the Company
to bring these two additional products to regional test markets in late 1998
or early 1999 could have a material adverse effect on the Company.
THE COMPANY ALSO EXPECTS TO INCUR FURTHER PRODUCT DEVELOPMENT AND MARKETING
RESEARCH EXPENSES AND OUTSIDE LEGAL EXPENSES IN 1998 ASSOCIATED WITH THE FURTHER
DEVELOPMENT OF CERTAIN CONSUMER NUTRITIONAL AND CLINICAL NUTRITIONAL BEVERAGE
PRODUCTS. The Company's product development length and cost is dependent upon,
to a certain degree, results of the Company's market research which may give the
Company certain indications of whom the Company's target customers may be and
what types of products they may desire.
ABILITY OF THE COMPANY TO SATISFY ITS ANTICIPATED CASH REQUIREMENTS THROUGH
APPROXIMATELY THE END OF THE FIRST QUARTER OF 1999. The Company's working
capital and capital requirements will depend upon numerous factors, including
the progress of the Company's product development programs and the timing and
cost of market research. The Company's capital requirements also will depend on
the levels of resources devoted to the development of manufacturing and
marketing capabilities, technological advances, the status of competitive
products and the ability of the Company to establish strategic alliances to
provide funding to the Company for certain manufacturing, sales, product
development and marketing activities. The inability of the Company to satisfy
its cash requirements could have a material adverse effect on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) ncorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Company issued to Incorporated By
Piper Jaffray Inc., dated January 26, 1993.(1) Reference
4.3 Warrant to purchase 20,312 shares of Common Stock of the Company issued to Gus Incorporated By
A. Chafoulias, dated October 12, 1993.(1) Reference
4.4 Warrant to purchase 20,312 shares of Common Stock of the Company issued to Incorporated By
John Pappajohn, dated October 12, 1993.(1) eference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Company issued to Cato Incorporated By
Holding Company, dated June 21, 1994.(1) Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Stock of the Incorporated By
Company, issued in connection with the sale of Convertible Promissory Reference
Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.11 Warrant to purchase 18,250 shares of Common Stock of the Company issued to IAI Incorporated By
Investment Funds VI, Inc. (IAI Emerging Growth Fund), dated January 30, Reference
1996.(1)
13
<PAGE>
4.12 Warrant to purchase 6,250 shares of Common Stock of the Company issued to IAI Incorporated By
Investment Funds IV, Inc. (IAI Regional Fund), dated January 30, 1996.(1) Reference
4.13 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
John Pappajohn, dated February 2, 1996.(1) Reference
4.14 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Edgewater Private Equity Fund, L.P., dated February 2, 1996.(1) Reference
4.15 Warrant to purchase 10,000 shares of Common Stock of the Company issued to Incorporated By
Joseph Giamenco, dated February 2, 1996.(1) Reference
4.16 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Gus A. Chafoulias, dated February 2, 1996.(1) Reference
4.17 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Land O'Lakes, Inc., dated February 2, 1996.(1) Reference
4.19 6% Convertible Debenture Purchase Agreement dated November 18, 1997 among the Incorporated By
Company and the Purchasers named therein.(8) Reference
4.20 Registration Rights Agreement dated November 18, 1997 among the Company and the Incorporated By
Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued to Libertyview Plus Fund dated Incorporated By
November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Libertyview Fund, LLC dated Incorporated By
November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated November 18, 1997.(13) Incorporated By
Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund dated November 18, Incorporated By
1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC dated November 18, Incorporated By
1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of December 1,1997.(16) Incorporated By
Reference
4.28 Warrant issued to CLARCO Holdings dated as of December 1,1997.(17) Incorporated By
Reference
4.29 Warrant issued to CLARCO Holdings dated as of December 1,1997.(18) Incorporated By
Reference
14
<PAGE>
#10.1 License Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
10.4 Master Services Agreement between the Company and Land O'Lakes dated May 7, Incorporated By
1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Chiron Incorporated By
Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Chiron Corporation Incorporated By
dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended.(2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Minnesota, N.A., dated Incorporated By
as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Corporation, dated Incorporated By
June 5, 1996.(2) Reference
10.12 Master Equipment Lease between the Company and Cargill Leasing Corporation, Incorporated By
dated June 6, 1996.(2) Reference
10.13 Agreement for Progress Payments between the Company and Cargill Leasing Incorporated By
Corporation, dated June 6, 1996.(2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, dated June 3, 1996.(2) Incorporated By
Reference
*10.15 Letter agreement with John G. Watson dated September 14, 1996.(3) Incorporated By
Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. dated November 1, Incorporated By
1996.(4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December 27, 1996.(4) Incorporated By
Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated January 15, 1997.(4) Incorporated By
Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Plan.(4) Incorporated By
Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Compensation Plan.(4) Incorporated By
Reference
15
<PAGE>
*10.21 GalaGen Inc. 1997 Incentive Plan.(6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Business Credit Incorporated By
Corporation dated June 8, 1997.(7) Reference
10.23 Amended and Restated License Agreement between the Company and Land O'Lakes Incorporated By
dated March 11, 1998.(19) Reference
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
23.1 Consent of Ernst & Young LLP.(19) Incorporated By
Reference
27.1 Financial Data Schedule for Quarter ended March 31, 1998. Electronic
Transmission
27.2 Restated Financial Data Schedule for Quarter ended March 31, 1996.(19) Incorporated By
Reference
99.1 Press release regarding first quarter 1998 results and Diffistat-G, Electronic
dated May 13, 1998. Transmission
</TABLE>
- --------------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the Company's
Registration Statement on
16
<PAGE>
Form S-3 (Registration No. 333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on Form S-3(Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1997 (File No. 0-27976).
