<PAGE> 1
Filed pursuant to Rule 424(B)(1)
Registration No. 333-05843
3,000,000 SHARES
GENZYME
TRANSGENICS
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by Genzyme
Transgenics Corporation. The Common Stock is traded on the Nasdaq National
Market System under the symbol GZTC. Of the 3,000,000 shares of Common Stock
being offered hereby, 900,000 shares will be sold to Genzyme Corporation,
currently a 49% shareholder of Genzyme Transgenics Corporation. See
"Underwriting." On July 30, 1996, the closing sale price of the Common Stock as
reported by Nasdaq was $4.75 per share. See "Price Range of Common Stock and
Dividend Policy."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $4.00 $0.26 $3.74
- -----------------------------------------------------------------------------------------------
Total..................................... $12,000,000 $546,000 $11,454,000
- -----------------------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-
Allotment Option(3)..................... $13,800,000 $663,000 $13,137,000
===============================================================================================
<FN>
(1) The Underwriters will not be paid underwriting discounts and commissions in
connection with the 900,000 shares of Common Stock sold to Genzyme
Corporation. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $360,000.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 450,000 additional shares of Common Stock,
on the same terms, solely to cover over-allotments. See "Underwriting."
</TABLE>
------------------------
The Shares are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Common
Stock will be made in New York City on or about August 5, 1996.
------------------------
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST
NEEDHAM & COMPANY, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS JULY 30, 1996.
<PAGE> 2
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each such instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement, each such statement
being deemed qualified in its entirety by such reference. A copy of the
Registration Statement may be inspected without charge at the offices of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Suite 1300, 7 World Trade Center, New York, New York 10007 and
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
---------------------
The Company was incorporated in Massachusetts in February 1993. The
Company's principal executive offices are located at Five Mountain Road,
Framingham, Massachusetts 01701, and its telephone number is (508) 620-9700.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET SYSTEM IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
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<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. The shares of Common
Stock offered hereby involve a high degree of risk. Investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
Genzyme Transgenics Corporation and its subsidiaries (together, "GTC" or
the "Company") have established a leadership position in the application of
transgenic technology to the development and production of genetically
engineered proteins for therapeutic, diagnostic and other biomedical uses, both
in collaboration with pharmaceutical and biotechnology companies and
independently. To date, GTC has produced more than 25 such proteins. For its
lead compound, human recombinant Antithrombin III ("AT-III"), the Company has
achieved clinical grade purity with high recovery levels and has completed
preclinical safety and efficacy studies. GTC is also a leading contract research
organization ("CRO"), providing services such as preclinical efficacy and safety
testing, in vitro testing and formulation development for pharmaceutical,
biotechnology, medical device and other companies. Revenues for the Company's
testing and production services in 1995 were $26.4 million; revenues for such
services for the quarter ended March 31, 1996 were $8.8 million, an increase of
76% compared to the same period for 1995.
GTC produces recombinant proteins transgenically by inserting into the
genetic material of an animal a gene that directs the production of a desired
protein in the milk of female offspring. The Company believes that transgenic
production offers significant economic and technological advantages relative to
traditional protein production systems, including reduced capital expenditures
and lower direct production cost per unit for complex proteins. For proteins
currently derived from pooled human plasma, transgenic production provides an
alternative source, free from the risks of transmission of human viruses. In the
case of certain complex proteins, transgenic production may represent the only
technologically and economically feasible method of commercial production. To
date, GTC has expressed 14 proteins at levels of one gram per liter or higher,
more than 10 times the level typically achieved for comparable proteins in
traditional cell culture systems.
GTC's most advanced product candidate is transgenic AT-III, an
anticoagulant normally present in human serum. Plasma-derived AT-III is an
approved therapy for inherited AT-III deficiency and for certain acquired
deficiencies. Worldwide sales of plasma-derived AT-III were approximately $200
million in 1994. The Company believes transgenic AT-III may represent a more
attractive product in light of safety considerations, the limited volume of
AT-III available from plasma and the impracticality of producing sufficient
quantities of recombinant AT-III by traditional methods. GTC has expressed
transgenic AT-III in goats, demonstrating stable expression across two
generations, and has purified it to clinical grade with attractive yields.
Preclinical safety and efficacy studies have been successfully completed and GTC
is preparing an Investigational New Drug Application ("IND") for filing with the
U.S. Food and Drug Administration (the "FDA") to initiate a Phase I clinical
trial for this product.
Other significant plasma proteins under development by GTC include
Alpha1-protease inhibitor ("API") and human serum albumin ("HSA"). Additionally,
GTC is working with corporate partners on a number of monoclonal antibodies,
including transgenic BR-96, which has potential anti-cancer utility, under an
agreement with Bristol-Myers Squibb Corporation ("Bristol-Myers"). The Company
is also developing transgenic production processes for other proteins including
prolactin, insulin and a protein for a malaria vaccine.
The Company's CRO operations are focused on enabling its clients to meet
regulatory testing and other product development needs quickly and effectively
by offering a fully integrated line of services. GTC's laboratories focus on
providing high value, scientifically differentiated services to clients,
including preclinical efficacy testing, experimental surgery, photobiology and
reproductive toxicology testing as well as formulation development. GTC uses its
technological capabilities to introduce new services that improve the ability of
its customers to develop their products successfully. The Company's
comprehensive programs link its preclinical
3
<PAGE> 4
and manufacturing support services in order to reduce the time and expense of
bringing new therapeutics or other products to market.
As an outgrowth of production services performed for the National Cancer
Institute (the "NCI"), the Company has developed technology for the production
of idiotypic vaccines, in which a cancer patient's own tumor cells are used to
enhance the immune system's ability to prevent the regrowth of tumors. Idiotypic
vaccines produced by GTC have shown promising results, including the absence of
disease for over six years in four of nine lymphoma patients treated. Results
from this program have been reported in an October 1992 issue of The New England
Journal of Medicine and the May 1995 issue of The Lancet. GTC expects to produce
vaccines for approximately 20 patients in 1996.
THE OFFERING
Common Stock Offered by the
Company............................. 3,000,000 shares
Common Stock to be Outstanding after
the Offering........................ 16,572,618 shares(1)
Use of Proceeds..................... To fund research and product
development programs, for general
corporate purposes and working capital
and to repay outstanding indebtedness
to Genzyme Corporation ("Genzyme") of
approximately $1.4 million.
Nasdaq National Market Symbol....... GZTC
- ---------------
(1) Excludes 1,524,201 shares issuable on the exercise of options outstanding as
of June 30, 1996 and 190,600 shares issuable on the exercise of warrants
outstanding as of June 30, 1996.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues........................ $ 3,222 $ 9,471 $ 32,421 $ 6,124 $ 10,353
Loss from continuing
operations................... (1,171) (5,466) (5,704) (2,570) (1,954)
Discontinued operations......... -- 182 1,571 255 --
Net loss........................ (1,171) (5,284) (4,133) (2,315) (1,954)
Net loss per common share....... (0.44) (0.80) (0.35) (0.23) (0.15)
---------- ---------- ----------- ----------- -----------
Weighted average number of
common shares outstanding.... 2,632,070 6,598,545 11,788,542 10,189,985 13,171,132
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................... $ 2,945 $ 12,639
Working capital..................................................... (9,548) 1,546
Total assets........................................................ 57,919 67,613
Long-term debt...................................................... 4,699 4,699
Total stockholders' equity.......................................... 25,883 36,977
<FN>
- ---------------
(1) As adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby at a public offering price of $4.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses and
the application of the estimated net proceeds therefrom as set forth in
"Use of Proceeds."
</TABLE>
4
<PAGE> 5
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
History of Operating Losses; Need for Additional Funds. GTC has had
operating losses since its inception and expects such losses to continue for the
next several years. For the period from its inception in 1993 to March 31, 1996,
the Company incurred cumulative losses of approximately $12.1 million. GTC's
losses have resulted principally from costs incurred in connection with research
activities and from expenses in excess of revenues from the Company's CRO
services. GTC's sources of revenues to date have consisted primarily of research
and development contracts and CRO services. Such revenues to date have not been
sufficient to generate profits. The Company expects to continue to incur
significant operating losses until such time as product sales and CRO service
revenues are sufficient to fund its operations. No assurance can be given that
the Company will become profitable.
The Company currently believes that existing cash resources, available
financing and the proceeds from this offering will be sufficient to meet its
operating cash flow needs and capital requirements at least through the end of
1997. The development of transgenic products by the Company will require the
commitment of substantial resources to conduct costly and time-consuming
research, preclinical testing and clinical trials necessary to bring such
products to market. If GTC's businesses do not achieve profitable operations at
or prior to the time such existing resources are exhausted, the Company will
need to obtain additional financing, through public or private financings,
including debt or equity financings, or through collaborative or other
arrangements with corporate partners, as appropriate. Adequate funds for the
Company's operations from such sources may not be available when needed or on
terms acceptable to the Company. If additional financing cannot be obtained when
needed or on acceptable terms, GTC could be forced to delay, scale back or
eliminate certain of its research and development programs or to license to
other parties rights to commercialize products or technologies that the Company
would otherwise seek to develop internally as well as delaying or forgoing
timely expansion, improvement or investment in the Company's contract research
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The foregoing forward-looking statements regarding the Company's
expectations of the need for additional funds are subject to risks and
uncertainties. The Company's cash requirements may vary materially from those
now planned depending upon the results of existing businesses, the terms of
future collaborations, results of research and development, competitive and
technological advances, regulatory requirements and other factors.
Early Stage of Transgenic Technology. Development of products based on
transgenic technology is subject to a number of significant technological risks
and the time period required for any such development is both lengthy and
uncertain. Neither GTC nor, to GTC's knowledge, any other entity has conducted
human clinical trials of any protein produced in the milk of transgenic animals
and there can be no assurance that GTC will be able to do so successfully. There
can be no assurance that any transgenically produced protein will be safe or
effective. All of the proteins that GTC is developing will require significant
additional research, development and testing and will require the expenditure of
substantial additional capital prior to their commercialization. In addition,
there can be no assurance that research and discoveries by others will not
render GTC's technology obsolete or noncompetitive.
No Assurance of Commercial Success of Transgenic Products. The successful
commercialization of any transgenic protein product by the Company will depend
on many factors, including the successful completion of clinical testing, the
response of medical professionals to the data from clinical trials, the
Company's ability to create or access a sales force able to market such
transgenic products, the Company's ability to supply a sufficient amount of
product to meet market demand, the degree to which third-party reimbursement for
use of such product is available and the number and relative efficacy of
competitive products that may subsequently enter the market, as well as, with
respect to transgenic products designed to replace or supplement products
currently being marketed, the relative cost-effectiveness of the transgenic
products.
5
<PAGE> 6
There can be no assurance that the Company or its collaborative partners will be
successful in efforts to develop and implement a commercialization strategy for
any such products.
GTC does not currently have a sales force to market any transgenic products
it may develop. The Company anticipates that for products it develops
independently it will enter into marketing arrangements with larger
pharmaceutical or biotechnology companies which have established sales forces
able to market such products. There can be no assurance that any marketing or
distribution arrangements will be available on acceptable terms or that, in the
alternative, GTC will be able to establish its own sales force successfully.
Unforeseen delays in this process may have an adverse effect on the
commercialization of any of the Company's products.
Third-party payors are increasingly attempting to contain health care costs
by limiting both coverage and the level of reimbursement for new therapeutic
products. The successful commercialization of any products developed by the
Company may depend on obtaining coverage and reimbursement for the use of these
products from third-party payors.
In addition, the successful commercialization of the Company's products
will require that medical professionals become convinced of the efficacy of the
products in treating a particular condition and incorporate such products as
standard practice in relevant therapeutic protocols. There can be no assurance
that any transgenic product developed by GTC will be accepted by the medical
profession.
Government Regulation. Transgenic products will require approval by the
FDA prior to marketing in the United States. In addition, the manufacturing and
marketing of such products, and certain areas of research related to them, are
subject to regulations by other U.S. governmental authorities including the
United States Department of Agriculture (the "USDA") and the Environmental
Protection Agency (the "EPA"). Comparable authorities are involved in other
countries.
In cases where the Company expects to obtain revenue from the sale of
transgenic products, whether through direct sales, marketing relationships with
others or royalty arrangements, the Company will incur the risk of such product
failing to satisfy applicable regulatory requirements prior to marketing. The
approval process involves two parts, governing first the approval of an
individual pharmaceutical product as safe and effective and second the approval
of the manufacturing process as complying with applicable FDA current good
manufacturing practices regulations ("GMPs"). In 1995, the FDA and comparable
European regulatory authorities issued guidelines regarding the production of
therapeutic proteins in transgenic animals. While the FDA's guidelines, known as
Points to Consider guidelines ("Points to Consider"), cover issues specific to
transgenic production, the basic regulatory framework for FDA approval will also
apply to transgenic therapeutic products submitted for approval. To GTC's
knowledge, no protein produced in the milk of a transgenic animal has been
submitted for regulatory approval in the United States or elsewhere.
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of therapeutic pharmaceutical products
through lengthy and detailed laboratory and clinical testing procedures,
sampling activities and other costly and time-consuming procedures. Satisfaction
of these requirements typically takes several years or more and can vary
substantially based upon the type, complexity and novelty of the product. With
respect to therapeutic products, the standard FDA approval process includes
preclinical laboratory and animal testing, submission of an IND to the FDA,
appropriate human clinical trials to establish safety and effectiveness and
submission of either a Biologics License Application or a New Drug Application
("NDA") prior to market introduction. With respect to obtaining approval for the
production facilities to be used in producing a therapeutic product, the Company
expects to be subject to both the requirements for establishment license
applications and the Points to Consider issued with respect to transgenic
recombinant products.
The effect of government regulation may be to delay marketing of the
Company's products for a considerable or indefinite period of time, impose
costly procedural requirements upon the Company's activities and may furnish a
competitive advantage to larger companies or companies more experienced in
regulatory affairs. There can be no assurance that FDA or other regulatory
approvals for any products developed by the Company will be granted on a timely
basis or at all. Any delay in obtaining or any failure to obtain such
6
<PAGE> 7
approvals could adversely affect the Company's ability to generate revenue. Even
if initial regulatory approvals for the Company's product candidates are
obtained, the Company, its products and its transgenic manufacturing processes
would be subject to continual review and periodic inspection. There can be no
assurance that the FDA will permit the marketing of any transgenic product for
any particular indication, if at all.
The Company's operations are also subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and waste, including but not limited to animal waste and waste water.
See "Business -- Government Regulation."
Dependence of Testing Services on Current Government Regulatory
Requirements. The market for GTC's preclinical testing services is dependent
upon the maintenance of strict standards for the conduct of laboratory and
clinical tests and related procedures which are promulgated by governmental
entities responsible for public health and welfare, including the FDA, and by
regulatory authorities in foreign countries. The process of obtaining these
approvals varies according to the nature and use of the product and routinely
involves lengthy and detailed laboratory and clinical testing and other costly
and time-consuming procedures. The Company offers the customers of its
preclinical testing and development services the necessary expertise to comply
with these complex regulations. If the regulatory structure were to change in a
way which reduced the need for such services, the Company could be materially
adversely affected.
Dependence on Genzyme. GTC has entered into a number of contractual
agreements with Genzyme, including a research and development agreement pursuant
to which Genzyme provides purification services to GTC for transgenically
produced proteins (the "Genzyme R&D Agreement"), a lease of GTC's facility in
Framingham, Massachusetts, and an agreement to fund the development of AT-III
through the first quarter of 1997. See "Business -- Relationship with Genzyme."
Under the Genzyme R&D Agreement, Genzyme is obligated to use commercially
reasonable efforts to perform purification services for GTC. GTC does not
currently have personnel capable of undertaking such purification services.
Until such time, if ever, as GTC develops its own capabilities in this regard,
there can be no assurance that Genzyme will be able to provide such services
when and as required by GTC or that GTC would be able to obtain comparable
services elsewhere.
There can be no assurance that Genzyme and GTC will reach agreement to
extend Genzyme's funding of the AT-III development program beyond the first
quarter of 1997 under terms attractive to GTC, if at all. There also can be no
assurance that, in the absence of such agreement, the Company will be able to
fund such program on its own beyond the end of 1997 or that the Company will be
able to obtain such funding from a third party on acceptable terms, if at all.
Potential Conflicts of Interest with Genzyme. After giving effect to this
offering, Genzyme will remain the largest single stockholder of GTC. Of the
3,000,000 shares of Common Stock being offered hereby, 900,000 shares will be
sold to Genzyme. Therefore, assuming exercise of a currently exercisable warrant
for 145,000 shares of Common Stock, Genzyme will own approximately 45% of the
outstanding Common Stock following the offering. See "Business -- Relationship
with Genzyme" and "Share Ownership."
Genzyme's ownership interest gives it significant influence over any
election of directors and any other action requiring approval by the holders of
a majority of the Common Stock. Three members of GTC's Board of Directors,
including Henri Termeer, the Chairman of the Board of the Company, also serve as
directors and/or executive officers of Genzyme. The interests of Genzyme on the
one hand and GTC on the other hand may, from time to time, differ.
Dependence on Collaborators. The success of GTC's transgenic protein
production business will depend, in large part, on GTC's ability to enter into
arrangements with biotechnology and pharmaceutical companies for the transgenic
production of proteins to which such companies have proprietary rights or to
fund the development of transgenic proteins which are in the public domain or
the subject of expiring patents. To date, the scope of these agreements has
generally been limited to demonstrating the feasibility of transgenic production
of targeted proteins in particular animal species. There can be no assurance
that these feasibility studies will be successful or lead to agreements for the
commercial production of any proteins.
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<PAGE> 8
Depending upon the terms of any future collaborations, the Company's role in
such collaborations may be limited to the production aspects of the proteins
under development. As a result, GTC may also be dependent on collaborators for
other aspects of the development, preclinical and clinical testing, regulatory
approval and commercialization of any transgenic product.
Uncertainty Regarding Patents and Proprietary Technology. GTC has relied
upon trade secrets, proprietary know-how and continuing technological innovation
to develop and maintain its competitive position and to protect its proprietary
technology. In part, these legal rights are protected by contracts with
employees, consultants and business partners. There can be no assurance that
trade secrets possessed by GTC will be maintained, that secrecy obligations will
be honored or that others will not independently develop similar or superior
technology. There is no assurance that patent applications filed by GTC will
result in patents being issued or that any patents issued to or licensed by GTC
will be held valid. The Company may also be subject to claims that result in the
revocation of patent rights previously licensed to GTC as a result of which the
Company may be required to obtain licenses from others to continue to develop,
test or commercialize its products. There can be no assurance that GTC will be
able to obtain such licenses on acceptable terms, if at all. In addition, there
may be pending or issued patents held by parties not affiliated with GTC that
relate to the technology utilized by GTC. As a result, GTC may need to acquire
licenses to, or contest the validity of, such patents or any other similar
patents which may be issued. GTC could incur substantial costs in defending
itself against challenges to patent or infringement claims made by third parties
or in enforcing any patent rights of its own. The loss or exposure of trade
secrets possessed by GTC could also adversely affect its business.
On December 21, 1995, Pharming B.V. filed a request for arbitration under a
cross-license agreement with GTC granting various patent rights relating to the
transgenic production of proteins, seeking, among other things, a declaratory
judgment which would effectively rescind the agreement. While the outcome of the
arbitration proceeding cannot be determined, GTC believes that there is
insufficient ground for rescission of the license agreement and that GTC will be
able to successfully defend this proceeding. There can be no assurance, however,
that GTC will prevail in the defense of the arbitration proceeding. Failure by
the Company to prevail for any reason could have a material adverse effect on
the Company, including potential delays in the commercialization of the
Company's transgenic products and increased costs. See "Business -- Legal
Proceedings."
Competition. The industries in which GTC operates are highly competitive
and may become even more competitive. It will be necessary for GTC to continue
to devote substantial efforts and expense to research, development, sales and
marketing in order to maintain a competitive position. There can be no assurance
that developments by others will not render GTC's current and proposed services,
products or technologies obsolete. In addition, GTC may encounter significant
competition for protein development and production contracts from other
companies. Transgenic products may face significant competition from biological
products manufactured in cell culture or derived from human serum or tissue or
animal serum or tissue. GTC's business will compete both against other companies
whose business is dedicated to offering transgenic production or preclinical
testing and development as a service and with prospective customers or
collaborators who decide to pursue such transgenic production or preclinical
testing and development internally.
Risk of Service or Product Liability. GTC's business exposes it to
potential product and professional liability risks which are inherent in the
testing, production, marketing and sale of human therapeutic products. While GTC
has obtained product and professional liability insurance under an insurance
policy arrangement with Genzyme and Genzyme's affiliates, there can be no
assurance that such insurance will be sufficient to cover any claim. See
"Business -- Relationship with Genzyme." Uninsured product or service liability
could have a material adverse effect on the financial results of GTC. In
addition, there can be no assurance that any insurance will provide GTC with
adequate protection against potential liabilities. Potential liability also may
arise from the handling by GTC of clinical samples containing human blood and
tissues, which may contain human pathogens; liability may also arise from
handling animal blood and tissue which may contain zoonotic pathogens. Although
such products are used only in the laboratory, inadvertent human contact may
occur.