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted to
the Company.
(b.) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
17
<PAGE>
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.
GalaGen Inc.
-------------
(Registrant)
Date: May 14, 1998 By: /s/ Robert A. Hoerr
--------------------
Robert A. Hoerr,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 By: /s/ Gregg A. Waldon
----------------------
Gregg A. Waldon,
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Company issued to Incorporated By
Piper Jaffray Inc., dated January 26, 1993.(1) Reference
4.3 Warrant to purchase 20,312 shares of Common Stock of the Company issued to Gus Incorporated By
A. Chafoulias, dated October 12, 1993.(1) Reference
4.4 Warrant to purchase 20,312 shares of Common Stock of the Company issued to Incorporated By
John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Company issued to Cato Incorporated By
Holding Company, dated June 21, 1994.(1) Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Stock of the Incorporated By
Company, issued in connection with the sale of Convertible Promissory Reference
Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Preferred Stock of Incorporated By
the Company issued to Chiron Corporation, dated March 29, 1995.(1) Reference
4.11 Warrant to purchase 18,250 shares of Common Stock of the Company issued to IAI Incorporated By
Investment Funds VI, Inc. (IAI Emerging Growth Fund), dated January 30, Reference
1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Company issued to IAI Incorporated By
Investment Funds IV, Inc. (IAI Regional Fund), dated January 30, 1996.(1) Reference
4.13 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
John Pappajohn, dated February 2, 1996.(1) Reference
19
<PAGE>
4.14 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Edgewater Private Equity Fund, L.P., dated February 2, 1996.(1) Reference
4.15 Warrant to purchase 10,000 shares of Common Stock of the Company issued to Incorporated By
Joseph Giamenco, dated February 2, 1996.(1) Reference
4.16 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Gus A. Chafoulias, dated February 2, 1996.(1) Reference
4.17 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Company issued to Incorporated By
Land O'Lakes, Inc., dated February 2, 1996.(1) Reference
4.19 6% Convertible Debenture Purchase Agreement dated November 18, 1997 among the Incorporated By
Company and the Purchasers named therein.(8) Reference
4.20 Registration Rights Agreement dated November 18, 1997 among the Company and the Incorporated By
Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued to Libertyview Plus Fund dated Incorporated By
November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Libertyview Fund, LLC dated Incorporated By
November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated November 18, 1997.(13) Incorporated By
Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund dated November 18, Incorporated By
1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC dated November 18, Incorporated By
1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of December 1,1997.(16) Incorporated By
Reference
4.28 Warrant issued to CLARCO Holdings dated as of December 1,1997.(17) Incorporated By
Reference
4.29 Warrant issued to CLARCO Holdings dated as of December 1,1997.(18) Incorporated By
Reference
#10.1 License Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated May 7, 1992.(1) Incorporated By
Reference
20
<PAGE>
10.4 Master Services Agreement between the Company and Land O'Lakes dated May 7, Incorporated By
1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Chiron Incorporated By
Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Chiron Corporation Incorporated By
dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended.(2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Minnesota, N.A., dated Incorporated By
as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Corporation, dated Incorporated By
June 5, 1996.(2) Reference
10.12 Master Equipment Lease between the Company and Cargill Leasing Corporation, Incorporated By
dated June 6, 1996.(2) Reference
10.13 Agreement for Progress Payments between the Company and Cargill Leasing Incorporated By
Corporation, dated June 6, 1996.(2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, dated June 3, 1996.(2) Incorporated By
Reference
*10.15 Letter agreement with John G. Watson dated September 14, 1996.(3) Incorporated By
Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. dated November 1, Incorporated By
1996.(4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December 27, 1996.(4) Incorporated By
Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated January 15, 1997.(4) Incorporated By
Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Plan.(4) Incorporated By
Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Compensation Plan.(4) Incorporated By
Reference
*10.21 GalaGen Inc. 1997 Incentive Plan.(6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Business Credit Incorporated By
Corporation dated June 8, 1997.(7) Reference
10.23 Amended and Restated License Agreement between the Company and Land O'Lakes Incorporated By
dated March 11, 1998.(19) Reference
21
<PAGE>
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
23.1 Consent of Ernst & Young LLP.(19) Incorporated By
Reference
27.1 Financial Data Schedule for Quarter ended March 31, 1998. Electronic
Transmission
27.2 Restated Financial Data Schedule for Quarter ended March 31, 1996.(19) Incorporated By
Reference
99.1 Press release regarding first quarter 1998 results and Diffistat-G, Electronic
dated May 13, 1998. Transmission
</TABLE>
- --------------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on
22
<PAGE>
Form S-3(Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1997 (File No. 0-27976).