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<PAGE> 9
Retention of Key Personnel. Although GTC believes that the size and
qualifications of its current staff are adequate for its current business, the
Company must continue to attract and retain qualified scientific, technical,
marketing and management personnel as its business expands. There is intense
competition for qualified personnel in the areas of the Company's activities,
and there can be no assurance that GTC will be able to continue to attract and
retain the qualified personnel necessary for the development of its business.
Loss of the services of, or failure to recruit, key scientific and technical
personnel could have a material adverse effect on GTC's business.
Public Concerns. Certain of GTC's activities involve animal testing and
genetic engineering in animals. Such activities have been the subject of
controversy and adverse publicity. Animal rights groups and various other
organizations and individuals have attempted to stop animal testing and genetic
engineering activities by pressing for legislation and regulation in these
areas. To the extent the activities of such groups are successful, GTC's
business may be adversely affected.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
adversely affect the prevailing market price of the Common Stock. As of June 30,
1996, there were 13,572,618 shares of Common Stock outstanding. As of June 30,
1996, options to purchase an aggregate of 1,524,201 shares of Common Stock at
varying exercise prices were outstanding; of such total, options for 671,370
shares were immediately exercisable and such shares could be immediately resold
into the public market. An additional 190,600 shares of Common Stock are
reserved for issuance upon exercise of outstanding warrants. Of the 6,528,365
shares held by Genzyme, 4,000,000 could be sold into the public markets upon
compliance with Rule 144. See "Shares Eligible for Future Sale." In addition,
all other shares held by Genzyme and those issuable to Genzyme upon exercise of
an outstanding warrant are entitled to registration rights which could expedite
the resale of such shares into the public market. Genzyme, the directors,
officers and certain employees of GTC have agreed not to dispose of their shares
for a period of 90 days (180 days in the case of Genzyme) after the effective
date of this offering. See "Description of Capital Stock" and "Shares Eligible
for Future Sale."
Possible Volatility of Stock Price; Absence of Dividends. There has been a
history of significant volatility in the market prices of publicly-traded common
stock of companies engaged in applications of biotechnology, including the
Company, and the market price of the Common Stock has been and may continue to
be highly volatile. Announcements of technological innovations or new products
by GTC or others, developments or disputes concerning patents or proprietary
rights, publicity regarding actual or potential medical results relating to
products under development by GTC or its competitors, regulatory developments,
period-to-period fluctuations in GTC's financial results and general economic
and market conditions, among other things, may have a significant impact on the
market price of the Common Stock. GTC has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
Change in Control. Certain provisions of Massachusetts law and of GTC's
charter documents could have the effect of discouraging others from attempting
hostile takeovers of GTC. Such provisions may also have the effect of preventing
changes in the management of GTC. It is possible that such provisions could make
it more difficult to accomplish transactions which stockholders may deem to be
in their best interests. See "Description of Capital Stock -- Anti-Takeover
Measures."
Dilution. Purchasers of Common Stock offered hereby will experience an
immediate and substantial dilution in net book value of $3.06 per share. At June
30, 1996, there were options outstanding to purchase an aggregate of up to
1,524,201 shares of Common Stock at exercise prices between $2.75 and $55.00 per
share. GTC also has outstanding warrants to purchase 190,600 shares of Common
Stock at exercise prices between $0.05 and $6.50 per share. The exercise of
these options and warrants will result in further dilution to investors in this
offering. See "Dilution," "Shares Eligible for Future Sale" and "Description of
Capital Stock."
9
<PAGE> 10
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be $11.1 million ($12.8 million if the Underwriters' over-allotment
option is exercised in full), after deducting estimated discounts and
commissions and estimated offering expenses.
The net proceeds of this offering, together with the Company's existing
cash, cash equivalents, short-term investments and cash generated from
operations are expected to be used for the following purposes: (i) to fund
research and product development programs, including the anticipated clinical
trials of AT-III (to the extent not funded by Genzyme or others) and the
development of idiotypic vaccines for the NCI, (ii) for general corporate
purposes and working capital and (iii) to repay outstanding indebtedness to
Genzyme in an amount of approximately $1.4 million pursuant to a line of credit,
under which the outstanding balance accrues interest at a rate of 7.0% per
annum, that will terminate upon completion of this offering. Such general
corporate purposes may include acquisitions of other businesses, technologies,
product rights or distribution rights.
The timing and amount of funds required for all specific uses of the
proceeds from this offering cannot be precisely determined by the Company at
this time. The rate of the Company's progress in developing transgenic products,
the timing and nature of regulatory action, economic and regulatory factors
affecting the contract research industry as a whole and the availability of
alternative methods of financing, including collaborative agreements with other
companies relating to the development, manufacture and marketing of transgenic
products, will also affect the Company's allocation of the net proceeds from
this offering and the timing thereof.
The Company currently believes that its existing capital resources
(exclusive of the Genzyme line of credit to be terminated upon completion of
this offering), together with the proceeds of this offering and interest
thereon, plus anticipated revenues from CRO operations and research funding
currently obligated from corporate partners, will enable the Company to maintain
its current and planned operations at least through the end of 1997. The
foregoing forward-looking statements regarding the Company's expectations of the
need for additional funds are subject to risks and uncertainties. The Company's
cash requirements may vary materially from those now planned depending upon the
results of existing businesses, the terms of future collaborations, results of
research and development, competitive and technological advances, regulatory
requirements and other factors. See "Business -- Relationship with Genzyme."
Pending use, the net proceeds will be invested in interest-bearing,
investment grade securities. The Company intends to invest and use such proceeds
so as not to be considered an "investment company" under the Investment Company
Act of 1940, as amended.
10
<PAGE> 11
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
<TABLE>
The Common Stock is traded on the Nasdaq National Market System ("Nasdaq")
under the symbol GZTC. The following table sets forth, for the periods
indicated, the range of high and low sales prices for the Common Stock as
reported by Nasdaq:
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994:
First Quarter...................................................... $ 8 1/2 $6 1/2
Second Quarter..................................................... 7 4 1/4
Third Quarter...................................................... 4 3/4 3
Fourth Quarter..................................................... 3 7/8 2
1995:
First Quarter...................................................... $ 3 1/8 $1 1/2
Second Quarter..................................................... 3 5/8 1 7/8
Third Quarter...................................................... 6 1/8 2 /16
Fourth Quarter..................................................... 5 7/8 4
1996:
First Quarter...................................................... $ 7 1/8 $4 3/8
Second Quarter..................................................... 10 5/8 5
Third Quarter (through July 30).................................... 8 1/8 4 5/8
</TABLE>
On July 30, 1996, the last reported sale price of the Common Stock on
Nasdaq was $4.75 per share. As of July 30, 1996, there were approximately 700
holders of record of the Common Stock.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. The Company currently
intends to retain its earnings, if any, for the development of its business.
11
<PAGE> 12
CAPITALIZATION
<TABLE>
The following table sets forth, as of March 31, 1996, the actual
capitalization of the Company and the capitalization as adjusted to reflect the
sale of the 3,000,000 shares of Common Stock offered hereby at the public
offering price of $4.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses and the application of the estimated
net proceeds therefrom as set forth in "Use of Proceeds." This table should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations, less current portion...... $ 4,699 $ 4,699
Stockholders' equity(1):
Undesignated Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, none issued or outstanding............................. -- --
Common Stock, $0.01 par value, 24,000,000 shares authorized;
13,290,140 shares issued and outstanding (actual); 24,000,000
shares authorized, 16,290,140 issued and outstanding (as
adjusted).......................................................... 133 163
Additional paid-in capital............................................ 37,899 48,963
Accumulated deficit................................................... (12,139) (12,139)
Accumulated translation adjustments................................... (10) (10)
-------- ---------
Total stockholders' equity.................................... 25,883 36,977
-------- ---------
Total capitalization.......................................... $ 30,582 $ 41,676
======== =========
<FN>
- ---------------
(1) Excludes 1,524,201 shares issuable on the exercise of options outstanding as
of June 30, 1996, 190,600 shares issuable on the exercise of warrants
outstanding as of June 30, 1996, 38,426 shares issued on June 30, 1996
pursuant to GTC's 1993 Employee Stock Purchase Plan and 193,321 shares
issued on June 30, 1996 on conversion of indebtedness held by Genzyme. See
"Business -- Relationship with Genzyme."
</TABLE>
12
<PAGE> 13
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
$4,150,000, or $0.31 per share. Net tangible book value per share represents the
total tangible assets of the Company, less total liabilities, divided by the
total number of shares of Common Stock outstanding. Assuming the receipt by the
Company of the net proceeds from the sale of the 3,000,000 shares of Common
Stock offered hereby at a public offering price of $4.00 per share, the pro
forma net tangible book value of the Company as of March 31, 1996 would have
been $15,244,000, or $0.94 per share. This represents an immediate increase in
the pro forma net tangible book value of $0.62 per share to existing
stockholders of the Company and an immediate dilution of $3.06 per share to new
investors purchasing Common Stock in this offering.
<TABLE>
The following table illustrates the per share dilution to be incurred by
new investors as of March 31, 1996:
<S> <C> <C>
Public offering price................................................ $4.00
Net tangible book value at March 31, 1996.......................... $0.31
Increase attributable to new investors............................. 0.62
-----
Pro forma net tangible book value after the offering................. 0.94
-----
Dilution to new investors............................................ $3.06
=====
</TABLE>
<TABLE>
The following table sets forth, on a pro forma basis, as of March 31, 1996,
the differences between the existing stockholders and the new investors with
respect to the number of shares of Common Stock acquired from the Company, the
total consideration paid and the average price per share (assuming a public
offering price of $4.00 per share):
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............ 13,290,140 81.6% $38,032,000 76.0% $2.86
New Investors.................... 3,000,000 18.4 12,000,000 24.0 4.00
---------- ----- ----------- -----
Total.................. 16,290,140 100.0% $50,032,000 100.0%
========== ===== =========== =====
</TABLE>
The above information excludes, as of June 30, 1996, (i) an aggregate of
1,524,201 shares of Common Stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $5.69 per share, (ii) 190,600
shares of Common Stock reserved for issuance upon the exercise of outstanding
warrants at a weighted average exercise price of $2.27 per share, (iii) 38,426
shares issued on June 30, 1996 under GTC's 1993 Employee Stock Purchase Plan,
and (iv) 193,321 shares issued on June 30, 1996 upon conversion of indebtedness
held by Genzyme. To the extent that such options and warrants are exercised,
there will be further dilution to new investors. See "Business -- Relationship
with Genzyme."
13
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA OF GTC
<TABLE>
The following selected consolidated financial data for the last five fiscal
years ended December 31, 1995 are derived from the consolidated financial
statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
independent auditors. The financial data for the three-month periods ended March
31, 1995 and March 31, 1996 are derived from unaudited consolidated financial
statements. The unaudited consolidated financial statements include all
adjustments (consisting only of normally recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 29, 1996. The following data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- --------- --------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Services.................................. $ -- $ -- $ -- $ 4,465 $ 26,399 $ 5,008 $ 8,795
Research and development.................. 2,246 2,247 3,222 4,097 6,022 1,116 1,558
Product................................... -- -- -- 909 -- -- --
------ ------- --------- --------- ---------- ----------- ----------
Total revenues...................... 2,246 2,247 3,222 9,471 32,421 6,124 10,353
COSTS AND EXPENSES:
Services.................................. -- -- -- 5,157 24,250 4,955 7,621
Research and development.................. 2,106 2,272 3,143 4,671 6,394 1,579 1,987
Products.................................. -- -- -- 841 -- -- --
Selling, general and administrative....... 521 635 1,088 3,596 8,919 2,071 2,583
Equity in loss of Joint Venture........... 363 326 -- 582 713 163 40
Impairment of investment in Joint
Venture................................. -- 163 318 58 -- -- --
------ ------- --------- --------- ---------- ----------- ----------
Total operating expenses............ 2,990 3,396 4,549 14,905 40,276 8,768 12,231
------ ------- --------- --------- ---------- ----------- ----------
Loss from continuing operations............. (744) (1,149) (1,327) (5,434) (7,855) (2,644) (1,878)
Other income and (expenses):
Interest income........................... -- -- 156 238 32 10 8
Interest expense.......................... -- -- -- (263) (1,007) (258) (310)
Other income.............................. -- -- -- -- 780 356 318
------ ------- --------- --------- ---------- ----------- ----------
Loss from continuing operations before
income taxes.............................. (744) (1,149) (1,171) (5,459) (8,050) (2,536) (1,862)
Provision (benefit) for income taxes...... -- -- -- 7 (2,346) 34 92
------ ------- --------- --------- ---------- ----------- ----------
Loss from continuing operations............. (744) (1,149) (1,171) (5,466) (5,704) (2,570) (1,954)
Discontinued operations:
Income from discontinued clinical
operations (less applicable taxes of
$21, $239 and $158)..................... -- -- -- 182 412 255 --
Gain on disposal of clinical operations
(less applicable taxes of $3,401)....... -- -- -- -- 1,159 -- --
------ ------- --------- --------- ---------- ----------- ----------
Net loss.................................... $ (744) $(1,149) $ (1,171) $ (5,284) $ (4,133) $ (2,315) $ (1,954)
====== ======= ========= ========= ========== =========== ==========
Results per weighted average number of
common shares outstanding(a):
From continuing operations................ $ (0.44) $ (0.83) $ (0.48) $ (0.25) $ (0.15)
========= ========= ========== =========== ==========
Net loss.................................. $ (0.44) $ (0.80) $ (0.35) $ (0.23) $ (0.15)
========= ========= ========== =========== ==========
Weighted average number of common shares
outstanding(a)............................ 2,632,070 6,598,545 11,788,542 10,189,985 13,171,132
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------ ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $ 994 $ 761 $10,361 $ 3,047 $ 5,825 $ 2,945
Working capital............................................. (99) (137) 9,882 (7,858) (7,011) (9,548)
Total assets................................................ 1,559 1,213 10,527 47,993 58,042 57,919
Long-term liabilities....................................... -- -- -- 9,082 7,179 6,093
Stockholders' equity(b)..................................... 435 302 10,014 19,424 27,288 25,883
- ---------------
<FN>
(a) Net loss per common share and weighted average number of common shares
outstanding have not been presented for fiscal years 1991 and 1992 because
the Company operated as a division of Genzyme during that period.
(b) There were no cash dividends paid for any period presented.
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF GTC
OVERVIEW
The Company was incorporated as a wholly-owned subsidiary of Genzyme in
February 1993. In May 1993, Genzyme entered into a stock purchase agreement
under which Genzyme purchased four million shares of GTC's Series A Convertible
Preferred Stock in exchange for the transfer of substantially all of the assets
and liabilities of Genzyme's transgenics business unit to the Company. As part
of this transaction, the Company and Genzyme entered into a Technology Transfer
Agreement (the "Technology Transfer Agreement"), the Genzyme R&D Agreement and
certain sublease and service agreements. Upon completion of the Company's
initial public offering in July 1993, Genzyme owned approximately 73% of the
Company. Through subsequent equity transactions, Genzyme's ownership declined to
approximately 49%.
In October 1994, the Company acquired all of the outstanding common stock
of TSI Corporation ("TSI") in exchange for 4,367,601 shares of Common Stock with
an approximate market value of $14 million at the transaction date. This
acquisition was undertaken in order to expand the Company's business operations
and to provide a more comprehensive offering of support services to its
customers. The Company further expanded its non-clinical capabilities in July
1995 with the acquisition of BioDevelopment Laboratories, Inc. ("BDL") for
approximately 831,000 shares of Common Stock with an approximate market value at
the time of $2.6 million. Also in 1995, the Company refocused the testing
operations toward the non-clinical area with the closure of Health and Sciences
Research Incorporated ("HSRI"), a small clinical trials monitoring unit, and the
disposition of GDRU Limited ("GDRU"), a London-based Phase I clinical trials
unit, for approximately $9.5 million in cash. In January 1995, the Company sold
its diagnostics products business, The TSI Center for Diagnostics Products, Inc.
("CDP"), which was acquired as part of TSI, for $822,550 in cash and a note
receivable in the amount of $1.1 million.
RESULTS OF OPERATIONS
Recent Developments
Total revenues for the second quarter of 1996 were $11.4 million, compared
with $7.4 million in the comparable period of 1995, an increase of 54%. Of such
total revenues, $9.4 million represented revenue from the Company's testing and
production service operations, an increase of 52% over the second quarter of
1995. Exclusive of the BDL acquisition, service revenues for the second quarter
of 1996 increased to $8.6 million from $6.2 million in the comparable quarter of
1995, an increase of 40%. Research and development revenues increased to $2.0
million in the second quarter of 1996, an increase of 64% over the second
quarter of 1995.
Gross profit for the second quarter of 1996 was $1.1 million, compared with
$0.3 million in the comparable period of 1995, an increase of 319%. Exclusive of
the BDL acquisition, gross profit on services increased 114% over the second
quarter of 1995.
The Company realized a loss from continuing operations of $2.2 million in
the second quarter of 1996 compared with a loss of $2.1 million in the second
quarter of 1995.
First Quarter Ended March 31, 1996 as Compared to First Quarter Ended March
31, 1995
Total revenues for the first quarter of 1996 were $10.4 million, compared
with $6.1 million in the comparable period of 1995, an increase of 69%. Of the
increase, $999,000 represents service revenue derived from the operations of
BDL. Exclusive of the BDL acquisition, service revenues increased 56%. Revenues
from continuing service operations have grown in each quarter following the
acquisition of TSI, from $4.5 million in the fourth quarter of 1994 to $8.8
million in the first quarter of 1996, a cumulative growth of 97%, and
year-to-year growth of 76% over the first quarter of 1995. Research and
development revenues increased to $1.6 million in the first quarter of 1996 from
$1.1 million in the first quarter of 1995, an increase of 40%, due primarily to
an increase in activity and revenues related to the funding received in the
development of AT-III.
Cost of services for the first quarter of 1996 was $7.6 million compared
with $5.0 million in the first quarter of 1995, an increase of 54%. Of the
increase, $728,000 represented cost of services derived from the operations of
BDL. Exclusive of the BDL acquisition, cost of services increased $1.9 million,
or 39%. Research and development expenses increased to $2.0 million in the first
quarter of 1996 from $1.6 million in the first quarter of 1995, an increase of
26%. The increase was due to increased activity in research programs.
15
<PAGE> 16
Gross profit for the first quarter of 1996 was $745,000 versus a loss of
$410,000 in the first quarter of 1995. Gross profit on services for the first
quarter of 1996 was $1.2 million, a gross margin of 13%, versus $53,000, a gross
margin of 1%, in the first quarter of 1995. Gross profit from continuing service
operations has grown each quarter since the acquisition of TSI in October 1994.
Selling, general and administrative ("SG&A") expenses increased to $2.6
million in the first quarter of 1996 from $2.1 million in the first quarter of
1995, an increase of 25%. Of the increase, $245,000 represents SG&A expenses of
BDL, including $106,000 of goodwill amortization related to the BDL acquisition.
Exclusive of BDL, SG&A expenses increased by $267,000, or 13%.
Interest income decreased to $8,000 in the first quarter of 1996 from
$10,000 in the first quarter of 1995, due to a reduction in funds available for
investment. Interest expense increased to $310,000 in the first quarter of 1996
from $258,000 in the first quarter of 1995. Of the 1996 total, $255,000
represented interest expense incurred under a line of credit with a commercial
bank and other financial obligations related to the testing operations.
The Company recognized $40,000 of losses attributable to GTC's joint
venture with Sumitomo Metals Industries, Ltd. (the "Joint Venture") during the
first quarter of 1996 compared to $163,000 in the first quarter of 1995. The
decrease in the loss was due to the decreased research and development activity
which the Joint Venture funded during the period.
The Company realized no income from its discontinued clinical operations in
the first quarter of 1996 compared to $255,000 in the first quarter of 1995. The
1995 income from discontinued clinical operations represents the results of
operations (net of tax) for the first quarter of 1995 for GDRU and HSRI. The
Company received $318,000 of non-operating income in the first quarter of 1996
which represented the second payment of the promissory note received in
connection with the sale of CDP. Due to uncertainties surrounding recovery of
the note, 90% of the value of the promissory note was reserved and will be
recognized as income as payments are received.
Testing Service Operating Performance -- Six Quarters Ended March 31, 1996
The following is a summary of the operating performance of the Company's
continuing testing service operations in the six quarters since the acquisition
of TSI (all dollar amounts in thousands):
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
----------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JULY 2, OCTOBER 1, DECEMBER 31, MARCH 31,
1994 1995 1995 1995 1995 1996
------------ --------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $4,465 $ 5,008 $ 6,166 $ 7,153 $8,072 $ 8,795
Gross Profit............. (692) 53 580 625 891 1,174
Gross Margin %........... (16)% 1% 9% 9% 11% 13%
</TABLE>
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Total revenues for 1995 were $32.4 million compared with $9.5 million in
1994, an increase of 242%. Service revenues for 1995 were $26.4 million compared
with $4.5 million in 1994, an increase of 491%. The increase was primarily due
to the inclusion of a full year of TSI operations, compared to one quarter of
TSI operations in 1994, as well as to the inclusion of the operations of BDL for
six months in 1995. There were no product revenues in 1995, compared to $909,000
in 1994, due to the sale of CDP in January 1995. Research and development
revenues increased to $6.0 million in 1995 from $4.1 million in 1994, an
increase of 47%, due primarily to an increase in activity and revenues related
to the research and development agreement between the Company and the Joint
Venture and a significant commercial contract that utilizes the transgenic
production facility.
Cost of services for 1995 was $24.3 million compared with $5.2 million in
1994. The increase reflects a full year of the TSI operations in 1995 compared
to one quarter in 1994. There was no cost of products in 1995 compared to
$841,000 in 1994 due to the sale of CDP. Research and development expenses
increased to $6.4 million in 1995 compared to $4.7 million in 1994, an increase
of 37%. The increase reflected a full year of expenses relating to the
operations of the transgenic production facility which began operations in July
1994. The remainder of the increase in research and development expenses was due
to higher expenditures on the AT-III program funded by the Joint Venture.
16
<PAGE> 17
Gross profit amounted to $1.8 million in 1995 versus a loss of $1.2 million
in 1994. Gross profit on services was $2.1 million, a gross margin of 8%, versus
a loss of $692,000 in 1994. The increase in gross profit was due to higher sales
reflecting greater customer confidence in the financial viability of TSI after
the acquisition as well as greater emphasis on developing significant client
relationships.
SG&A expenses increased to $8.9 million in 1995 from $3.6 million in 1994.
Of the 1995 amount, $7.1 million represented the SG&A expenses of TSI for a full
year in 1995 versus $1.8 million for one quarter in 1994, an increase of $5.3
million. The 1995 amount also reflected $1.1 million of goodwill amortization.
Exclusive of TSI and BDL, SG&A expenses remained generally constant.
Interest income decreased to $32,000 in 1995 from $238,000 in 1994, a
decrease of 87%, primarily due to the use in operations of the funds that
previously were invested. Interest expense was $1.8 million in 1995 compared to
$263,000 in 1994, an increase of 283%. Of the total, $827,000 represented
interest incurred by the testing service operations and $180,000 represented
interest incurred on the financing provided by Genzyme for the construction of
the transgenic production facility.
The Company recognized $713,000 of Joint Venture losses in 1995 compared to
$582,000 in 1994, an increase of 23%. The increase in the loss was due to the
increased research and development activity which the Joint Venture funded
during the period.
The Company recognized $780,000 of non-operating income in 1995 compared to
none in 1994. Of the total, $356,000 represented the Company's portion of the
proceeds from the sale of one of the transgenic animal models owned by Exemplar
Corporation ("Exemplar"), a former customer of TSI, to a third party. In
November 1993, TSI relinquished all rights to Exemplar's transgenic animal
models subject to the potential to receive a portion of the proceeds of the sale
of any of the models to a third party. The remaining $424,000 represented
collection of the first payment of the promissory note received in connection
with the sale of CDP.
Income from discontinued clinical operations was $412,000 in 1995 compared
with $182,000 in 1994. The income represented the results of operations (net of
tax) for GDRU and HSRI. The Company recognized a gain on disposal of clinical
operations in the amount of $1.2 million. The net gain on the disposal of GDRU
reflected a tax charge of $3.4 million and a write-down of goodwill identifiable
with GDRU of $2.0 million.
Year Ended December 31, 1994 as Compared to Year Ended December 31, 1993
The 1994 results include the results of operations of TSI from the date of
acquisition (October 1, 1994), adjusted for the reclassification of the
discontinued operations.
Total revenues for 1994 were $9.5 million, compared with $3.2 million in
1993, an increase of 194%. Of the increase, $4.5 million represented service
revenues derived from the operations of TSI. Additionally, $909,000 of the
increase represented product revenues derived from CDP from the date of the TSI
acquisition. Research and development revenues increased to $4.1 million in 1994
from $3.2 million in 1993, an increase of 27%, due primarily to an increase in
activity and revenues related to the research and development agreement between
the Company and the Joint Venture.
Costs of services of $5.2 million in 1994 were derived from the operations
of TSI. Cost of products of $841,000 in 1994 was derived from the operations of
CDP. Research and development expenses increased to $4.7 million in 1994 from
$3.1 million in 1993, an increase of 49%. The increase included approximately
$459,000 of expenses related to the development of the transgenic production
facility which began operating in July 1994. The remainder of the increase in
research and development expense was due to an increase in the number of
research programs as well as an increase in expenditures on the AT-III program.
Gross profit was a loss of $1.2 million in 1994 versus a profit of $79,000
in 1993, a decrease of $1.3 million. Gross profit on services was a loss of
$692,000 in 1994 representing the operations of TSI for the fourth quarter. The
low margin was due to a reduced level of testing service revenues during that
period resulting from a number of factors, including: (1) potential customers'
perception that TSI's financial position was unstable prior to the acquisition,
(2) TSI's inability to invest in sales and marketing programs due to cash flow
constraints prior to the acquisition and (3) a general delay in client product
development programs resulting from financial pressures on pharmaceutical and
biotechnology companies.
SG&A expenses increased to $3.6 million in 1994 from $1.1 million in 1993,
an increase of $2.5 million. Of the increase, $1.8 million represented SG&A
expenses of TSI, including $242,000 of goodwill amortiza-
17
<PAGE> 18
tion. Exclusive of TSI, SG&A expenses increased to $1.7 million in 1994 from
$1.1 million in 1993, an increase of 59%. The increase was due primarily to
additions to the management and sales organization in the latter part of 1993,
the costs of which existed for all of 1994 and only part of 1993. In addition to
these direct costs, the service fee covering Genzyme's administrative support
totaled $310,000 in 1994 and $144,000 in 1993. The increase was due to a full
year of charges in 1994.
Interest income increased to $238,000 in 1994 from $156,000 in 1993, an
increase of 53%, primarily due to the investment of cash proceeds from the
Company's initial public offering for a full year in 1994. Interest expense was
$263,000 in 1994 compared with none in 1993. Of the total, $202,000 represented
interest expense incurred by TSI. Additionally, $61,000 of interest expense was
incurred in 1994 on financing provided by Genzyme for construction of the
transgenic production facility.
The Company recognized $582,000 of Joint Venture losses in 1994 compared to
none in 1993. The Company also reduced its investment by $58,000 in 1994 and
$318,000 in 1993 due to impairment in the value of the Joint Venture. The
increase in the loss from the Joint Venture, as well as the decrease in the
reduction of the investment, was due to a combination of increased losses
incurred by the Joint Venture and a change in the accounting treatment related
to the investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments of $2.0
million at March 31, 1996. During the first quarter of 1996, the Company had a
$2.4 million net decrease in cash: $4.6 million of cash was used in operations
(due primarily to the net loss of $2.0 million and an increase in working
capital of $3.3 million offset by $696,000 of non-cash charges), $703,000 was
invested in the transgenic production facility and other capital equipment,
$505,000 was used to pay down long-term debt and $300,000 was used to pay down
the Company's operating line of credit. Sources of funds during the period
included $2.8 million in advances under the Convertible Debt Agreement, $475,000
of proceeds from the sale of GDRU which were released from escrow, $352,000 in
proceeds from long-term debt and $133,000 in proceeds from the issuance of
Common Stock.
The Company had a working capital deficit of $9.5 million at March 31,
1996, compared to a deficit of $7.0 million at December 31, 1995. As of March
31, 1996, the Company had $300,000 available under its operating line of credit,
$7.2 million available under the Convertible Debt Agreement and $625,000
available under a capital lease line.
Upon completion of this offering, Genzyme's commitment to advance funds
under a Convertible Debt and Development Funding Agreement between the Company
and Genzyme (the "Convertible Debt Agreement") will terminate and the Company
will be obligated to repay any outstanding amounts thereunder not previously
converted to Common Stock. The $1.4 million currently outstanding under the
Convertible Debt Agreement will be repaid to Genzyme upon completion of this
offering.
Management estimates that the proceeds from this offering, along with
existing cash balances and funds available from existing bank and lease lines,
will be sufficient to fund operations through the end of 1997. The foregoing is
a forward-looking statement. The Company's cash requirements may vary materially
from those now planned depending upon the results of the testing services
business, the ability of the Company to enter into any transgenic research and
development collaborations in the future and the terms of such collaborations,
the results of research and development and preclinical and clinical testing,
competitive and technological advances, regulatory requirements and other
factors. If the Company experiences increased losses, the Company may have to
seek additional financing through collaborative arrangements or from public or
private sales of its securities, including equity securities. There can be no
assurance that additional funding will be available when needed or on terms
acceptable to GTC, if at all. If additional financing cannot be obtained when
needed or on acceptable terms, to continue its operations GTC could be forced to
delay, scale back or eliminate certain of its research and development programs
or to enter into license agreements with third parties for the commercialization
of technologies or products that the Company would otherwise undertake itself.
18
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA OF TSI
<TABLE>
The following selected consolidated financial data are derived from the
consolidated financial statements of TSI Corporation. The consolidated financial
statements as of and for the fiscal year ended July 3, 1994 and the period from
July 4, 1994 to September 30, 1994 have been audited by Coopers & Lybrand
L.L.P., independent accountants. The consolidated financial statements as of and
for the years ended June 30, 1991, June 28, 1992 and June 27, 1993 have been
audited by Ernst & Young LLP, independent auditors. The consolidated financial
statements as of June 27, 1993, July 3, 1994 and September 30, 1994 and for the
fiscal years ended June 27, 1993, July 3, 1994 and for the period July 4, 1994
to September 30, 1994, and the reports of Ernst and Young LLP and Coopers &
Lybrand L.L.P. relating thereto, are included elsewhere in this prospectus. The
following data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<CAPTION>
FISCAL YEAR ENDED PERIOD FROM
------------------------------------------------- JULY 4, TO
JUNE 30, JUNE 28, JUNE 27, JULY 3, SEPTEMBER 30,
1991 1992 1993 1994 1994
---------- ---------- ---------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE AND FOR SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Services................................... $ 15,361 $ 23,048 $ 44,482 $ 40,224 $ 6,790
Products................................... 5,105 7,899 10,962 8,690 1,720
Research and development................... 2,335 3,752 2,662 682 --
---------- ---------- ---------- ---------- -----------
Total revenues...................... 22,801 34,699 58,106 49,596 8,510
Costs and expenses:
Services................................... 9,735 19,763 37,207 32,755 6,800
Products................................... 4,461 8,173 9,951 8,603 1,481
Research and development................... 3,114 3,542 2,829 618 --
Selling, general and administrative........ 5,566 13,301 16,813 11,539 3,475
Restructuring.............................. -- -- 6,061 (770) --
Write-down of costs in excess of net assets
acquired................................. -- -- 9,586 -- --
---------- ---------- ---------- ---------- -----------
Total operating expenses............ 22,876 44,779 82,447 52,745 11,756
---------- ---------- ---------- ---------- -----------
Loss from operations......................... (75) (10,080) (24,341) (3,149) (3,246)
Other income and (expenses):
Interest income............................ 518 656 194 -- --
Interest expense........................... (310) (468) (699) (380) (111)
Other expense.............................. (120) (1,451) -- -- --
Disposal of operations..................... -- -- (6,327) -- --
---------- ---------- ---------- ---------- -----------
Loss before income taxes and minority
interest................................... 13 (11,343) (31,173) (3,529) (3,357)
Provision (benefit) for income taxes....... 389 (52) 850 353 106
---------- ---------- ---------- ---------- -----------
Loss before minority interest................ (376) (11,291) (32,023) (3,882) (3,463)
Minority interest.......................... -- 88 -- -- --
---------- ---------- ---------- ---------- -----------
Net Loss..................................... $ (376) $ (11,203) $ (32,023) $ (3,882) $ (3,463)
========== ========== ========== ========== ===========
Results per weighted average number of common
shares outstanding:
From continuing operations................. $ (0.03) $ (0.64) $ (1.24) $ (0.18) $ (0.16)
========== ========== ========== ========== ===========
Net loss................................... $ (0.03) $ (0.64) $ (1.54) $ (0.18) $ (0.16)
========== ========== ========== ========== ===========
Weighted average number of common shares
outstanding................................ 11,461,843 17,615,400 20,787,929 21,307,847 21,813,355
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 28, JUNE 27, JULY 3, SEPTEMBER 30,
1991 1992 1993 1994 1994
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments.............................. $ 12,662 $ 21,985 $ 1,886 $ 787 $ --
Working capital (deficiency)............... 14,533 20,896 (3,396) (6,002) (8,537)
Total assets............................... 34,408 64,622 33,959 27,418 25,823
Long-term liabilities...................... 2,736 5,557 4,852 3,175 4,603
Stockholders' equity(a).................... 25,929 43,871 11,499 8,696 5,244
<FN>
- ---------------
(a) There were no cash dividends paid for any period presented.
</TABLE>
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF TSI
INTRODUCTION
TSI was acquired by GTC on October 1, 1994. The audited financial
statements of TSI are included herein as a predecessor company of GTC within the
meaning of the applicable regulations of the Commission.
RESULTS OF OPERATIONS
Period from July 4, 1994 to September 30, 1994
Total revenues were $8.5 million for the fiscal first quarter of which 80%,
or $6.8 million, were from services and 20%, or $1.7 million, were from
products. TSI had no research and development revenues or expenses in the
quarter as its research and development agreement with Exemplar (the "Exemplar
Agreement") was terminated in November 1993.
Cost of services was $6.8 million in the quarter. The break-even
performance in services was due primarily to a significant decrease in services
revenue reflecting reduced sales and marketing efforts due to financial
constraints, as well as customer concern regarding the financial condition of
TSI before its acquisition by GTC in October 1994.
Cost of products was $1.5 million for the quarter, resulting in a $239,000
gross profit, or a 14% gross margin. SG&A expenses were $3.5 million for the
quarter. Net loss for the quarter was $3.5 million.
Year Ended July 3, 1994 as Compared to Year Ended June 27, 1993
For the fiscal year ended July 3, 1994, revenues decreased 15% to $49.6
million from fiscal 1993. The decrease in revenues was primarily the result of
the cessation of operations in the second quarter of fiscal 1994 at the
International BioResearch Group ("IBR") in Germany. Additionally, TSI's fiscal
1993 results included revenues from the Laboratory Animal Services ("LAS")
operation which was sold in June 1993 and from the Exemplar Agreement. In fiscal
1994, 81% of the revenues were derived from services, 18% from products and the
balance from the Exemplar Agreement. Excluding the results of IBR, LAS and the
Exemplar Agreement, revenues increased 9% in fiscal 1994 compared to fiscal
1993.
Services revenues decreased 10% in fiscal 1994 to $40.2 million primarily
due to the cessation of operations of IBR. Excluding the results of IBR,
services revenues increased 17% reflecting strong demand in the preclinical
testing business. Product revenues declined 21% in fiscal 1994 to $8.7 million
from fiscal 1993 due primarily to diagnostic revenues below the unusually high
level in fiscal 1993, the elimination of LAS and the effects of the interruption
in business caused by the relocation of the TSI-Washington operation in the
second quarter of fiscal 1994. Research and development revenues decreased 74%
in fiscal 1994 to $682,000 from fiscal 1993 reflecting the termination of the
Exemplar Agreement.
Cost of services for fiscal 1994 declined 12% to $32.8 million from fiscal
1993. Excluding the results of IBR and $1.4 million of unusual charges taken in
the third quarter of fiscal 1993, cost of services increased 11% in fiscal 1994
compared to fiscal 1993.
Gross profit on services amounted to $7.5 million in fiscal 1994 compared
to $7.3 million in fiscal 1993. The gross margin on services improved to 19% in
fiscal 1994 as compared to 16% in fiscal 1993, reflecting increased cost control
and revenue growth in the preclinical testing business. Excluding the impact of
IBR and the unusual charges, gross margin on services was 17% in fiscal 1994 as
compared to 13% in fiscal 1993.
Cost of products decreased 14% in fiscal 1994 from fiscal 1993 reflecting
the sale of LAS and a $451,000 charge to reserve for certain slow-moving
products incurred during fiscal 1993. Gross profit on products decreased to
$87,000 in fiscal 1994 from $1,011,000 in fiscal 1993. The gross margin on
products in fiscal 1994 decreased to 1% from 9% in fiscal 1993. The decrease was
primarily attributable to the relocation of TSI-Washington.
20
<PAGE> 21
SG&A expenses declined 31% in fiscal 1994 to $11.5 million compared to
fiscal 1993. Excluding the impact of IBR, LAS and $1.6 million of unusual
charges incurred in the third quarter of fiscal 1993, SG&A expenses declined 4%
reflecting the impact of TSI's fiscal 1993 restructuring of operations.
The net loss in fiscal 1994 was $3.9 million as compared to $32.0 million
in fiscal 1993. The net loss in fiscal 1994 included a $1.0 million one-time
gain due to the settlement of an arbitration claim regarding the purchase price
paid by TSI for HSRI. The net loss in fiscal 1993 reflected unusual charges
relating to asset write-offs and expense accruals of $1.6 million, a write-down
of costs in excess of net assets acquired of $9.6 million, a restructuring
charge of $6.1 million and a provision of $6.3 million for the planned disposal
of the LAS, IBR and CDP. Excluding the unusual charges, the write-down of costs
in excess of net assets acquired, the restructuring charge and the provision
from the disposal of operations, the net loss was $8.4 million in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
TSI had a zero cash position at September 30, 1994 compared to a positive
cash position of $787,000 at July 3, 1994. At September 30, 1994, TSI had a
working capital deficit of $8.5 million as compared to a deficit of $6.0 million
at July 3, 1994. On October 1, 1994, TSI was acquired by GTC, which subsequently
funded its working capital deficit and future operations.
TSI had a revolving line of credit with a commercial bank, which was
extended until August 1, 1994. Under the terms of the extension, TSI continued
to have a $1.0 million standby letter of credit and was able to borrow up to 70%
of the amount of eligible accounts receivable of its U.S. subsidiaries, subject
to a maximum borrowing of $2.0 million. In consideration for the extension, TSI
paid a fee of $100,000 and issued the bank 20,000 shares of TSI's common stock
and a warrant to purchase an additional 188,000 shares of TSI common stock which
became fully exercisable in July 1994.
In connection with TSI's acquisition agreement with GTC, GTC agreed to
facilitate TSI's bank refinancing by providing certain credit enhancements and
interim financing. As part of the refinancing, GTC provided a guarantee of the
standby letter of credit facility and the equipment lease obligations
outstanding with the bank. In addition, GTC provided a secondary credit line of
up to $2.0 million subordinate to the amounts outstanding under the bank's
credit agreement through August 1, 1995.
In June 1994, the bank modified and extended the credit agreement through
August 1, 1995. Under the terms of the extension, TSI was able to borrow up to
$3.0 million based upon 75% of eligible accounts receivable. In addition, the
bank agreed to increase the standby letter of credit from $1.0 million to $1.5
million.
In September 1994, TSI received a $2.0 million lease line with a commercial
leasing company. The leases required monthly payments over 36 months at 10% with
a fair market value buyout in the range of 5% to 10% of original cost. A 25%
cash deposit was payable at inception. As of September 30, 1994, substantially
all of the lease line was utilized.
21
<PAGE> 22
BUSINESS
GENERAL
GTC has established a leadership position in the application of transgenic
technology to the development and production of genetically engineered proteins
for therapeutic, diagnostic and other biomedical uses, both in collaboration
with pharmaceutical and biotechnology companies and independently. To date, GTC
has produced more than 25 such proteins. For its lead compound, AT-III, the
Company has achieved clinical grade purity with high recovery levels and has
completed preclinical safety and efficacy studies. GTC is also a leading CRO,
providing services such as preclinical efficacy and safety testing, in vitro
testing and formulation development to pharmaceutical, biotechnology, medical
device and other companies. Revenues for the Company's testing and production
services in 1995 were $26.4 million; revenues for the quarter ended March 31,
1996 were $8.8 million, an increase of 76% above the same period for 1995.
GTC produces recombinant proteins transgenically by inserting into the
genetic material of an animal a gene that directs the production of a desired
protein in the milk of female offspring. The Company believes that transgenic
production offers significant economic and technological advantages relative to
traditional protein production systems, including reduced capital expenditures
and lower direct production cost per unit for complex proteins. For proteins
currently derived from pooled human plasma, transgenic production provides an
alternative source, free from the risks of transmission of human viruses. In the
case of certain complex proteins, transgenic production may represent the only
technologically and economically feasible method of commercial production. To
date, GTC has expressed 14 proteins at levels of one gram per liter or higher,
more than 10 times the level typically achieved for comparable proteins in
traditional cell culture systems.
GTC's most advanced product candidate is transgenic AT-III, an
anticoagulant normally present in human serum. Plasma-derived AT-III is an
approved therapy for inherited AT-III deficiency and for certain acquired
deficiencies. Worldwide sales of plasma-derived AT-III were approximately $200
million in 1994. The Company believes transgenic AT-III may represent a more
attractive product in light of safety considerations, the limited volume of
AT-III available from plasma and the impracticality of producing sufficient
quantities of recombinant AT-III by traditional methods. GTC has expressed
transgenic AT-III in goats, demonstrating stable expression across two
generations. Further, GTC has purified transgenic AT-III to clinical grade with
attractive yields. Preclinical safety and efficacy studies have been
successfully completed and GTC is preparing an IND for filing with the FDA to
initiate a Phase I clinical trial for this product.
Other significant plasma proteins under development by GTC include API and
HSA. Additionally, GTC is working with corporate partners on a number of
monoclonal antibodies, including transgenic BR-96, which has potential
anti-cancer utility, under an agreement with Bristol-Myers. The Company is also
developing transgenic production processes for other proteins, including
prolactin, insulin and a protein for malaria vaccine.
The Company's CRO operations are focused on enabling its clients to meet
regulatory testing and other product development needs quickly and effectively
by offering a fully integrated line of services. GTC's laboratories focus on
providing high value, scientifically differentiated services to clients,
including preclinical efficacy testing, experimental surgery, photobiology and
reproductive toxicology testing as well as formulation development. GTC uses its
technological capabilities to introduce new services that improve the ability of
its customers to develop their products successfully. The Company's
comprehensive programs link its preclinical and manufacturing support services
in order to reduce the time and expense of bringing new therapeutics or other
products to market.
As an outgrowth of production services performed for the NCI, the Company
has developed technology for the production of idiotypic vaccines, in which a
cancer patient's own tumor cells are used to enhance the immune system's ability
to prevent the regrowth of tumors. Idiotypic vaccines produced by GTC have shown
promising results, including the absence of disease for over six years in four
of nine lymphoma patients treated. Results from this program have been reported
in the October 1992 issue of The New England Journal of
22
<PAGE> 23
Medicine and the May 1995 issue of The Lancet. GTC expects to produce vaccines
for approximately 20 patients in 1996.
TRANSGENIC PRODUCTION
Overview and Strategy
A growing number of recombinant proteins are being developed for
therapeutic and diagnostic applications. Many of these proteins have proven
difficult or expensive to produce in the quantities required using conventional
methods, such as bacteria, yeast or mammalian cells. Moreover, bacteria or yeast
systems cannot produce many complex proteins. While mammalian cells can
reproduce complex proteins, they are generally more difficult and expensive to
grow and often produce lower volumes of protein. Proteins produced by the
Company transgenically have been expressed at concentrations significantly
greater than those typically achieved using conventional methods.
Transgenic technology uses in vitro microinjection or other techniques to
introduce a genetically engineered segment of exogenous DNA (an "expression
vector") into the genetic material of a fertilized egg or early stage animal
embryo. Two types of genetic instructions are incorporated into the expression
vector: the coding sequence and the promoter sequence. Coding sequences instruct
the cells of the animal to express a specified protein. Promoter sequences
direct the expression of proteins at appropriate times and by specific tissues
or cell types. The modified embryo is then transferred to a recipient female.
Transgenes are successfully integrated into the genetic makeup of only a small
percentage of the embryos that are microinjected. If successful, the resulting
animal, when mature, will express the desired protein. Once established in the
first generation of transgenic animals, the transgene is transmitted like other
genetic traits to future generations through traditional breeding with either
non-transgenic or other transgenic animals.
The Company believes transgenic production offers significant economic and
technological advantages over traditional methods of protein production,
including reduction in the total amount of required capital expenditures, lower
direct production cost per unit and reduced risk of transmission of human
viruses. For certain complex proteins, transgenic production may represent the
only technologically and economically feasible method of commercial production.
Transgenic production may be achieved in any dairy species. To date, the
Company has worked principally with goats, which offer an attractive combination
of large milk volumes, relatively short generational time periods and ease of
handling and milking. Dairy goats mature six months after birth, have a
gestation period of five months and produce approximately 800 liters of milk per
year, which compares favorably with sheep, which have similar gestation and
maturation periods, but produce only one-half to three-quarters of the volume of
milk per year as goats. Although cows produce considerably more milk per year
than goats, the combined gestation and maturation period for cows is
approximately 24 months, compared to 11 months for goats. GTC's facility in
central Massachusetts currently houses more than 500 goats which were imported
from New Zealand for their scrapie-free certification.
GTC's strategy is to commercially produce proteins by use of transgenic
technology both by (i) entering into contracts with biotechnology and
pharmaceutical companies to utilize the Company's transgenic services in
exchange for revenue, royalties and, possibly, marketing rights to the resulting
product and (ii) independently identifying proteins in the public domain,
proteins covered by lapsing patents and proprietary proteins available for
license which represent attractive candidates for transgenic production and
funding development of such proteins itself or seeking corporate partner
funding.
GTC has entered into funding contracts for the development of AT-III, other
plasma proteins, certain monoclonal antibodies and other products. To date, such
contracts have generally consisted of feasibility studies aimed at expressing a
targeted protein in the milk of transgenic animals. GTC believes that future
collaborations will be of broader scope.
23
<PAGE> 24
Achievements to Date
Over the past few years, GTC has shown the feasibility of transgenic
protein production by the achievement of specific milestones:
- To date, GTC has produced 27 different transgenic proteins in animals,
14 at concentrations of one gram per liter or greater and one protein
in excess of 35 grams per liter, levels often many times higher than
those achievable in other production systems. For example, proteins
produced in mammalian cell culture are typically expressed at levels
considerably less than 0.1 grams per liter.
- The Company has produced a significant number of transgenic goats. GTC
maintains a herd of over 500 goats at its facility in Massachusetts as
well as an additional 150 goats at Tufts University School of
Veterinary Medicine ("Tufts"). Over 40 of these goats are transgenic,
expressing five different proteins.
- Stability of expression has been demonstrated across lactations, and,
for two proteins, across two generations expressing the same transgene.
- Together with Genzyme, GTC has been able to achieve clinical grade
purity for a transgenically produced protein at high recovery levels.
This transgenic protein has been extensively characterized and its
pharmacodynamic properties in animal models have been shown to be
comparable to those of the same protein from other sources.
- GTC recently completed the final preclinical safety and efficacy
studies required prior to filing an IND for AT-III.
Although the Company plans to file an IND with the FDA to initiate a Phase
I clinical trial for AT-III later in 1996, to the Company's knowledge, no
protein produced in the milk of a transgenic animal has been submitted for
regulatory approval in the United States or elsewhere, nor has any entity
conducted human clinical trials of any such protein. There can be no assurance
that the Company's clinical trial will be allowed, and if allowed, will be
completed successfully. Likewise, there can be no assurance that regulatory
approval for AT-III will be received on a timely basis or at all. See "Risk
Factors-Government Regulation."
TRANSGENIC PRODUCTS UNDER DEVELOPMENT
Antithrombin III. AT-III is an anticoagulant normally present in human
serum. Decreased levels of AT-III are found in individuals who have either a
hereditary or an acquired deficiency of AT-III. The hereditary deficiency has an
incidence rate of 1 in 2,000 to 1 in 20,000. Individuals with hereditary AT-III
deficiency have an increased tendency towards thromboses and are treated with
AT-III protein replacement therapy during periods when they are at high risk,
such as during surgery. Acquired AT-III deficiency occurs in many disease states
as a result of several possible causes, including a decrease in the amount of
AT-III produced, an increase in the rate of AT-III consumption or an abnormal
loss of AT-III from the circulation. Examples of such conditions include acute
liver failure, disseminated intravascular coagulation, sepsis and septic shock,
burns, multiple organ failure, bone marrow and other organ transplantation and
hemodialysis.
Plasma-derived AT-III is approved for use in Europe and Japan for treatment
of both acquired and hereditary AT-III deficiency. In the United States,
plasma-derived AT-III is currently approved for use only for hereditary AT-III
deficiency. The worldwide market for plasma-derived AT-III was approximately
$200 million in 1994.
GTC believes transgenic AT-III may represent a more attractive product in
light of the risks of viral transmission from pooled plasma products in general,
the limited volume of AT-III currently available from plasma and the
impracticality of producing sufficient quantities of recombinant AT-III in cell
culture systems. The Company also believes that a lower cost, higher volume
alternative to plasma-derived AT-III will further expand the use of AT-III in
clinical settings.
GTC has produced multiple transgenic goats carrying the AT-III gene and has
selected a founder goat from which a production herd is being generated. This
genetic line expresses AT-III at levels of approximately
24
<PAGE> 25
two grams per liter. The processes for production and purification have been
finalized and result in a product that is purified to clinical grade at
attractive yields. Preclinical safety and efficacy studies for AT-III have been
successfully completed. The Company plans to file an IND with the FDA for the
use of transgenic AT-III as a potential treatment for AT-III deficiency that
occurs during certain vascular surgeries, including cardiopulmonary artery
bypass grafting.
GTC is developing recombinant human AT-III under a license from
Behringwerke AG, subject to a royalty obligation. In March 1996, GTC and Genzyme
signed an agreement pursuant to which Genzyme is funding the development of
AT-III through the first quarter of 1997. Genzyme has been granted co-marketing
rights to transgenic AT-III in Europe and the United States subject to its
entering into a long-term development and supply agreement with GTC by March
1997. If the parties do not enter into such an agreement, all marketing rights
revert to GTC and GTC may continue to pursue development of transgenic AT-III on
its own or may seek another corporate partner. The Joint Venture, which
contributed development funding for AT-III through December 1995, retains
marketing rights to transgenic AT-III in Asia. See "Business -- Relationship
with Genzyme" and "Business -- Other Strategic Collaborations."
Alpha1 -- Protease Inhibitor. API is a serine protease inhibitor which is
normally present in human plasma. In certain pulmonary diseases, including
congenital alpha1-antitrypsin ("AAT") deficiency and cystic fibrosis, patients
develop chronic emphysema. Although the precise mechanism is uncertain,
researchers believe that the development of emphysema results from a chronic
imbalance between elastase and API, which is deficient in patients with
hereditary AAT deficiency. Plasma-derived API is approved in the United States
for parenteral use in the treatment of patients with congenital AAT deficiency.
Treatment of AAT deficiency focuses on chronic replacement therapy with API to
restore the elastase/elastase inhibitor balance. Dosing requirements are high,
averaging four grams per week for a 150-pound patient.
An imbalance between elastase and elastase inhibitors also occurs in cystic
fibrosis, which is the most common fatal genetic disease among Caucasians,
occurring in one in every 2,500 infants born in the United States. Based on
preliminary data, the Company believes that aerosol administration of API to
cystic fibrosis patients may be effective in reducing the level of neutrophil
elastase in the lung, thereby reducing elastase-induced pulmonary tissue
degradation and fibrosis.
GTC believes that transgenic API may represent a more attractive product
than plasma-derived API in light of risks of viral transmission from donor
plasma products, and that it will be more economical to produce and more widely
available than the plasma-derived products. The ability to produce large
quantities of transgenic API may enable the Company to pursue other indications
for this product, such as atopic dermatitis, in which an imbalance of proteases
is also implicated.
GTC has expressed API at levels equivalent to 35 grams per liter in a mouse
model. Several transgenic founder goats have been generated, including at least
one line which expresses API in excess of 10 grams per liter. The Company has
acquired an option to license certain patents relating to the use of API for
certain indications. To date, GTC has funded the development of API internally.
Human Serum Albumin. HSA is the protein principally responsible for
maintaining osmotic pressure and plasma volume. It is critical to the transport
of amino acids, fatty acids, enzymes and hormones in the blood stream. The
therapeutic use of HSA is indicated in situations of blood loss and decreased
blood albumin levels which can occur during shock, serious burns, pre- and
post-operative conditions, gastric and intestinal malfunctions. HSA is currently
produced by human plasma fractionation, with worldwide sales in excess of $1.3
billion during 1994.
GTC has expressed transgenic HSA in mice at levels equivalent to or greater
than 15 grams per liter. The Company believes that HSA is not the subject of any
composition of matter patent, and is in discussions with several large
multinational pharmaceutical companies with respect to further development of
transgenic HSA.
Monoclonal Antibodies. Monoclonal antibodies are immune system proteins
that can find and attach to specific biological targets in the body. Recent
advances in developing humanized and human antibodies, single chain antibodies
and conjugated antibodies have added to the potential value of these therapeutic
agents. More than 50 monoclonal antibodies are now in clinical trials with many
more in development as therapeutics
25
<PAGE> 26
for cancer, cardiovascular disease, immune system disorders and against a wide
variety of infectious agents, such as viruses and bacterial infections. GTC is
now collaborating with pharmaceutical and biotechnology companies for the
transgenic production of a number of therapeutic monoclonal antibodies.
Bristol-Myers, a leading pharmaceutical company specializing in cancer
treatment, has entered into an agreement with GTC for transgenic production in
goats of its BR-96 monoclonal antibody, a potential therapy for breast and lung
cancer. Bristol-Myers' approach is to use the BR-96 antibody to deliver a
traditional chemotherapeutic agent, doxorubicin, directly to cancer sites in the
body. The expected effect is to achieve greater impact on the cancer while
reducing toxicities associated with doxorubicin. In this program, several goats
have recently been born at GTC's farm carrying the BR-96 transgene.
Bristol-Myers has tested BR-96 produced in the milk of mice, confirming its
comparability to BR-96 made in cell culture and initial product samples from
founder female goats are expected in early 1997.
GTC currently has five other funded antibody development programs underway.
One, an anti-colon cancer antibody produced on behalf of a Japanese
pharmaceutical company, has been expressed in the milk of goats at four grams
per liter. Other programs, on behalf of such companies as NovoPharm,
Behringwerke AG, NeoRx Corporation and Boehringer Mannheim GmbH, are in early
stages. The Company is in active discussions with a number of other
pharmaceutical and biotechnology companies for the transgenic development of
therapeutic antibodies.
Insulin. Current worldwide sales of insulin products are more than $3
billion. More than a decade ago, recombinant DNA insulin was approved and now
accounts for approximately 50% of the market.
GTC has expressed insulin precursors at the equivalent of more than eight
grams per liter in the milk of mice, which provides for the potential to
manufacture insulin on a highly cost effective basis. GTC has taken initial
steps to develop appropriate insulin processing and purification procedures, and
the Company believes that there are several approaches to the manufacture of a
transgenic insulin that may offer cost benefits compared to current products.
GTC intends to seek a collaborator for the further development of transgenic
insulin. Insulin is not the subject of any composition of matter patents which
could foreclose the Company's development program.
Prolactin. In collaboration with Genzyme, GTC has developed multiple
transgenic mouse lines which express prolactin at levels in excess of the
equivalent of one gram per liter. Prolactin is a human hormone which has
numerous biological activities, including stimulation of the immune system and
stimulation of lactation. Genzyme has a pending patent application covering
recombinant prolactin and the parties are jointly exploring the development of
transgenic prolactin for multiple clinical indications, and for the infant and
specialty nutritional product markets.
Malaria Vaccine. Proteins used for human vaccines must be properly
processed by the cells that produce them in order to create the optimal
immunization levels and therefore protect against the infectious agent. Certain
mammalian cell cultures complete this task automatically. For systems which
cannot complete the necessary processing (microbial and yeast), the output must
be chemically modified to achieve the desired result. Public health approaches
and cost constraints require that the cost per vaccine dose be low, while
quantities of the protein required may be large. For some vaccines now in
development, the protein is not always expressed in the ideal form when it is
made in available systems, such as in yeast culture. GTC's transgenic expression
system has the potential to express the correct, most immunogenic, protein both
economically and on a large scale.
Malaria is a disease that has an annual incidence of more than 300 million
people worldwide and results in several million deaths annually. GTC is working
with the U.S. National Institutes of Health (the "NIH") and the Federal Malaria
Vaccine Coordinating Committee to transgenically express a malaria vaccine in
development and to examine the options for commercializing the vaccine. GTC has
begun discussions with potential collaborators on its vaccine program.
The Company believes that transgenic technology is also applicable to the
development of vaccines for other diseases.
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TransGenerics. GTC has a program to identify and develop transgenic
production systems for generic products ("TransGenerics"). The first generation
of approved recombinant drugs will come off patent over the next several years.
As a result, brand name drugs, many of which have established significant
markets, may become vulnerable to competition from generic versions produced by
manufacturing methods which are more cost effective. GTC is developing
transgenically produced beta interferon and a long-acting form of tissue
plasminogen activator ("LA-tPA") and believes that Factor VIII and
erythropoietin may be candidates for transgenic production. These drugs
currently are approved products and have significant, established markets.
LA-tPA has been expressed at gram per liter levels in two generations of
goats. Work has also begun on beta interferon. GTC is in discussions with both
generic and proprietary pharmaceutical and biotechnology companies with
strategic and product-specific interests in the TransGenerics program.
CRO SERVICES
Overview
Contract research organizations provide testing and development services to
pharmaceutical, biotechnology, medical device and other companies, as well as to
certain government agencies. The industry is divided generally into companies
which conduct human clinical trials and those providing non-clinical services,
including preclinical testing, clinical trial support and other development
services. The worldwide revenues for non-clinical CRO services were in excess of
$1 billion in 1993.
The growth of the CRO market has been influenced by several factors. First,
cost control pressures on large pharmaceutical firms are leading them to focus
on core competencies often resulting in a reduction in the size and capacity of
in-house, non-clinical testing departments. Second, emerging biotechnology and
medical device companies often have and can afford little infrastructure
dedicated to such functions. Third, new scientific developments continue to lead
to new fields of safety testing. Fourth, regulatory changes have mandated
additional testing requirements. Fifth, the need for services, such as efficacy
models and formulation development, increases as pharmaceutical companies
venture further from their traditional bases in search of breakthrough products.
GTC believes that it has built one of the premier non-clinical CROs in the
industry. The Company believes that it has a broader set of value-added services
than any of its competitors and is differentiated by its ability to offer
comprehensive development programs. The Company has the ability to perform
virtually all of the safety, efficacy and quality control testing, as well as to
provide the regulatory affairs expertise necessary to bring a client's early
research-stage product to the start of Phase I clinical trials.
Operations and Technical Capabilities
GTC acquired its CRO capabilities through the acquisition of TSI in October
1994 and BDL in June 1995. GTC conducts its CRO services through five
laboratories: Mason Laboratories (Worcester, Massachusetts); Argus Research
Laboratories (Horsham, Pennsylvania); Redfield Laboratories (Redfield,
Arkansas); Washington Laboratories (Rockville, Maryland) and BDL (Cambridge,
Massachusetts).
GTC's laboratories focus on providing high value, scientifically
differentiated service to its clients. Fields in which GTC provides contract
services include:
- Preclinical Efficacy Testing to measure the effectiveness of a drug
candidate prior to human clinical trials. GTC believes that its Mason
Laboratories facility has the only comprehensive preclinical efficacy
service in the preclinical CRO marketplace utilizing a wide variety of
disease models and expertise intended to assist clients in designing
optimal clinical trials.
- Experimental Surgery to support toxicology programs enables GTC
scientists to test novel routes of administration for biotechnology
products which cannot be delivered through standard routes. GTC
believes that its Mason Laboratories facility has the leading surgical
capabilities in the preclinical CRO marketplace and has the ability to
perform studies which are unavailable from other CROs.
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- Photobiology Testing to measure a drug candidate's potential
interactions with the sun. GTC believes that the FDA will require an
increasing number of products to be tested for these effects. GTC has
the only CRO facilities capable of performing a full range of
phototoxicology and photocarcinogenesis testing.
- Developmental and Reproductive Toxicology Testing to measure a drug
candidate's potential impact on a fetus. GTC believes that its Argus
Research Laboratories facility has performed more teratology studies
than any other laboratory in the industry and is widely recognized as
the leader in the field.
- Diet Optimization for carcinogenicity studies has been shown to reduce
variability in tumor growth and mortality. GTC believes that these
studies offer improved quality at a lower price than would be possible
without diet optimization. GTC's Redfield Laboratories facility is the
only CRO facility to have validated multiple strains of test animals
for these studies.
GTC has also made significant investments in bioanalytical chemistry
services to support clinical trials, drug formulation development and lot
release testing for biopharmaceuticals. The Company believes that its experience
in related areas, its client base and its sales force enable the Company to
compete effectively in these fields. Clients have recently contracted with the
Company for GTC to provide services for major programs in each of these areas,
and GTC is pursuing opportunities which may, if successfully concluded, lead to
growth in each field. GTC believes that its ability to provide high value,
scientifically differentiated services, combined with its traditional strengths
in toxicology, pharmacokinetics, cell line testing and production and regulatory
affairs, offers clients the broadest set of preclinical services available in
the CRO industry.
GTC believes the key to sustaining superior performance in this field will
be in providing services in a close, collaborative relationship in which
customers are able to receive scientific service from GTC at levels equal to or
greater than that which they could receive from an in-house department. Toward
this end, GTC has also made significant investment in people, technology and
programs since its acquisition of TSI, increasing the numbers of doctoral level
employees by 35% during 1995. GTC believes that its testing services strategy
has been validated by the growth in its business since the acquisition of TSI in
October 1994. Revenues for the Company's testing and production services in 1995
were $26.4 million and revenues for the quarter ended March 31, 1996 were $8.8
million, representing a 76% increase compared to the same period for 1995.
IDIOTYPIC CANCER VACCINES
GTC's Washington Laboratories has been producing experimental cancer
vaccines for the NCI under contract since 1993. These vaccines have shown
preliminary efficacy in an early clinical trial. The Company recently signed a
letter of intent to enter into a collaborative research and development
agreement with NCI to expand the clinical trials and gain development rights to
the program.
Idiotypic cancer vaccines are autologous therapeutics, requiring that
immunoglobulin harvested from individual patients be expanded in separate cell
cultures. Vaccines are produced at the NCI and Washington Laboratories and are
given to patients upon the completion of chemotherapy. GTC believes that the
vaccine activates the patient's immune system to destroy the cancer cells which
often remain after traditional chemotherapy regimens.
The principal clinical focus of the work today is on B-cell lymphoma, with
a secondary effort on multiple myeloma. There are over 35,000 newly diagnosed
cases of B-cell lymphoma in the United States each year. Most patients initially
respond favorably to chemotherapy, but the cancer has a 80% to 90% mortality
rate, with patients typically relapsing within three and a half years.
Idiotypic vaccines produced by GTC have shown promising results, including
the absence of disease for over six years in four of nine lymphoma patients. The
first myeloma patient treated is disease-free after three years. Results from
this program have been reported in the October 1992 issue of The New England
Journal of Medicine and the May 1995 issue of The Lancet. GTC expects to produce
vaccines to treat approximately
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20 patients in 1996. The production cost for these vaccines will be borne by the
NCI, and GTC will invest in process development and scale-up.
RELATIONSHIP WITH GENZYME
Equity Position. Genzyme is the largest single stockholder of the Company,
currently holding 6,528,365 shares of Common Stock. Genzyme also holds a Common
Stock Purchase Warrant exercisable for 145,000 shares of Common Stock at a price
of approximately $2.84 per share, the market price at the time of issuance (the
"Genzyme Warrant"). Of the 3,000,000 shares of Common Stock being offered
hereby, 900,000 shares will be sold to Genzyme. Therefore, assuming exercise of
the Genzyme Warrant, Genzyme will own approximately 45% of the outstanding
Common Stock after giving effect to this offering. All remaining indebtedness
under the Convertible Debt Agreement may also be converted, prior to repayment,
into Common Stock at Genzyme's option. However, the Company expects that the
outstanding balance will be repaid to Genzyme in cash upon the closing of this
offering. See "Use of Proceeds."
Four million of Genzyme's shares in GTC were acquired in 1993 at the time
of the Company's organization in exchange for the transfer of certain assets to
the Company. In February 1995, 500,000 shares were sold to Genzyme at $8.00 per
share upon exercise by GTC of a put agreement entered into at the time of the
Company's initial public offering. Genzyme received 1,333,333 shares in 1995 and
219,565 shares in 1996 in exchange for conversion of debt at the then current
market prices. The remaining 475,467 shares were issued to Genzyme in July 1995
in exchange for shares of Genzyme common stock delivered as a portion of the
consideration for the acquisition of BDL. The Genzyme Warrant, which expires on
July 3, 2005, was issued to Genzyme in consideration of Genzyme's guaranty of
the Company's indebtedness to a commercial bank discussed below. All of the
shares held by Genzyme are entitled to certain registration rights. See
"Description of Capital Stock."
Arrangements Regarding Technology and Product Development. GTC and Genzyme
have entered into a number of agreements regarding technology and product
development discussed below:
Technology Transfer Agreement. Under the Technology Transfer
Agreement dated May 1, 1993, Genzyme transferred substantially all of its
transgenic assets and liabilities to GTC, including its ownership in the
Joint Venture, assigned its relevant contracts and licensed to the Company
technology owned or controlled by it and relating to the production of
recombinant proteins in the milk of transgenic animals (the "Field") and
the purification of proteins produced in that manner. The license is
worldwide and royalty free as to Genzyme, although GTC is obligated to
Genzyme's licensors for any royalties due them. As long as Genzyme owns
less than 50% of GTC, Genzyme may use the transferred technology or any
other technology it subsequently acquires relating to the Field without any
royalty obligation to the Company, provided Genzyme may not offer
transgenic production services to third parties.
Genzyme R&D Agreement. Pursuant to the Genzyme R&D Agreement, Genzyme
and GTC agreed, until May 1, 1998, to provide research and development
services for the other relating, in the case of GTC, to transgenic
production of recombinant proteins and, in the case of Genzyme, to the
purification of such proteins. Each company receives payments from the
other equal to the performing party's fully allocated cost of such
services, which is no less than 80% of the annual budgets established by
the parties under the Genzyme R&D Agreement, plus, in most cases, a fee
equal to 10% of such costs.
AT-III Development Funding. Under the Convertible Debt Agreement,
Genzyme agreed to fund transgenic AT-III development through the first
quarter of 1997 in exchange for co-marketing rights to AT-III in all
territories other than Asia. Such marketing rights will terminate if a
development and supply agreement is not executed by the parties prior to
March 31, 1997. See "Business -- Transgenic Production."
Other Arrangements. GTC and Genzyme have also entered into a number of
other arrangements:
Services Agreement. Under a services agreement between GTC and
Genzyme (the "Services Agreement"), GTC pays Genzyme a fixed monthly fee
for basic laboratory and administrative support services provided by
Genzyme. The monthly fee is adjusted annually, based on the services to be
provided
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and changes in Genzyme's cost of providing the services. The Services
Agreement is self-renewing annually and may be terminated upon 90 days
notice by either party to the other party.
Lease. GTC leases a portion of Genzyme's facilities in Framingham,
Massachusetts (the "Lease"). GTC paid Genzyme $169,000 under the Lease in
1995. See "Facilities."
Credit Line Guaranty, Term Loan Guaranty and Lien. The Company
obtained a credit line in July 1995 and a term loan in December 1995 with a
commercial bank secured by Genzyme's guaranty of the Company's obligations
thereunder (up to $9.8 million at March 31, 1996). The Company has agreed
to reimburse Genzyme for any liability Genzyme may incur under such
guaranty and has granted Genzyme a first lien on all of the Company's
assets to secure such obligation.
Convertible Debt Agreement. In March 1996, the Company entered into
the Convertible Debt Agreement with Genzyme under which Genzyme agreed to
provide a revolving line of credit in the amount of $10 million. The line
of credit will terminate upon the closing of this offering and all
outstanding amounts will become due and payable. As of June 30, 1996,
approximately $1.4 million was outstanding under the revolving line of
credit and $1,673,000 of debt had been converted into 219,565 shares of
Common Stock in 1996. See "Use of Proceeds."
Insurance. The Company currently participates together with other
Genzyme affiliates as a co-insured under an insurance policy maintained by
Genzyme, which includes product and professional liability coverage. Claims
made by either Genzyme or any Genzyme affiliate under such insurance policy
with respect to a particular form of liability automatically reduce the
scope of the related liability coverage available for other co-insured
parties thereunder. As a result, there can be no assurance that such
insurance coverage will be sufficient to cover any claim, should such claim
arise. See "Risk Factors -- Risk of Service or Product Liability."
OTHER STRATEGIC COLLABORATIONS
Tufts University School of Veterinary Medicine. Pursuant to a cooperation
and licensing agreement, Tufts has agreed to work exclusively with GTC until
September 1998 in developing commercial applications of transgenic protein
production in milk. Tufts has also granted GTC a perpetual, non-exclusive
license to use certain proprietary microinjection technology and animal
husbandry techniques. Sales of products derived from transgenic goats produced
by Tufts, or from their offspring, are subject to royalties payable to Tufts.
The Company maintains a herd of 150 goats at Tufts' facility in Grafton,
Massachusetts.
The Joint Venture. GTC holds an interest in the Joint Venture which, in
March 1994, increased to 22% after an additional $1.2 million cash investment by
the Company. In October 1995, GTC contributed approximately $807,000 to maintain
its 22% interest. The Joint Venture and GTC are parties to a research and
development agreement under which the Joint Venture funded GTC's research into
transgenic production of AT-III through October 1995 and certain research and
other proteins (the "Funded Proteins") through October 1996. From its inception
until the acquisition of TSI, the Joint Venture provided the majority of GTC's
revenues. GTC has granted to the Joint Venture an exclusive license in Asia to
use GTC's transgenic technology to market and sell transgenic animals and to
sell Funded Proteins until the later of 2008 or the expiration of any applicable
Japanese patent, subject to various reciprocal royalty obligations. See
"Business -- Transgenic Production."
PATENTS AND PROPRIETARY RIGHTS
GTC has filed a number of patent applications which cover relevant portions
of its transgenic technology, several of which are covered by cross-licensing
agreements. GTC holds an exclusive license from Genzyme to rights under a number
of patent applications on file in the United States and corresponding foreign
patent applications relating to certain aspects of its technology. GTC has been
notified by the European Patent Office of the Office's intention to grant the
full range of claims presented in GTC's application covering the basic method of
protein production in milk, as well as any promoter used to do so. Other GTC
applications as to
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specific proteins, classes of proteins, techniques to enhance expression and
purification technologies remain pending.
GTC has exclusive and nonexclusive licenses to technologies owned by other
parties, including, DNX, Inc. as to microinjection, Stanford University as to
gene transfer, and Behringwerke AG as to AT-III, as well as promoter
cross-licenses in place with PPL Therapeutics PLC and Pharming B.V. Certain of
the licenses require GTC to pay royalties on sales of products which may be
derived from or produced using the licensed technology. The licenses generally
extend for the life of any applicable patent. GTC is currently involved in an
arbitration proceeding with Pharming B.V. with respect to one such cross-license
agreement. See "Business -- Legal Proceedings."
There can be no assurance that patent applications filed by GTC will result
in patents being issued or that any patents issued to or licensed by GTC will be
held valid. The Company may also be subject to claims that result in the
revocation of patent rights previously licensed to GTC as a result of which the
Company may be required to obtain licenses from others to continue to develop,
test or commercialize its products. There can be no assurance that GTC will be
able to obtain such licenses on acceptable terms, if at all. In addition, there
may be pending or issued patents held by parties not affiliated with GTC that
relate to the technology utilized by GTC. As a result, GTC may need to acquire
licenses to, or contest the validity of, such patents or any other similar
patents which may be issued. GTC could incur substantial costs in defending
itself against challenges to patent or infringement claims made by third parties
or in enforcing any patent rights of its own.
The Company also relies upon trade secrets, know how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information. The loss or exposure of trade secrets possessed
by GTC could adversely affect its business. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Technology."
COMPETITION
Transgenics
Many companies, including biotechnology and pharmaceutical companies, are
actively engaged in seeking efficient methods of producing proteins for
therapeutic or diagnostic applications. Two other companies known to GTC are
extensively engaged in the application of transgenic technology for the
production of proteins: Pharming B.V. and PPL Therapeutics PLC. Pharming B.V.,
based in the Netherlands, is engaged in the development of recombinant proteins
in the milk of transgenic cows, which are most suitable for extremely high
volume protein production. PPL Therapeutics PLC, which is based in Scotland,
utilizes sheep for their protein production. See "Business -- Legal
Proceedings."
GTC's success will depend on its continued ability to attract and retain
qualified personnel, to develop and secure the rights to advanced proprietary
technology and to exploit commercially its technology in a timely and cost
effective manner so that transgenic production systems are competitive with
existing and future therapeutics production systems.
Testing Services
The worldwide markets for testing services, manufacturing support services
and related development services are highly fragmented, involving several
hundred companies as well as universities and government bodies. Competition in
these markets is based primarily on technological capabilities and reputation
for quality
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of products and services offered and perceived financial stability. In certain
market segments, price is a significant competitive factor. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
Transgenics
The manufacturing and marketing of GTC's potential products, and certain
areas of research related to them, are subject to regulation by governmental
authorities in the United States, including the FDA, the USDA and the EPA.
Comparable authorities are involved in other countries.
To GTC's knowledge, no protein produced in the milk of a transgenic animal
has been submitted for regulatory approval. However, the FDA issued the Points
to Consider in August 1995. Earlier in 1995 comparable guidelines were issued by
European regulatory authorities. GTC believes that its programs satisfactorily
address the issues raised by these documents and generally views them as a very
positive milestone in the acceptance of the transgenic form of production. Based
on discussions with the FDA and others, GTC expects that the basic U.S.
regulatory framework for the transgenic production of recombinant proteins in
animals will be similar to that described in the Points to Consider.
The anticipated approval process will be a two-part process, governing
first the approval of an individual pharmaceutical product as safe and effective
and second the approval of the manufacturing process as complying with
applicable FDA current GMPs. There can be no assurance, however, that there will
not be any delays in product development or FDA approval due to issues arising
from the breeding of transgenic animals and the use of proteins derived from
such animals.
With respect to therapeutic products, the standard FDA approval process
includes preclinical laboratory and animal testing, submission of an IND
application to the FDA, appropriate human clinical trials to establish safety
and effectiveness and submission of an NDA prior to market introduction. Based
on the information available to it, the Company expects the same process to
apply to transgenically produced products, with the approval process to be
undertaken either by the Company, by a collaborator for which the Company is
producing proteins or jointly, depending upon the nature of the relationship
involved.
Approval for the production facilities to be used in producing a
therapeutic product will be subject to both the requirements for Biologics
License Applications and the Points to Consider. See "Risk Factors -- Government
Regulation."
Testing Services
GTC and its customers are subject to a variety of regulatory requirements
intended to ensure the quality and integrity of their products and services. The
industry standard for conducting non-clinical testing is embodied in regulations
called Good Laboratory Practices ("GLPs"). GLPs have been adopted by the EPA and
the FDA and foreign regulatory bodies. To help ensure compliance, the Company
maintains a strict quality assurance program at each site to audit test data and
conduct regular inspections of testing procedures and facilities. GTC also
complies with FDA-established current GMPs at its Washington Laboratories and at
BDL.
GTC also maintains certain licenses and permits issued by federal, state
and local authorities relating to the operation of its current laboratory and
testing facilities, including those required for hazardous waste disposal, the
purchase, use and disposal of radioactive isotopes and the use of animals in
testing and research. These licenses and permits include licenses from the U.S.
Nuclear Regulatory Commission for the purchase, use and disposal of small
amounts of short-lived radioactive isotopes for research purposes. GTC also has
registered with the Massachusetts Department of Environmental Protection and the
EPA as a Very Small Quantity Hazardous Waste Generator in connection with its
disposal of certain organic hazardous wastes used in connection with its
molecular biology and biomedical research. These wastes are disposed of through
a licensed hazardous waste transporter. The use and disposal of chemicals is
regulated under the Toxic Substances Control Act and other state and federal
legislation.
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Each of GTC's laboratories is licensed by the USDA and state and local
authorities to house and use laboratory animals for biomedical research
purposes. The ability to continue using animals in testing and research is
dependent on continued compliance with the requirements of such licenses. GTC's
Argus, Mason and Washington Laboratories are also registered with the U.S.
Public Health Service to conduct biomedical research on laboratory animals
funded by the NIH and other federal agencies. GTC's Argus, Mason and Redfield
laboratories are also licensed by federal and state drug enforcement agencies to
procure and use controlled substances in research programs involving laboratory
animals. See "Risk Factors -- Dependence of Testing Services on Current
Government Regulatory Requirements."
The Company's operations are also subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and waste, including but not limited to animal waste and waste water.
EMPLOYEES
As of March 31, 1996, GTC employed 433 people. Of these, 274 were engaged
in operations, 37 were engaged in research and development and 122 were engaged
in marketing and general administration. None of GTC's employees are covered by
collective bargaining agreements. GTC believes its employee relations are
positive.
FACILITIES
GTC's headquarters and research facilities are located in approximately
9,100 square feet of laboratory and office space leased from Genzyme in
Framingham, Massachusetts. This lease extends through May 1998, at which time
the lease automatically renews on a year-to-year basis unless terminated by
either party on 90 days' notice. See "Business -- Relationship with Genzyme."
GTC owns a 168-acre commercial production facility in central
Massachusetts. This facility contains 48,200 square feet of production,
laboratory and administrative space, as well as a newly completed 7,200 square
foot facility for clinical-grade milk collection and processing. The facility
also currently houses more than 500 goats. GTC believes its and Genzyme's
current facilities are adequate for significant further development of
commercial transgenic products. GTC also currently utilizes animal housing, care
and treatment facilities operated by Tufts in Massachusetts.
GTC also owns or leases sites for each of its testing laboratories. The
Company's Mason Laboratories
occupies two facilities in Worcester, Massachusetts, the largest of which is an
approximately 107,600 square foot preclinical testing facility, leased through
March 2005. In addition, GTC owns an adjacent building that consists of 46,800
square feet, of which 9,400 square feet of space has been renovated for
preclinical testing. The remaining 37,400 square feet is shell space available
for future expansion.
In addition, GTC owns and occupies a 57,000 square-foot preclinical testing
facility in Redfield, Arkansas; occupies a 37,000 square-foot preclinical
testing facility in Horsham, Pennsylvania, under a lease which expires in June
2002; operates its formulation business in a 10,500 square-foot laboratory
facility in Cambridge, Massachusetts under a lease that expires in October 2002;
and occupies a 20,600 square-foot laboratory and office facility in Rockville,
Maryland, under a lease expiring in December 2000.
The operations of the Company's former subsidiary, HSRI were located in a
20,700 square foot facility in Englewood, New Jersey under a lease expiring in
August 1998. The Company has sublet approximately 6,000 square feet of this
space and is attempting to sublet the remainder.
LEGAL PROCEEDINGS
The Company and Pharming B.V. entered into a license agreement (the
"License Agreement") on September 21, 1994, under which the Company and Pharming
B.V. cross-licensed to the other various intellectual property rights under
certain patents relating to the transgenic production of proteins. On December
21, 1995, Pharming B.V. filed a request for arbitration under the License
Agreement claiming breach of that agreement on various grounds. The plaintiff is
seeking a declaratory judgment which would
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effectively rescind the Company's intellectual property rights under the License
Agreement, injunctive relief and unspecified damages. GTC has denied Pharming
B.V.'s allegations and has filed a counterclaim alleging that Pharming B.V.'s
request for arbitration was filed for improper purposes. While the outcome of
the arbitration proceeding cannot be determined, GTC believes that there is
insufficient ground for rescission of the License Agreement and that GTC will be
able to defend this proceeding successfully. There can be no assurance, however,
that GTC will prevail in the defense of the arbitration proceeding. Failure by
the Company to prevail for any reason could have a material adverse effect on
the Company, including potential delays in the commercialization of the
Company's transgenic proteins and increased costs.
On June 17, 1994, a lawsuit was filed in the Court of Chancery of the State
of Delaware for New Castle County, Civil Action No. 13569, on behalf of the
stockholders of TSI naming the Company, TSI and each of the directors of TSI as
defendants. The complaint alleges, among other things, that (i) the terms of the
merger between TSI and a subsidiary of GTC pursuant to the Agreement and Plan of
Merger dated June 14, 1994 among TSI, GTC and such subsidiary of GTC (the
"Merger Agreement") are unfair to the TSI stockholders, (ii) TSI's directors
breached their fiduciary duties to the TSI stockholders in authorizing TSI to
enter into the Merger Agreement and failing to conduct an auction for TSI, and
(iii) GTC aided and abetted the TSI directors in the breach of their fiduciary
duty. The lawsuit seeks an unspecified amount of damages and a court order to
unwind the Merger. The Company, TSI and the directors of TSI deny the
allegations set forth in the complaint and intend to vigorously defend the
lawsuit. On or about September 21, 1994, GTC filed a motion to dismiss all
claims asserted against it in the litigation. Plaintiffs have not filed a
substantive opposition to GTC's motion to dismiss, and the motion to dismiss
remains pending before the court.
Except as described above, GTC is not a party to any material legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
<TABLE>
The following table sets forth certain information concerning the executive
officers, key employees and directors of the Company as of June 30, 1996.
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henri A. Termeer........................... 50 Chairman of the Board
James A. Geraghty.......................... 41 President, Chief Executive Officer
John B. Green.............................. 42 Vice President and Chief Financial Officer
Evan M. Lebson............................. 53 Vice President and Treasurer
Harry M. Meade............................. 50 Vice President, Transgenics Research
Robert W. Baldridge........................ 61 Vice Chairman of the Board
Henry E. Blair............................. 52 Director
Francis J. Bullock......................... 59 Director
Alan A. Smith.............................. 50 Director
Alan W. Tuck............................... 47 Director
</TABLE>
Pursuant to the Company's Restated Articles of Organization, the Board of
Directors of the Company is divided into three classes, with each class being as
nearly equal in number of directors as possible. The term of one class expires,
and their successors are elected for a term of three years, at each annual
meeting of the Company's stockholders.
The Company has standing Audit and Compensation Committees of the Board of
Directors, but does not have a Nominating Committee. The Audit Committee,
consisting of Messrs. Baldridge, Blair and Tuck, held three meetings in 1995.
The primary function of the Audit Committee is to assist the Board of Directors
in the discharge of its duties and responsibilities by providing the Board with
an independent review of the financial health of the Company and of the
reliability of the Company's financial controls and financial reporting systems.
The committee reviews the general scope of the Company's annual audit, the fee
charged by the Company's independent accountants and other matters relating to
internal control systems.
The Compensation Committee of the Board of Directors determines the
compensation to be paid to all executive officers of the Company (except Messrs.
Termeer and Lebson, who are compensated by Genzyme), including the Chief
Executive Officer. The Compensation Committee also administers the Company's
1993 Equity Incentive Plan (the "Equity Plan"), including the grant of stock
options and other awards under the Equity Plan. The Compensation Committee held
five meetings during 1995. The Compensation Committee is currently composed of
Messrs. Bullock (Chairman), Blair and Tuck.
Mr. Termeer has served as a director and as Chairman of GTC since its
incorporation in February 1993. He has also served as President and as a
director of Genzyme since October 1983, as Chief Executive Officer since
December 1985 and as Chairman of the Board since May 1988. For ten years prior
to joining Genzyme, Mr. Termeer worked for Baxter Travenol Laboratories, Inc., a
manufacturer of human health care products. Mr. Termeer is Chairman of the Board
of Neozyme II Corporation. He is also a director of Abiomed, Inc., AutoImmune
Inc. and GelTex Pharmaceuticals, Inc. and serves as a trustee of Hambrecht &
Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
Mr. Geraghty has been the President, Chief Executive Officer and a director
of GTC since its incorporation in February 1993. Mr. Geraghty joined Genzyme in
September 1992, where he was a Vice President for Corporate Development and the
General Manager of the transgenics business unit until the incorporation of the
Company. Mr. Geraghty was Vice President of the Prescription Services Division
of Caremark International from June to September 1992, which, at that time, was
a unit of Baxter International. Prior to that, he held a variety of general
management and strategy consulting positions with Bain and Company and with
companies in the Bain Venture Capital portfolio.
35
<PAGE> 36
Mr. Green has been the Vice President and Chief Financial Officer of GTC
since December 1994. He has also served as Vice President and Treasurer of TSI
since March 1993 and as its Chief Financial Officer since December 1994. Prior
to that, he was Vice President and Assistant Treasurer of TSI from December
1989.
Mr. Lebson has served as Vice President and Treasurer of GTC since its
incorporation in February 1993. He has also been Vice President and Treasurer of
Genzyme since August 1991, its Vice President, Financial Operations from April
1990 to August 1991 and, previously, from August 1989, Executive Assistant to
the President. Prior to joining Genzyme, he was, from 1983, Treasurer and Chief
Financial Officer of Integrated Genetics, Inc., a biotechnology company acquired
by Genzyme in 1989.
Dr. Meade has been Vice President, Transgenics Research for GTC since
August 1994 and has served as Research Director of GTC since May 1993. Prior to
joining GTC, Dr. Meade was a Scientific Fellow at Genzyme, where he was
responsible for directing the transgenic molecular biology program. From 1981 to
March 1990, when he joined Genzyme, Dr. Meade was a Senior Scientist at Biogen,
Inc., a biotechnology company, where he worked on the technology relating to the
production of proteins in milk and was an inventor on the first issued patent
covering this process.
Mr. Baldridge is Vice Chairman of the Board of Directors of the Company.
Mr. Baldridge served as a director of TSI from November 1990 until its
acquisition by the Company in October 1994, and was Chairman and Chief Executive
Officer of TSI from April 1993 to October 1994. He has served as an independent
financial consultant and investment banker since June 1988, in which capacity he
was affiliated with Downer & Company, investment bankers, between June 1990 and
September 1995. He previously held investment banking positions with PaineWebber
Incorporated, most recently as First Vice President for eleven years until June
1988.
Mr. Blair is a consultant to several companies, including Genzyme. Prior to
January 1990, Mr. Blair was Senior Vice President, Scientific Affairs of
Genzyme. Before joining Genzyme in 1981, he was Associate Director of the New
England Enzyme Center at Tufts University School of Medicine. Mr. Blair is also
a director of Genzyme, Dynagen, Inc. and Celtrix Pharmaceuticals, Inc.
Dr. Bullock has been a senior consultant with Arthur D. Little, Inc. since
September 1993, prior to which he was Senior Vice President, Research
Operations, of Schering-Plough Research Institute, a position he held from 1981
until August 1993. He previously held research positions at Abbott Laboratories
and Arthur D. Little, Inc.
Dr. Smith has been a Senior Vice President, Research of Genzyme since
August 1989. Prior to joining Genzyme, he was Vice President -- Scientific
Director of Integrated Genetics, Inc., a biotechnology company, from November
1984 until its acquisition by Genzyme in August 1989. From October 1980 to
October 1984, Dr. Smith was head of the Biochemistry Division of the National
Institute for Medical Research in London.
Mr. Tuck is a director of T Cell Sciences, Inc., a biotechnology company.
Mr. Tuck joined T Cell Sciences in February 1992 after four years as Vice
President, Marketing and Business Development of Biogen, Inc., a biotechnology
company. From February 1992 through May 1996, Mr. Tuck was the President and
Chief Executive Officer of T Cell Sciences.
DIRECTOR COMPENSATION
Director Fees. All directors not employed by the Company or Genzyme
receive $1,000 for each meeting of the Board of Directors attended in person,
$400 for each meeting of the Board of Directors attended by telephone conference
call and $400 for each committee meeting attended in person.
1993 Director Stock Option Plan. All of the directors who are not
employees of the Company (the "Eligible Directors") are currently eligible to
participate in the Company's 1993 Director Stock Option Plan (the "Director
Plan"), except for Mr. Termeer who has irrevocably elected not to participate in
the Director Plan. Options under the Director Plan are automatically granted
once a year, at the annual meeting of
36
<PAGE> 37
stockholders of the Company, to Eligible Directors elected or reelected at the
meeting. Each such Eligible Director receives an option to purchase 2,000 shares
of Common Stock for each year of the term of office to which the director is
elected (normally 6,000 shares for election to a three-year term of office). In
addition, upon the election of an Eligible Director other than at an annual
meeting, such director is automatically granted an option to purchase 2,000
shares of Common Stock for each year or portion thereof of the term of office to
which he or she is elected. Options become exercisable with respect to 2,000
shares on the date on which the option was granted and on the date of each
annual meeting of stockholders thereafter, so long as the optionee is then a
director of the Company. The options have a term of ten years and an exercise
price, payable in cash or shares of Common Stock, equal to the last sale price
for the Common Stock on the business day immediately preceding the date of
grant, as reported by Nasdaq.
Grant of Stock Option. On February 7, 1995, the Board of Directors voted
to grant Mr. Termeer a non-qualified stock option to purchase 10,000 shares of
Common Stock. The option became exercisable with respect to 6,000 shares on the
date of the 1995 annual meeting of stockholders and will become exercisable with
respect to 2,000 additional shares on each of the 1996 and 1997 annual meeting
of stockholders, provided that Mr. Termeer is a member of the Board of Directors
at the opening of business on such dates. The option has a term of ten years and
an exercise price of $3.625, payable in cash or shares of Common Stock.
Consulting Agreement. Under the terms of an Employment and Consulting
Agreement among the Company, TSI and Mr. Baldridge, Mr. Baldridge agreed to
provide full-time services to the Company for a one-year term that expired on
October 1, 1995 and part-time consulting services to the Company and Genzyme
during the five-year period thereafter. During the period of Mr. Baldridge's
full-time employment with the Company, TSI paid him a base salary of $216,000,
plus a bonus equal to 25% of such amount at the end of the one-year term. During
the current five-year consulting term, Mr. Baldridge receives a consulting fee
equal to $132,000 per year. Pursuant to the Employment and Consulting Agreement,
Mr. Baldridge was granted an option to purchase 35,000 shares of Common Stock.
By its terms, such option became exercisable with respect to 20% of such shares
on the date of grant and becomes exercisable with respect to an additional 20%
of such shares on each of the first four anniversaries of the effective date of
the Employment and Consulting Agreement.
37
<PAGE> 38
EXECUTIVE COMPENSATION
The following tables set forth certain information with respect to the
annual and long-term compensation paid or accrued by the Company for services
rendered to the Company in all capacities for the fiscal year ended December 31,
1995 by its Chief Executive Officer and the three named executive officers of
the Company (collectively, the "Named Executive Officers"). The Company's two
remaining executive officers, Henri A. Termeer, Chairman of the Board, and Evan
M. Lebson, Treasurer, are executive officers of Genzyme and are compensated by
Genzyme, although the Company has reimbursed Genzyme for a part of Mr. Lebson's
cash compensation under the Services Agreement.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- -------------------------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
James A.Geraghty(1)......................... 1995 $175,000 $65,273 60,000 $14,975(2)
Chief Executive Officer 1994 55,846 38,000 17,250 0
1993 139,800 37,083 80,000 0
John B. Green............................... 1995 $122,635 $14,367 25,000 $ 3,679(3)
VP, Chief Financial Officer 1994 28,000 35,000 20,000 2,925(3)
Harry M. Meade.............................. 1995 $120,000 $22,038 20,000 $ 2,774(3)
VP, Transgenics Research 1994 109,735 20,000 6,000 1,372(3)
Steven M. Niemi, DVM*....................... 1995 $135,000 $11,454 20,000 $ 2,700(3)
VP, U.S. Operations 1994 33,363 35,000 25,000 3,189(3)
<FN>
- ---------------
* Dr. Niemi resigned as an executive officer of the Company effective January
31, 1996.
(1) Prior to the transfer of certain assets to the Company on May 1, 1993, Mr.
Geraghty was General Manager of Genzyme's transgenics business unit. The
cash compensation reported above for 1993 includes $77,885 in salary and
$2,083 in bonus paid by Genzyme through July 1993, after which time all of
Mr. Geraghty's compensation was paid by the Company.
(2) The reported amount includes employer contributions of $1,481 under the
Genzyme Transgenics Corporation 401(k) Plan and relocation expenses of
$13,494.
(3) The reported amount represents employer contributions under the Genzyme
Transgenics Corporation 401(k) Plan.
</TABLE>
38
<PAGE> 39
<TABLE>
The following table sets forth certain information regarding options
granted during the twelve months ended December 31, 1995 by the Company to the
Chief Executive Officer and the Named Executive Officers:
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 0% ($) 5% ($) 10% ($)
- ---- ----------- ------------- ----------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James A.
Geraghty......... 60,000(2) 9.12% 3.00 5/19/05 0 113,201 286,874
John B. Green...... 25,000(3) 3.80 3.00 5/19/05 0 47,167 119,531
Harry M. Meade..... 20,000(4) 3.04 3.00 5/19/05 0 37,734 95,624
Steven M. Niemi.... 20,000(4) 3.04 3.00 5/19/05 0 37,734 95,624
All stockholders... -- -- -- -- 0 24,961,216 63,256,623
<FN>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Commission and, therefore, are not intended to
forecast possible future appreciation, if any, in the price of the
underlying Common Stock. No gain to the optionees is possible without an
increase in price of the Common Stock, which will benefit all shareholders
proportionately. In order to realize the potential values set forth in the
5% and 10% columns of this table, the per share price of the Common Stock
would have to be $4.89 and $7.78, or approximately 63% and 159% above the
respective exercise or base price shown. The amount shown for all
stockholders reflects the potential value to all stockholders if the price
of the Common Stock appreciates at such rates over the term of the options,
assuming a purchase in 1995 at the option exercise price shown.
(2) Represents two option grants on May 19, 1995: (a) a grant covering 30,000
shares, exercisable with respect to 20% of the underlying shares on the
date of grant and an additional 20% of the underlying shares on each of the
next four anniversaries of the date of grant; and (b) a grant covering
30,000 shares, fully exercisable on November 19, 2004, subject to
acceleration upon the achievement of an average closing price for the
Common Stock, over any period of thirty consecutive trading days ending
before December 31, 1996, 1997 and 1998, of $6.00, $7.00 and $8.00,
respectively.
(3) Represents two option grants on May 19, 1995: (a) a grant covering 15,000
shares, exercisable with respect to 20% of the underlying shares on the
date of grant and an additional 20% of the underlying shares on each of the
next four anniversaries of the date of grant; and (b) a grant covering
10,000 shares, fully exercisable on November 19, 2004, subject to
acceleration upon the achievement of an average closing price for the
Common Stock, over any period of thirty consecutive trading days ending
before December 31, 1996, 1997 and 1998, of $6.00, $7.00 and $8.00,
respectively.
(4) Represents two option grants on May 19, 1995: (a) a grant covering 10,000
shares, exercisable with respect to 20% of the underlying shares on the
date of grant and an additional 20% of the underlying shares on each of the
next four anniversaries of the date of grant; and (b) a grant covering
10,000 shares, fully exercisable on November 19, 2004, subject to
acceleration upon the achievement of an average closing price for the
Common Stock, over any period of thirty consecutive trading days ending
before December 31, 1996, 1997 and 1998, of $6.00, $7.00 and $8.00,
respectively.
</TABLE>
39
<PAGE> 40
<TABLE>
The following table sets forth certain information concerning the
unexercised stock options as of December 31, 1995 held by the Chief Executive
Officer and the Named Executive Officers. No options were exercised during the
fiscal year of 1995 by such executives.
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END ($)
ACQUIRED ON VALUE FISCAL YEAR-END (#) EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
- ---- ------------ ------------ ----------------------- --------------------
<S> <C> <C> <C> <C>
James A. Geraghty................. 0 0 52,900/104,350 9,113/75,544
John B. Green..................... 0 0 23,280/37,120 17,125/49,750
Harry M. Meade.................... 0 0 24,400/41,600 2,750/24,750
Steven M. Niemi................... 0 0 30,920/41,880 19,000/49,125
<FN>
- ---------------
(1) Based on the difference between the option exercise price and the closing
price of the underlying Common Stock on December 29, 1995 as reported by
Nasdaq, which closing price was $4.375.
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
JAMES A. GERAGHTY. Under the terms of an Employment Agreement between Mr.
Geraghty and the Company, Mr. Geraghty's base salary will be no less than
$190,000 per annum. He is also eligible to receive performance and incentive
bonuses as determined by the Company's Compensation Committee, which has set his
maximum cash bonus for 1996 at 40% of such base salary.
JOHN B. GREEN. Under the terms of an Employment Agreement between Mr.
Green and the Company, Mr. Green's base salary will be no less than $135,000 per
annum and the maximum amount of his annual bonus will be 25% of his base salary,
with such bonus payable on each December 31, subject to satisfaction of certain
established performance goals relating to individual and Company performance.
HARRY M. MEADE. Under the terms of an Employment Agreement between Dr.
Meade and the Company, Dr. Meade's base salary will be no less than $126,000 per
annum. Under the agreement, he is also eligible to receive bonuses based on
individual and Company performance, and the Company's Compensation Committee has
established a maximum bonus for 1996 equal to 25% of such base salary.
Each of the foregoing agreements will remain in effect until terminated in
accordance with its terms. In the event that the Company terminates any of the
foregoing employees without cause or if any of such employees terminates his
agreement upon a "change of control" of the Company, as such term is defined in
each of the employment agreements, such employee will immediately be paid the
maximum bonus for the year of termination, prorated on the basis of the portion
of the year completed, and will continue to receive his then current base salary
for a severance period. In the case of Mr. Geraghty, the severance period is two
years. In the case of Mr. Green, the severance period in the event of a "change
in control" is two years and otherwise is one year. In the case of Dr. Meade,
the severance period is one year. If any of the foregoing employees terminates
his agreement upon a change of control, such severance payments will be reduced
by income which such employee derives during the relevant severance period from
a subsequent employer. In any case in which the Company must pay severance upon
a change in control, outstanding stock options held by the affected employee
which are not then exercisable shall immediately become exercisable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Three members of the Company's Board of Directors serve as directors and/or
executive officers of Genzyme: Mr. Termeer is Chairman of the Board, President
and Chief Executive Officer; Mr. Blair is a director; and Dr. Smith is an
executive officer.
40
<PAGE> 41
CERTAIN TRANSACTIONS
The Company and Genzyme have entered into various agreements which are
described above in "Business -- Relationship with Genzyme." In 1995, the Company
paid Genzyme an aggregate of $2.8 million and received an aggregate of $485,000
from Genzyme pursuant to the Genzyme R & D Agreement, the Services Agreement and
the Lease. In addition, in February 1995, the Company received $4.0 million from
Genzyme under a Common Stock Put Agreement and, in June 1995, Genzyme converted
debt of the Company in the amount of $4.0 million for shares of Common Stock
pursuant to a Common Stock Purchase Agreement. In March and June of 1996,
Genzyme converted aggregate indebtedness of $1,673,000 into an aggregate of
219,565 shares of Common Stock pursuant to the Convertible Debt Agreement. On
June 30, 1996, approximately $1.4 million was outstanding under the Convertible
Debt Agreement. See "Business -- Relationship with Genzyme."
SHARE OWNERSHIP
<TABLE>
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock, and the General Division
Common Stock ("General Division Stock") and the Tissue Repair Division Common
Stock ("TR Stock") of Genzyme Corporation ("Genzyme"), as of June 30, 1996, by
(i) persons known by the Company to be beneficial owners of more than 5% of its
Common Stock, (ii) the Chief Executive Officer and the three named executive
officers, other than the Chief Executive Officer, of the Company, (iii) each
director of the Company and (iv) all current executive officers and directors of
the Company as a group:
<CAPTION>
PERCENTAGE OF
TOTAL(1)
---------------------
NUMBER OF SHARES BEFORE AFTER
STOCKHOLDER BENEFICIALLY OWNED OFFERING OFFERING
----------- ------------------ -------- --------
<S> <C> <C> <C>
Henri A. Termeer(2)............................... 6,690,865 48.7% 45.3%
c/o Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Genzyme Corporation(3)............................ 6,673,365 48.6% 45.3%
One Kendall Square
Cambridge, MA 02139
James A. Geraghty(4).............................. 121,051 * *
John B. Green(5).................................. 81,878 * *
Harry M. Meade(6)................................. 54,516 * *
Steven M. Niemi+(7)............................... 19,038 * *
Robert W. Baldridge(8)............................ 62,075 * *
Henry E. Blair(9)................................. 9,000 * *
Francis J. Bullock(10)............................ 11,000 * *
Alan E. Smith(11)................................. 8,000 * *
Alan W. Tuck(12).................................. 9,000 * *
All current executive officers and directors as a
group (10 persons)(13).......................... 7,047,785 50.2% 46.7%
<FN>
- ---------------
+ Mr. Niemi resigned as an executive officer of the Company effective January
31, 1996.
* Indicates less than 1%.
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares listed in the table.
Ownership of shares of General Division Stock and TR Stock set forth in
these footnotes does not include shares acquired for the account of any
named person under the Genzyme 1990 Employee Stock Purchase Plan and
Corporation Retirement Savings Plan
</TABLE>
41
<PAGE> 42
after March 31, 1996, and with respect to each named person, except Mr.
Termeer, represents less than one percent of the outstanding shares of each
class of stock.
(2) Includes 8,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996. Also includes
6,673,365 shares beneficially owned by Genzyme, which includes 145,000
shares subject to a currently-exercisable common stock warrant, as to all
of which Mr. Termeer disclaims beneficial ownership. Mr. Termeer is
President, Chief Executive Officer and Chairman of the Board of Genzyme.
Mr. Termeer also beneficially owns 449,048 and 104,020 shares of General
Division Stock and TR Stock, respectively, which includes options to
purchase 432,750 and 87,425 shares of General Division Stock and TR Stock,
respectively, that are exercisable within the 60-day period following June
30, 1996 and warrants to purchase 3,350 and 452 shares of General Division
Stock and TR Stock, respectively, that are currently exercisable. In the
aggregate, such ownership represents 1.30% of the outstanding shares of
General Division Stock and 0.82% of the outstanding shares of TR Stock.
(3) Includes 145,000 shares subject to a common stock purchase warrant which is
currently exercisable.
(4) Includes 115,120 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996. Mr. Geraghty
also beneficially owns 7,100 and 1,404 shares of General Division Stock and
TR Stock, respectively, which consist of options to purchase such shares
that are currently exercisable or exercisable within the 60-day period
following June 30, 1996.
(5) Includes 41,524 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996 and 16,964
shares held by John B. Green as trustee of the BioDevelopment Laboratories,
Inc. 401(k) Plan as to which Mr. Green disclaims beneficial ownership. Mr.
Green also holds 146 shares of General Division Stock as trustee of such
plan as to which Mr. Green disclaims beneficial ownership.
(6) Includes 48,844 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996. Dr. Meade
also beneficially owns 5,730 and 1,096 shares of General Division Stock and
TR Stock, respectively, which consist of options to purchase such shares
that are currently exercisable or exercisable within the 60-day period
following June 30, 1996.
(7) Based on information as of March 31, 1996.
(8) Includes 59,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996.
(9) Includes 8,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996. Mr. Blair
also beneficially owns 20,100 and 11,736 shares of General Division Stock
and TR Stock, respectively, which include options to purchase 7,600 and
8,402 shares of General Division Stock and TR Stock, respectively, that are
currently exercisable or exercisable within the 60-day period following
June 30, 1996.
(10) Consists of 11,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996.
(11) Consists of 8,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996. Dr. Smith
also beneficially owns 72,639 and 18,226 shares of General Division Stock
and TR Stock, respectively, which include options to purchase 69,646 and
17,071 shares of General Division Stock and TR Stock, respectively, that
are currently exercisable or exercisable within the 60-day period following
June 30, 1996.
(12) Consists of 8,000 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996 and 1,000
shares as to which Mr. Tuck shares voting and investment power with his
wife.
(13) Includes 307,888 shares subject to stock options currently exercisable or
exercisable within the 60-day period following June 30, 1996; 16,964 shares
held by John B. Green as trustee of the BioDevelopment Laboratories, Inc.
401(k) Plan as to which Mr. Green disclaims beneficial ownership; and
6,673,365 shares beneficially owned by Genzyme, a corporation of which Mr.
Termeer and Mr. Blair are directors and of which Mr. Termeer and Dr. Smith
are officers. The Company's current directors and executive officers as a
group beneficially own an aggregate of 567,081 and 142,437 shares of
General Division Stock and TR Stock, respectively, which include options to
purchase 534,759 and 120,938 shares of General Division Stock and TR Stock,
respectively, that are currently exercisable or exercisable within
42
<PAGE> 43
the 60-day period following June 30, 1996, 3,350 and 452 shares of General
Division Stock and TR Stock, respectively, subject to currently exercisable
warrants, and 146 shares of General Division Stock held by Mr. Green as
trustee of the BioDevelopment Laboratories, Inc. 401(k) Plan. Such
ownership represents 1.64% and 1.12% of the outstanding shares of General
Division Stock and TR Stock, respectively.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 24,000,000 shares
of Common Stock, $0.01 par value per share, and 5,000,000 shares of preferred
stock, $0.01 par value per share (the "Preferred Stock").
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Articles of
Organization (the "Articles"), which are included as an exhibit to the
Registration Statement, and by the provisions of applicable law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. Upon
the liquidation, dissolution or winding up of the Company, holders of Common
Stock share ratably in the assets of the Company available for distribution to
its stockholders, subject to the preferential rights of any then outstanding
shares of Preferred Stock. No shares of Preferred Stock will be outstanding
immediately following the effective date of the Registration Statement. The
Common Stock outstanding upon the effective date of the Registration Statement,
and the shares offered by the Company hereby upon issuance and sale, will be
fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock in one or more series and to fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting or
conversion rights that could adversely affect the voting power of the holders of
Common Stock and the issuance of Preferred Stock could be used, under certain
circumstances, to render more difficult or discourage a hostile takeover of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
STOCK PURCHASE RIGHTS
Upon its acquisition of TSI, GTC assumed an outstanding warrant that TSI
had issued to a commercial bank, currently exercisable for 37,600 shares of
Common Stock at exercise price of $0.05 per share. This warrant terminates on
October 28, 1998.
In consideration for Genzyme's guaranty of a line of credit with a
commercial bank, GTC issued a Common Stock Purchase Warrant to Genzyme covering
145,000 shares at a price of approximately $2.84 per share. This warrant
terminates on July 3, 2005.
In partial consideration for an equipment leasing facility with Financing
For Science International, Inc. ("FSI"), GTC has issued three Common Stock
Purchase Warrants to FSI covering an aggregate of 8,000 shares of Common Stock
(the "FSI Warrants"). The purchase rights represented by these warrants are
currently exercisable at prices ranging from $0.10 per share to $6.50 per share.
The FSI Warrants terminate on January 1, 2000 with respect to 4,000 shares and
on December 31, 2001 with respect to 4,000 shares.
43
<PAGE> 44
Under the Convertible Debt Agreement, all outstanding amounts will become
due on the closing of this offering. It is anticipated that approximately $1.4
million will be outstanding under such agreement at the closing of this
offering. Prior to repayment the entire balance may be converted at Genzyme's
option, to Common Stock at the then current market price. It is not anticipated
that Genzyme will exercise such conversion option.
STOCK OPTIONS
GTC maintains the Equity Plan and the Director Plan. Options for all 50,000
shares authorized for the Director Plan have been issued and are unexercised
while options for 1,524,201 shares remain outstanding and unexercised under the
Equity Plan.
REGISTRATION RIGHTS
FSI is entitled to certain rights with respect to registration under the
Securities Act of an aggregate of 8,000 shares of Common Stock issuable upon
exercise of the FSI Warrants. If the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the Company is required under the FSI
Warrants to use its best efforts to include the shares of Common Stock issuable
to FSI in such registration. These shares will not form a part of the shares of
Common Stock registered in this offering. In addition, under the Series A
Convertible Preferred Stock Purchase Agreement dated May 1, 1993, Genzyme has
certain demand and piggyback registration rights with respect to its shares of
Common Stock but is not expected to exercise these rights in conjunction with
this offering.
ANTI-TAKEOVER MEASURES
In addition to the Board of Directors' ability to issue shares of Preferred
Stock in series, the Articles and the Bylaws of the Company (the "Bylaws")
contain several other provisions that are commonly considered to have an
anti-takeover effect. The Articles include a provision classifying the Board of
Directors into three classes with staggered three-year terms, and the Bylaws
include a provision prohibiting stockholder action by written consent except as
otherwise provided by law. Under Massachusetts law, action taken by stockholders
without a meeting requires their unanimous written consent. Under the Articles
and Bylaws, the Board of Directors may enlarge the size of the Board and fill
any vacancies on the Board. The Bylaws provide that nominations for directors
may not be made by stockholders at any annual or special meeting unless the
stockholder intending to make a nomination notifies the Company of its intention
a specified period in advance and furnishes certain information. The Bylaws also
provide that special meetings of the Company's stockholders may be called only
by the President or the Board of Directors or upon written application of
holders of not less than 90% (or such lesser percentage as may be required by
law) of the stock entitled to vote at the meeting and require advance notice of
business to be brought by a stockholder before the annual meeting.
The Company, as a Massachusetts corporation, is subject to the
Massachusetts Business Combination statute and may, in the future, be subject to
the Massachusetts Control Share Acquisition statute. Under the Massachusetts
Business Combination statute, a person (other than certain excluded persons) who
acquires 5% or more of the stock of a Massachusetts corporation without the
approval of the Board of Directors (an "interested stockholder") may not engage
in certain transactions with the corporation for a period of three years
following such acquisition. There are certain exceptions to this prohibition,
including, if the Board of Directors approves the acquisition of stock or the
transaction prior to the time that the person became an interested stockholder,
or if the interested stockholder acquires 90% of the voting stock of the
corporation (excluding voting stock owned by directors who are also officers and
certain employee stock plans) in one transaction, or if the transaction is
approved by the Board of Directors and by the affirmative vote of two-thirds of
the outstanding voting stock which is not owned by the interested stockholder.
Under the Massachusetts Control Share Acquisition statute, a person (the
"Acquiror") who makes a bona fide offer to acquire, or acquires, shares of the
Common Stock that when combined with shares already
44
<PAGE> 45
owned, would increase the Acquiror's ownership to at least 20%, 33% or a
majority of the voting stock of the Company must obtain the approval of a
majority of shares held by all stockholders exclusive of those shares held by
the Acquiror and the officers and inside directors of the Company in order to
vote the shares acquired. The statute does not require the Acquiror to
consummate the purchase before the stockholder vote is taken. The Bylaws contain
an election by the Company not to be governed by the Massachusetts Control Share
Acquisition statute. However, if at a future date the Board of Directors
determines that it is in the best interests of the corporation and its
stockholders to be governed by the statute, the Board of Directors may amend the
Bylaws to permit the Company to be governed by the statute. Any such amendment,
however, would apply only to acquisitions crossing the thresholds which occur
after the effective date of such amendment.
The foregoing provisions of Massachusetts law and the Articles and Bylaws
could have the effect of discouraging others from attempting hostile takeovers
of the Company and, as a consequence, they may also inhibit temporary
fluctuations in the market price of the Common Stock that might result from
actual or rumored hostile takeover attempts. Such provisions may also have the
effect of preventing changes in the management of the Company. It is possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,572,618 shares
of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of any other outstanding options, warrants or other
rights to purchase Common Stock. Of these shares, 7,044,253 shares and the
3,000,000 shares sold in this offering will be freely tradable, without
restriction or further registration under the Securities Act, except for shares
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act.
The remaining 6,528,365 outstanding shares of Common Stock are owned by
Genzyme and are deemed "Restricted Shares" under Rule 144. These may not be
resold, except pursuant to an effective registration statement or an applicable
exemption from registration, including Rule 144. Immediately after this
offering, approximately 4,000,000 of these Restricted Shares will be eligible
for sale in the public market pursuant to Rule 144. The remaining Restricted
Shares will become eligible from time to time thereafter upon the expiration of
the minimum two-year holding period prescribed by Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. Affiliates may sell shares not constituting Restricted Shares in
accordance with the foregoing volume limitations and other restrictions, but
without regard to the two-year holding period. All shares, including Restricted
Shares, held by affiliates of the Company eligible for sale in the public market
under Rule 144 are subject to the foregoing volume limitations and other
restrictions.
The Commission has proposed an amendment to Rule 144 which would reduce the
holding period required for shares subject to Rule 144 from two years to one
year. If this proposal is adopted, as of the expected closing of this offering
an additional 2,308,800 shares of Common Stock will become eligible for sale by
Genzyme to the public.
45
<PAGE> 46
The Company has filed registration statements under the Securities Act to
register 2,015,000, 50,000 and 300,000 shares of Common Stock issuable under the
Equity Plan, the Director Plan and the Stock Purchase Plan, respectively, of
which 71,586, 0 and 142,735 shares, respectively, had been issued as of May 31,
1996. In addition 1,705,991 and 50,000 shares were subject to outstanding option
grants under the Equity Plan and the Director Plan, respectively. Such shares
are eligible for immediate resale upon exercise, subject, in the case of
affiliates, to the volume and notice requirements of Rule 144.
The Company, its directors, executive officers and certain employees have
agreed that they will not, without the prior consent of the representatives of
the Underwriters, offer to sell, sell, contract to sell, grant any option to
sell or otherwise dispose of or require the Company to file with the Commission
a registration statement under the Act to register any shares of Common Stock,
or securities convertible or exchangeable for shares of Common Stock, or
warrants or other rights to acquire shares of Common Stock (other than shares
acquired through the Company's Employee Stock Purchase Plan) during the 90-day
period following the effective date of the Registration Statement.
Genzyme is, and future transferees of shares owned by Genzyme will be,
entitled to both demand and piggyback registration rights with respect to all
6,528,365 shares of Common Stock owned by Genzyme as well as shares issuable on
exercise of the Genzyme Warrant and under the Convertible Debt Agreement.
Genzyme has agreed that it will not, without the prior consent of the
representatives of the Underwriters, offer to sell, sell, contract to sell,
grant any option to sell or otherwise dispose of or require the Company to file
with the Commission a registration statement under the Act to register any
shares of Common Stock, or securities convertible or exchangeable for shares of
Common Stock, or warrants or other rights to acquire shares of Common Stock
during the 180-day period following the effective date of the Registration
Statement.
No prediction can be made as to the effect, if any, that market sales of
the Restricted Shares or the availability of such Restricted Shares for sale
will have on the market price of the Common Stock. Nevertheless, sales of
substantial amounts of Common Stock in the public market may have an adverse
impact on the market price for the Common Stock. See "Risk Factors -- Dilution."
46
<PAGE> 47
UNDERWRITING
<TABLE>
The Underwriters named below, for whom PaineWebber Incorporated, Hambrecht
& Quist LLC and Needham & Company, Inc. are acting as Representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement among the Company and the Representatives (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the number of shares of Common Stock set
forth opposite their names below:
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
PaineWebber Incorporated............................................. 776,000
Hambrecht & Quist LLC................................................ 776,000
Needham & Company, Inc. ............................................. 776,000
Alex. Brown & Sons Incorporated...................................... 56,000
Cowen & Company...................................................... 56,000
Dillon, Read & Co. Inc............................................... 56,000
A. G. Edwards & Sons, Inc............................................ 56,000
Lehman Brothers Inc.................................................. 56,000
UBS Securities Inc................................................... 56,000
Advest, Inc.......................................................... 24,000
Doft & Co., Inc...................................................... 24,000
EVEREN Securities, Inc............................................... 24,000
Hoefer & Arnett Inc.................................................. 24,000
Josephthal, Lyon & Ross, Inc......................................... 24,000
Kaufman Bros. L.P.................................................... 24,000
Ladenburg, Thalmann & Co. Inc........................................ 24,000
Moors & Cabot, Inc................................................... 24,000
Pennsylvania Merchant Group Ltd...................................... 24,000
Punk, Ziegel & Knoell................................................ 24,000
Tucker, Anthony Incorporated......................................... 24,000
Unterberg Harris..................................................... 24,000
Vector Securities International, Inc................................. 24,000
H. C. Wainwright & Co., Inc.......................................... 24,000
---------
Total...................................................... 3,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain securities
dealers at such price, less a concession not in excess of $0.15 per share, and
that the Underwriters and such dealers may reallow to other dealers, including
the Underwriters, a discount not in excess of $0.10 per share. After the
commencement of the public offering, the concessions to selected dealers and the
discounts to other dealers may be changed by the Representatives.
As part of this offering, the Underwriters will sell 900,000 shares of
Common Stock to Genzyme at the public offering price set forth on the cover page
of this Prospectus. The Underwriters will not receive any fees or commissions in
connection with the sale of such shares.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional 450,000 shares of Common Stock
from the Company at the public offering price set forth on the cover page of
this Prospectus, less underwriting discounts and commissions. The Underwriters
may exercise the option only to cover over-allotments, if any. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as it was obligated to purchase pursuant to the Underwriting
Agreement.
47
<PAGE> 48
Each of the Company, its directors, executive officers and certain
employees and Genzyme have agreed that they will not, during the 90-day period
(with respect to the Company, its directors, executive officers and certain
employees) or the 180-day period (with respect to Genzyme) following the
effective date of the Registration Statement, without the prior written consent
of the Representatives, offer to sell, sell, contract to sell, grant any option
to sell or otherwise dispose of or require the Company to file with the
Commission a registration statement under the Act to register any shares of
Common Stock, or securities convertible or exchangeable for shares of Common
Stock, or warrants or other rights to acquire such shares of Common Stock (other
than certain shares acquired through the Company's Employee Stock Purchase
Plan).
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on Nasdaq immediately
prior to the commencement of sales in this offering in accordance with Rule
10b-6A under the Exchange Act. Passive market making consists of displaying bids
on Nasdaq limited by the bid prices of independent market makers for a security
and making purchases of a security which are limited by such prices and effected
in response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified prior period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Palmer & Dodge LLP, Boston, Massachusetts. Peter Wirth and Lynnette
C. Fallon, partners of Palmer & Dodge LLP, are the Clerk and Assistant Clerk,
respectively, of the Company. The validity of the Common Stock will be passed
upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated balance sheets of GTC at December 31, 1994 and 1995 and
the related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1995
included in this Prospectus have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated balance sheets of TSI at July 3, 1994 and September 30,
1994 and the related consolidated statements of operations, cash flows and
stockholders' equity for the fiscal year ended July 3, 1994 and the period from
July 4, 1994 to September 30, 1994 included in this Prospectus have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of TSI at June 27, 1993 and for the
fiscal year then ended included in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included herein in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
48
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENZYME TRANSGENICS CORPORATION:
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the (unaudited) three-month periods ended March 31, 1995 and 1996...... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995 and for the (unaudited) three-month period ended March 31, 1996....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the (unaudited) three-month periods ended March 31, 1995 and 1996...... F-6
Notes to Consolidated Financial Statements............................................ F-7
TSI CORPORATION:
Report of Independent Accountants..................................................... F-23
Consolidated Balance Sheets as of July 3, 1994 and September 30, 1994................. F-24
Consolidated Statements of Operations for the fiscal year ended July 3, 1994 and the
period from July 4, 1994 to September 30, 1994...................................... F-25
Consolidated Statements of Stockholders' Equity for the fiscal year ended July 3, 1994
and the period from July 4, 1994 to September 30, 1994.............................. F-26
Consolidated Statements of Cash Flows for the fiscal year ended July 3, 1994 and the
period from July 4, 1994 to September 30, 1994...................................... F-27
Notes to Consolidated Financial Statements............................................ F-28
Report of Independent Auditors........................................................ F-40
Consolidated Balance Sheet as of June 27, 1993........................................ F-41
Consolidated Statement of Operations for the year ended June 27, 1993................. F-42
Consolidated Statement of Stockholders' Equity for the year ended June 27, 1993....... F-43
Consolidated Statement of Cash Flows for the year ended June 27, 1993................. F-44
Notes to Consolidated Financial Statements............................................ F-45
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Genzyme Transgenics Corporation:
We have audited the consolidated balance sheets of Genzyme Transgenics
Corporation as of December 31, 1994 and 1995 and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Genzyme Transgenics Corporation as of December 31, 1994 and 1995 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 26, 1996, except as to
the information presented in Note 13,
for which the date is March 28, 1996
F-2
<PAGE> 51
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- 1996
1994 1995 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 816 $ 4,400 $ 1,995
Restricted cash.......................................... -- 1,425 950
Short-term investments................................... 2,231 -- --
Accounts receivable, net of allowance of $405, $803 and
$485 at December 31, 1994, 1995 and March 31, 1996,
respectively.......................................... 4,760 4,035 5,451
Unbilled contract revenue (including $103, $539 and
$1,236 from related parties at December 31, 1994, 1995
and
March 31, 1996, respectively)......................... 2,171 5,895 6,787
Other current assets..................................... 870 809 1,212
Net assets held for sale................................. 781 -- --
-------- -------- --------
Total current assets............................. 11,629 16,564 16,395
Net property, plant and equipment.......................... 15,962 17,776 17,961
Costs in excess of net assets acquired, net................ 19,157 21,856 21,733
Investment in Joint Venture................................ 545 639 599
Other assets............................................... 700 1,207 1,231
-------- -------- --------
$ 47,993 $ 58,042 $ 57,919
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,661 $ 3,229 $ 1,878
Accounts payable -- Genzyme Corporation.................. 309 1,140 1,594
Revolving line of credit................................. 1,330 6,000 5,700
Revolving line of credit -- Genzyme Corporation.......... -- -- 2,650
Accrued expenses......................................... 6,430 6,962 6,887
Advance payments......................................... 6,157 4,690 4,807
Accrued income taxes..................................... 764 -- --
Current portion of long-term debt and capital leases..... 732 1,554 2,427
Current portion of note payable to Genzyme Corporation... 104 -- --
-------- -------- --------
Total current liabilities........................ 19,487 23,575 25,943
Long-term debt and capital leases, net of current
portion............................................... 3,417 5,725 4,699
Note payable to Genzyme Corporation, net of current
portion............................................... 3,468 -- --
Deferred lease obligation................................ 272 402 428
Other liabilities........................................ 1,925 1,052 966
-------- -------- --------
Total liabilities................................ 28,569 30,754 32,036
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $.01 par value; authorized 5,000,000
shares, none outstanding.............................. -- -- --
Common Stock, $.01 par value; 24,000,000 shares
authorized; 9,889,791, 13,151,113 and 13,290,140
shares issued and outstanding at December 31, 1994,
1995 and March 31, 1996, respectively................. 99 132 133
Capital in excess of par value........................... 25,476 37,351 37,899
Unrealized loss on investments........................... (94) -- --
Accumulated deficit...................................... (6,052) (10,185) (12,139)
Accumulated translation adjustment....................... (5) (10) (10)
-------- -------- --------
Total stockholders' equity....................... 19,424 27,288 25,883
-------- -------- --------
$ 47,993 $ 58,042 $ 57,919
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 52
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
FOR THE YEARS ENDED ENDED MARCH 31
DECEMBER 31 (UNAUDITED)
----------------------------------------- ---------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Services......................... $ -- $ 4,465 $ 26,399 $ 5,008 $ 8,795
Research and development......... 3,222 4,097 6,022 1,116 1,558
Products......................... -- 909 -- -- --
---------- ---------- ----------- ----------- -----------
3,222 9,471 32,421 6,124 10,353
Costs and operating expenses:
Services......................... -- 5,157 24,250 4,955 7,621
Research and development......... 3,143 4,671 6,394 1,579 1,987
Products......................... -- 841 -- -- --
Selling, general and
administrative................ 1,088 3,596 8,919 2,071 2,583
Equity in loss of Joint
Venture....................... -- 582 713 163 40
Impairment of investment in Joint
Venture....................... 318 58 -- -- --
---------- ---------- ----------- ----------- -----------
4,549 14,905 40,276 8,768 12,231
---------- ---------- ----------- ----------- -----------
Loss from continuing operations.... (1,327) (5,434) (7,855) (2,644) (1,878)
Other income (expense):
Interest income.................. 156 238 32 10 8
Interest expense................. -- (263) (1,007) (258) (310)
Other income..................... -- -- 780 356 318
---------- ---------- ----------- ----------- -----------
Loss from continuing operations
before income taxes.............. (1,171) (5,459) (8,050) (2,536) (1,862)
Provision (benefit) for income
taxes............................ -- 7 (2,346) 34 92
---------- ---------- ----------- ----------- -----------
Loss from continuing operations.... $ (1,171) $ (5,466) $ (5,704) $ (2,570) $ (1,954)
Discontinued operations:
Income from discontinued clinical
operations (less applicable
income taxes of $21, $239 and
$158)......................... -- 182 412 255 --
Gain on disposal of clinical
operations (less applicable
income taxes of $3,401)....... -- -- 1,159 -- --
---------- ---------- ----------- ----------- -----------
Net loss........................... $ (1,171) $ (5,284) $ (4,133) $ (2,315) $ (1,954)
========== ========== =========== =========== ===========
Net loss per common share:
From continuing operations....... $ (0.44) $ (0.83) $ (0.48) $ (0.25) $ (0.15)
========== ========== =========== =========== ===========
Net loss per share............... $ (0.44) $ (0.80) $ (0.35) $ (0.23) $ (0.15)
========== ========== =========== =========== ===========
Weighted average number of common
shares outstanding............... 2,632,070 6,598,545 11,788,542 10,189,985 13,171,132
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 53
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL IN PARENT UNREALIZED
--------------------- --------------------- EXCESS PAR COMPANY LOSS ON
SHARES AMOUNT SHARES AMOUNT VALUE INVESTMENT INVESTMENTS
--------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992................ -- -- -- -- -- $ 302 --
Net loss.................................. (403)
Investment by parent company.............. 295
Issuance of series A Convertible Preferred
Stock.................................... 4,000 40 154 (194)
Conversion of series A Convertible
Preferred Stock.......................... (4,000) (40) 4,000 40
Sale of common stock to public, net of
expenses................................. 1,500 15 10,556
Common stock issuance under Employee Stock
Purchase Plan............................ 3 17
------ --- ------ ---- ------- ----- ---
BALANCE, DECEMBER 31, 1993................ -- -- 5,503 55 10,727 -- --
Net loss..................................