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted to
the Company.
23
<PAGE>
EXHIBIT 11.1---STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
---------------------------
1998 1997
---------------------------
<S> <C> <C>
BASIC LOSS PER SHARE:
Weighted average shares outstanding 7,560,438 7,163,769
----------- ------------
----------- ------------
Net loss applicable to common stockholders $(1,217,095) $(1,576,928)
----------- ------------
----------- ------------
Basic net loss per share applicable to common
stockholders $(.16) $(.22)
----------- ------------
----------- ------------
DILUTED LOSS PER SHARE:
Weighted average shares outstanding 7,560,438 7,163,769
Dilutive potential common shares - -
----------- ------------
Total 7,560,438 7,163,769
----------- ------------
----------- ------------
Net loss applicable to common stockholders $(1,217,095) $(1,576,928)
----------- ------------
----------- ------------
Diluted net loss per share applicable to
common stockholders $(.16) $(.22)
----------- ------------
----------- ------------
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 749,020
<SECURITIES> 5,923,556
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,718,095
<PP&E> 1,895,097
<DEPRECIATION> 471,831
<TOTAL-ASSETS> 8,294,788
<CURRENT-LIABILITIES> 666,301
<BONDS> 0
0
0
<COMMON> 79,622
<OTHER-SE> 5,922,739
<TOTAL-LIABILITY-AND-EQUITY> 8,294,788
<SALES> 3,050
<TOTAL-REVENUES> 3,050
<CGS> 1,525
<TOTAL-COSTS> 1,525
<OTHER-EXPENSES> 1,123,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219,890
<INCOME-PRETAX> (1,217,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,217,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,217,095)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<PAGE>
Exhibit 99.1
CONTACT: GalaGen Inc. Padilla Speer Beardsley
Gregg A. Waldon Marian Briggs/Diane Rose
Chief Financial Officer (612) 871-8877
Robert A. Hoerr e-mail: [email protected]
President and Chief Executive Officer e-mail: [email protected]
(612) 481-2105
www.galagen.com
FOR IMMEDIATE RELEASE
GALAGEN INC. ANNOUNCES FIRST QUARTER RESULTS
NUTRITIONAL PRODUCTS COMPANY LAUNCHES BASICS PLUS-TM- DIETARY SUPPLEMENT
IN TWIN CITIES SUPERMARKETS
ARDEN HILLS, MINN., MAY 13, 1998 -- GalaGen Inc. (Nasdaq: GGEN), a development
stage nutritional products company, today announced financial results for the
first quarter ended March 31, 1998.
As anticipated, the Company reported a net loss for the first quarter of 1998.
The loss narrowed to $1,217,095, or $0.16 per share, compared to a net loss of
$1,576,928, or $0.22 per share, in the first quarter of 1997. GalaGen has begun
to sell its Proventra-TM- Brand Natural Immune Components for use in Basics
Plus-TM-, the first refrigerated, dairy-based dietary supplement to enter the
grocery store market. The Company ended the quarter with $6,672,576 in cash,
cash equivalents and available-for-sale securities.