Issuance of common stock in connection
with purchase of subsidiary.............. 4,368 44 14,697
Common stock issuance under Employee Stock
Purchase Plan............................ 19 52
Unrealized loss on investments............ (94)
Translation adjustment....................
------ --- ------ ---- ------- ----- ---
BALANCE, DECEMBER 31, 1994................ -- -- 9,890 99 25,476 -- (94)
Net loss..................................
Common stock issuance under the Genzyme
Common Stock Put Agreement............... 500 5 3,995
Issuance of common stock in connection
with the Common Stock Purchase Agreement
with Genzyme............................. 1,334 13 3,987
Issuance of common stock in connection
with the purchase of a subsidiary........ 866 10 2,469
Issuance of common stock for payment of
consulting and non-competition
agreement................................ 341 3 973
Common stock issuance under Employee Stock
Purchase Plan............................ 87 1 170
Common stock issuance in connection with
the TSI Savings and Retirement Plan...... 130 1 273
Proceeds from the exercise of stock
options.................................. 3 8
Realized loss on investments.............. 94
Translation adjustment....................
------ --- ------ ---- ------- ----- ---
BALANCE, DECEMBER 31, 1995................ -- -- 13,151 132 37,351 -- --
Unaudited:
Net loss..................................
Issuance of common stock in connection
with the Genzyme Convertible Debt and
Development Funding Agreement............ 26 150
Common stock issuance under Employee Stock
Purchase Plan............................ 34 90
Common stock issuance in connection with
the TSI Savings and Retirement Plan...... 58 1 265
Proceeds from the exercise of stock
options.................................. 21 43
------ --- ------ ---- ------- ----- ---
BALANCE, MARCH 31, 1996 (UNAUDITED)....... -- -- 13,290 $133 $37,899 -- --
====== === ====== ==== ======= ===== ===
<CAPTION>
ACCUMULATED TOTAL
ACCUMULATED TRANSLATION STOCKHOLDERS'
DEFICIT ADJUSTMENT EQUITY
----------- ----------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1992................ -- -- $ 302
Net loss.................................. (768) (1,171)
Investment by parent company.............. 295
Issuance of series A Convertible Preferred
Stock.................................... --
Conversion of series A Convertible
Preferred Stock.......................... --
Sale of common stock to public, net of
expenses................................. 10,571
Common stock issuance under Employee Stock
Purchase Plan............................ 17
--------- ----- -------
BALANCE, DECEMBER 31, 1993................ (768) -- 10,014
Net loss.................................. (5,284) (5,284)
Issuance of common stock in connection
with purchase of subsidiary.............. 14,741
Common stock issuance under Employee Stock
Purchase Plan............................ 52
Unrealized loss on investments............ (94)
Translation adjustment.................... (5) (5)
--------- ----- -------
BALANCE, DECEMBER 31, 1994................ (6,052) (5) 19,424
Net loss.................................. (4,133) (4,133)
Common stock issuance under the Genzyme
Common Stock Put Agreement............... 4,000
Issuance of common stock in connection
with the Common Stock Purchase Agreement
with Genzyme............................. 4,000
Issuance of common stock in connection
with the purchase of a subsidiary........ 2,479
Issuance of common stock for payment of
consulting and non-competition
agreement................................ 976
Common stock issuance under Employee Stock
Purchase Plan............................ 171
Common stock issuance in connection with
the TSI Savings and Retirement Plan...... 274
Proceeds from the exercise of stock
options.................................. 8
Realized loss on investments.............. 94
Translation adjustment.................... (5) (5)
--------- ----- -------
BALANCE, DECEMBER 31, 1995................ (10,185) (10) 27,288
Unaudited:
Net loss.................................. (1,954) (1,954)
Issuance of common stock in connection
with the Genzyme Convertible Debt and
Development Funding Agreement............ 150
Common stock issuance under Employee Stock
Purchase Plan............................ 90
Common stock issuance in connection with
the TSI Savings and Retirement Plan...... 266
Proceeds from the exercise of stock
options.................................. 43
--------- ----- -------
BALANCE, MARCH 31, 1996 (UNAUDITED)....... ($ 12,139) ($ 10) $25,883
========= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 54
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash Flows for operating activities:
Net loss......................................... $(1,171) $(5,284) $(4,133) $(2,315) $(1,954)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 22 898 3,712 884 824
Loss on sale of investments.................... -- 70 108 -- --
Write-off/(adjustment) of goodwill............. -- -- 972 -- (168)
Deferred tax provision......................... -- -- 175 41 --
Gain on disposal of discontinued operations.... -- -- (2,350) -- --
Gain from utilization of operating loss
carryforward................................. -- -- (1,159) -- --
Loss on disposal of fixed assets............... -- 31 88 -- --
Equity in loss of Joint Venture................ -- 582 713 163 40
Impairment of investment in Joint Venture...... 318 58 -- -- --
Changes in assets and liabilities, net of effects
from purchase of subsidiaries:
Accounts receivable and unbilled contract
revenue...................................... 13 (970) (2,803) (1,859) (2,308)
Inventory and other current assets............. (34) 456 (29) (296) (403)
Decrease in net assets held for
sale/disposition............................. -- 203 781 781 --
Accounts payable............................... -- 1,049 (561) (1,332) (1,351)
Accounts payable -- Genzyme Corporation........ 139 170 831 484 454
Accrued income taxes........................... -- 197 (407) (350) --
Other accrued expenses......................... 66 (1,106) (1,962) (620) 191
Advance payments............................... (603) 2,160 (1,825) 1,179 117
------- ------- ------- ------- -------
Net cash used by operating activities....... (1,250) (1,486) (7,849) (3,240) (4,558)
Cash flows for investing activities:
Purchase of property, plant and equipment...... (33) (4,585) (2,326) (1,450) (703)
Purchase of short-term investments............. (8,949) (11,351) -- 25 --
Proceeds from sales and maturities of
short-term investments....................... 7,005 10,902 2,217 -- --
Investment in Joint Venture.................... -- (1,186) (807) -- --
Cash paid for acquisition of TSI Corporation... -- (2,024) (314) (196) --
Cash paid for acquisition of BioDevelopment
Laboratories................................. -- -- (365) -- --
Proceeds from sale of discontinued
operations................................... -- -- 6,443 -- --
Restricted cash................................ -- -- (1,425) -- 475
Other assets................................... -- -- 495 (2) (39)
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities................................ (1,977) (8,244) 3,918 (1,623) (267)
Cash flows from financing activities:
Net proceeds from the issuance of common
stock........................................ 17 52 4,446 4,306 133
Net proceeds from the exercise of stock
options...................................... -- -- 8 -- --
Proceeds from long-term debt................... -- 140 2,423 299 352
Repayment of long-term debt.................... -- (161) (3,515) (196) (505)
Net borrowings under revolving line of
credit....................................... -- (990) 4,670 564 (300)
Investment and advances by Genzyme
Corporation.................................. 295 3,572 428 1,640 2,800
Proceeds from initial public offering.......... 10,571 -- -- --
Deposits on capital leases..................... -- (479) (197) (55) --
Other long-term liabilities.................... -- -- (743) (263) (60)
------- ------- ------- ------- -------
Net cash provided by financing activities... 10,883 2,134 7,520 6,295 2,420
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. 7,656 (7,596) 3,589 1,432 (2,405)
Effect of exchange rates on cash............... -- (5) (5) 15 --
Cash and cash equivalents at beginning of the
year......................................... 761 8,417 816 816 4,400
------- ------- ------- ------- -------
Cash and cash equivalents at end of year....... $ 8,417 $ 816 $ 4,400 $ 2,263 $ 1,995
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 55
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED;
ALL TABULAR $ IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1. NATURE OF BUSINESS
Genzyme Transgenics Corporation (together with its subsidiaries, the
"Company") is engaged in the application of transgenic technology to the
development and production of recombinant proteins for therapeutic and
diagnostic uses and, through its wholly-owned subsidiaries TSI Corporation
("TSI") and BioDevelopment Laboratories, Inc. ("BDL"), is a leading provider of
preclinical and toxicology testing services to pharmaceutical, biotechnology,
medical device and chemical companies.
The accompanying financial statements have been presented on the assumption
that the Company is a going concern. The Company has incurred losses and
negative operating cash flow in each of the years ended December 31, 1993, 1994
and 1995. The Company had a working capital deficit of $7.0 million and $9.5
million at December 31, 1995 and March 31, 1996, respectively. The Company
expects to continue to operate with negative working capital for the foreseeable
future.
In March 1996, the Company entered into a Convertible Debt and Development
Funding Agreement with Genzyme Corporation ("Genzyme") under which Genzyme
agreed to provide a revolving line of credit in the amount of $10 million and
has agreed to fund development costs of the AT-III program. Upon completion of
an offering of Common Stock which generates net proceeds to the Company of at
least $10 million, Genzyme's commitment to advance funds under the Convertible
Debt and Development Funding Agreement will terminate and the Company will be
obligated to repay any amounts outstanding not previously converted to Common
Stock. Under the Company's 1996 operating plan, existing cash balances along
with funds available under the bank line and the Convertible Debt and
Development Funding Agreement are expected to be sufficient to fund the Company
through March 31, 1997.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with government regulations.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was incorporated in February 1993. In May 1993, Genzyme entered
into a stock purchase agreement under which Genzyme purchased 4 million shares
of the Company's Series A Convertible Preferred Stock in exchange for entering
into the Technology Transfer Agreement, the Research and Development Agreement,
the Sublease Agreement and the Services Agreement, as described in Note 10. This
transaction involved Genzyme transferring substantially all of the assets and
liabilities of its transgenic business unit (the "Division"), which was
established in 1986, to the Company in exchange for all of the outstanding
shares of the Company's Series A Convertible Preferred Stock.
The accompanying financial statements reflect the May 1993 equity
transaction and include assets, liabilities, revenue and expenses of the
Division at Genzyme's historical cost. Genzyme funded the Division's operations
through July 16, 1993. Operating losses from inception through the effective
date of Genzyme's transfer of assets and technology have been recorded as a
reduction of the net balance advanced to the Company by Genzyme.
On October 1, 1994, the Company acquired TSI and its respective
subsidiaries, Argus Research Laboratories, Inc. ("Argus"), The TSI Center for
Diagnostic Products, Inc. ("CDP"), Health and Sciences Research Incorporated
("HSRI"), TSI Mason Laboratories, Inc. ("Mason"), TSI Redfield Laboratories,
Inc. ("Redfield"), TSI Washington Laboratories, Inc. ("Washington") and G.D.R.U.
Limited ("GDRU").
F-7
<PAGE> 56
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In July 1995, the Company acquired BDL. The Company has accounted for both of
these acquisitions using the purchase method as fully described in Note 3.
In August 1995, the Company completed the closure of HSRI. The results of
operations for HSRI are shown net of tax and included in discontinued clinical
operations for all periods presented. Effective September 1, 1995, the Company
completed the sale of GDRU. The results of operations for GDRU are shown net of
tax and included in discontinued clinical operations for all periods presented.
HSRI and GDRU were the only laboratories performing human clinical trials within
the Company's operations.
Subsequent to the Company's initial public offering ("IPO") in July 1993,
as described in Note 6, Genzyme owned approximately 73% of the Company's
outstanding stock. Subsequent to the Company's acquisition of TSI in October
1994, Genzyme owned approximately 40% of the Company. In February 1995, Genzyme
purchased 500,000 additional shares of the Company's common stock pursuant to a
Common Stock Put Agreement (see Note 6), resulting in approximately a 43%
interest in the Company. In June 1995, Genzyme exchanged $4 million in
outstanding indebtedness of the Company for 1,333,333 shares of the Company's
Common Stock (see Note 5) after which it owned approximately 49% of the Company.
In July 1995, the Company purchased BDL for stock after which Genzyme owned
approximately 48% of the Company (see Note 3).
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of March 31, 1996 and
for the three month periods ended March 31, 1994 and 1995 have been prepared by
management in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results of interim periods are not necessarily indicative of the results that
may be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions in these financial
statements include contract revenue recognition, net realizable value of costs
in excess of net assets acquired and tax valuation reserves. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents, consisting principally of money market funds and
municipal notes purchased with initial maturities of three months or less, are
valued at cost plus accrued interest, which approximates market.
RESTRICTED CASH
Restricted cash represents cash from the sale of GDRU that is held in
escrow and could become unrestricted during 1996, subject to the terms of the
escrow agreement and related share purchase agreement.
F-8
<PAGE> 57
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SHORT-TERM INVESTMENTS
All short-term investments are classified as available for sale and are
stated at the lower of cost or market plus accrued interest with premiums and
discounts amortized over the life of the investment. Gains and losses on sales
of securities are calculated using the specific identification method.
During 1994, the Company sold securities with a cost basis of $10,972,000
and realized losses of $70,000 on those sales. At December 31, 1994, short-term
investments consisted of $2,325,000 of corporate notes with remaining maturities
of one to five years. The market value of these investments at December 31,
1994, as of the closing price of the day, was $2,231,000. The unrealized loss on
investments of $94,000 at December 31, 1994 is included in equity.
During 1995, the Company sold securities with a cost basis of $2,231,000
and realized losses of $108,000 on those sales. At December 31, 1995, there were
no short-term investments.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
The $19,397,000 of excess consideration paid and costs incurred over the
net value of assets acquired (goodwill) by GTC of TSI (see Note 3) is being
amortized over a twenty-year period. Accumulated amortization at December 31,
1995 was $1,150,000. The carrying value of goodwill is periodically reviewed by
management. When material adverse changes in operations are noted, management
will determine the amount by which the related goodwill has been impaired, if
any. In connection with the sale of GDRU and in accordance with the principles
outlined in FAS 121, goodwill was written down by $2 million, representing
GDRU's percentage of the total long-term assets acquired in the TSI acquisition,
with the charge offsetting a portion of the gain on disposal for clinical
operations. In addition, final purchase adjustments to goodwill in relation to
the purchase of TSI were recorded, which amounted to a net decrease in goodwill
of $1,537,000. At December 31, 1995 goodwill in connection with the purchase of
TSI was $15,860,000.
There was $7,329,000 of excess consideration paid and costs incurred over
the net fair value of assets acquired by GTC of BDL (Note 3). This amount is
being amortized using the straight-line method over twenty years. Accumulated
amortization at December 31, 1995, was $183,000.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
life of the improvement or the remaining term of the lease, whichever is
shorter. The direct costs of the herd of New Zealand goats ("Livestock") and
related costs to bring them to the United States were capitalized and are being
amortized using the straight-line method over three years.
F-9
<PAGE> 58
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
The following is the summary of property, plant and equipment and related
accumulated amortization and depreciation as of December 31, 1994 and 1995.
<CAPTION>
YEARS DECEMBER 31, DECEMBER 31,
OF LIFE 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Land................................................... -- $ 470 $ 526
Buildings.............................................. 20 -- 30 5,991 7,252
Livestock.............................................. 3 740 740
Leasehold improvements................................. lease life 839 2,483
Laboratory, manufacturing and office equipment......... 3 -- 10 4,428 4,295
Laboratory, manufacturing and office
equipment -- capital lease........................... 3 -- 10 2,446 3,740
Construction in process................................ -- 1,673 122
-------- --------
$ 16,587 $ 19,158
Less accumulated amortization and depreciation......... (625) (1,382)
-------- --------
Net property, plant, and equipment..................... $ 15,962 $ 17,776
======== ========
</TABLE>
Depreciation expense was $22,000, $639,000 and $2,330,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $513,000 and $596,000
for the three months ended March 31, 1995 and 1996, respectively. Equipment
acquired under capital leases was $1,312,000 for the year ended 1995 and
$371,000 and $319,000 for the three months ended March 31, 1995 and 1996,
respectively. Accumulated amortization for equipment under capital lease was
$375,000 and $741,000 at December 31, 1994 and 1995, respectively.
LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121
(FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of in 1995. FAS 121 requires that long-lived assets be
reviewed for impairment by comparing the fair value of the assets with their
carrying amount. Any write-downs are to be treated as permanent reductions in
the carrying amount of the assets.
ACCRUED EXPENSES
<TABLE>
Accrued expenses at December 31 included the following:
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Accrued payroll and benefits................................ $1,657 $1,624
Accrued severance........................................... 734 561
Loss reserves on contracts.................................. 1,512 1,014
Other....................................................... 2,527 3,763
------ ------
Total accrued expenses.................................... $6,430 $6,962
====== ======
</TABLE>
As a result of the acquisition of BDL, the Company established severance
reserves of $542,000 for the elimination of 19 positions of which 9 were
laboratory positions, 3 were accounting/finance positions and 7 were general and
administrative positions. As of December 31, 1995, $224,000 has been paid,
leaving a balance of $318,000, which is expected to be paid in 1996. During the
three months ended March 31, 1996, additional payments of $100,000 were made
leaving a balance at March 31, 1996 of $218,000.
As a result of the merger with TSI, the Company established severance
reserves for the elimination of 35 positions of which 20 were laboratory
positions, 8 were accounting/finance positions and 7 were general and
F-10
<PAGE> 59
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
administrative positions. The total severance reserve established was $1,417,000
of which $578,000 was classified as a long-term liability to be paid through
1999. Of the $839,000 short-term accrued severance reserves, $105,000 had been
paid out through December 31, 1994. As of December 31, 1995, $650,000 has been
paid out leaving a balance of $662,000 of which $419,000 is classified as
long-term.
INVESTMENT IN JOINT VENTURE
In 1990, the Company entered into a Joint Venture as a 25% owner (see Note
12). In 1992, the Company's ownership percentage declined to 20% based on
additional investments by the partners. Through August 1992, the date of that
change, the Company's investment in the Joint Venture was accounted for under
the equity method and, accordingly, the Company recorded its share of the Joint
Venture's losses in its statements of operations. Beginning August 1992, the
investment in the Joint Venture was accounted for using the cost method.
However, because the Joint Venture R&D program was being funded in part by the
Company and the Joint Venture had a series of operating losses, the Company
reduced its investment in the Joint Venture to reflect the impairment in value
of the investment. Additionally, the Company recognized revenue for amounts
received from the Joint Venture pursuant to the Joint Venture R&D Agreement. In
March 1994, the Company made an additional investment of $1.2 million,
increasing the Company's ownership percentage in the Joint Venture to 22%, and
revised the terms of the Joint Venture R&D Agreement. Accordingly, the
investment has been accounted for under the equity method since the March 1994
investment, and the Company recognized its share of Joint Venture losses in its
statement of operations. In October 1995, the Company made an additional
investment of $807,000 in the Joint Venture which maintained the Company's
ownership interest at 22%.
REVENUE RECOGNITION AND CONTRACT ACCOUNTING
<TABLE>
For both services and research and development revenues the Company
accounts for cost reimbursement contracts and fixed price contracts using the
percentage of completion method. Unbilled contract revenue represents
recoverable costs and accrued profit which had not been billed at the balance
sheet date. Advance payments represent cash received from customers in advance
of the work being performed. Product revenues are generally recognized upon
shipment. R&D revenues from the Joint Venture (see Note 12), related parties
(see Note 10) and commercial clients were as follows:
<CAPTION>
JOINT VENTURE RELATED PARTIES COMMERCIAL CLIENTS
------------- --------------- ------------------
<S> <C> <C> <C>
Year ended December 31, 1993................ $ 2,065 $ 1,072 $ 85
Year ended December 31, 1994................ 2,947 883 267
Year ended December 31, 1995................