GalaGen's president and CEO, Robert A. Hoerr, M.D., Ph.D., said: "We continue to
make great progress in our nutritional product development, as the recent
collaboration with Land O'Lakes to develop yogurt products containing GalaGen's
immune-enhancing Proventra-TM- demonstrates. We are focusing our efforts and
resources on launching two additional nutritional products, including a yogurt
product with Land O'Lakes, in late 1998 or early 1999." For fiscal year 1997,
the dairy foods unit of Land O'Lakes posted $2.2 billion in sales and record
profits.
THE YOGURT PRODUCT
Last week, GalaGen announced that it is entering into a consumer product
development agreement with Land O'Lakes, Inc., the large food and agricultural
cooperative from which GalaGen was spun-out in 1992. Under terms of the
agreement, the two companies will collaborate to develop yogurt products
containing GalaGen's Proventra-TM- and potentially other functional components.
"Land O'Lakes' recent acquisition of a private label yogurt production company
provides capacity and expertise needed to succeed in the $3.7 billion U.S.
yogurt market," said Hoerr. This collaboration initially will develop a yogurt
product with unique benefits for women, who make the majority of yogurt
purchases. The Company plans to be in regional test markets with this yogurt in
late 1998 or early 1999, with Land O'Lakes handling the product development,
manufacturing, sales, distribution and marketing.
-more-
<PAGE>
GALAGEN INC.
PAGE TWO
BASICS PLUS EXPANSION INTO THE TWIN CITIES
The first nutritional product to be launched from the Chicago-based Lifeway
Foods, Inc. (Nasdaq: LWAY) and GalaGen collaboration is Basics Plus-TM-, which
is a dairy beverage being manufactured and test marketed in selected cities by
Lifeway. Basics Plus containing GalaGen's Proventra-TM- was recently
introduced in the Minneapolis and St. Paul area in selected Byerly's and other
supermarkets. The product, featured in the February 1998 issue of DAIRY FOODS,
targets the rapidly growing healthy beverage market, estimated to exceed $20
billion annually.
The Company also announced that it would limit further spending on development
of pharmaceutical products this year, believing that applying its technology and
resources toward nutritional product development will provide superior
shareholder value. The Phase II dose ranging study for Diffistat-G, a
pharmaceutical treatment for antibiotic-associated diarrhea, has now provided
sufficient data for the design of future studies necessary for approval by the
U.S. Food and Drug Administration. As previously announced, subsequent studies
will only be implemented in collaboration with a corporate partner. The Company
remains positive about the long-term value of its pharmaceutical program and
products, but believes that pharmaceutical development can be best supported
from corporate alliances. The Company will continue to seek partners for all of
its pharmaceutical development products.
GalaGen Inc. is utilizing its expertise in its antibody platform technology to
develop a portfolio of proprietary nutritional products, including dietary
supplements and medical foods, which incorporate its Proventra-TM- Brand Natural
Immune Components. These products will target the needs of both consumers and
healthcare professionals. The Company currently has its first dietary
supplement product, Basics Plus, in test markets in conjunction with its
marketing and manufacturing partner, Lifeway Foods, and has several other
projects under way in various stages of development.
EXCEPT FOR HISTORICAL INFORMATION, MATTERS DISCUSSED IN THIS PRESS RELEASE ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES, INCLUDING, BUT
NOT LIMITED TO, RISKS ASSOCIATED WITH ENTERING NEW MARKETS, CONSUMER ACCEPTANCE,
REGULATION OF DIETARY SUPPLEMENTS, COMPETITIVE PRESSURES AND OTHER IMPORTANT
FACTORS DETAILED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR FISCAL 1997
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
(see attached tables)
<PAGE>
GALAGEN INC.
(A Development Stage Company)
FINANCIAL HIGHLIGHTS
CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 3,050 $ --
Cost of goods sold 1,525 --
Research and development expense 608,368 1,119,214
General and administrative expense 514,911 573,996
----------- -----------
Loss from operations (1,121,754) (1,693,210)
Interest income 124,549 116,282
Interest expense (219,890) --
----------- -----------
Net loss $(1,217,095) $(1,576,928)
Net loss per share, basic and diluted $ (0.16) $ (0.22)
Shares used in computing net loss per share,
basic and diluted 7,560,438 7,163,769
<CAPTION>
BALANCE SHEET DATA
MARCH 31, 1998
(Unaudited)
<S> <C>
ASSETS:
Cash and cash equivalents and available-for-sale
securities $ 6,672,576
Other current assets 45,519
-----------
Total current assets 6,718,095
Property and equipment, net 1,423,266
Other assets 153,427
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 666,301
Convertible promissory notes, net of discount 722,908
Note payable, long-term portion 858,218
Other long-term obligations 45,000
Stockholders' equity 6,002,361
</TABLE>
# # #
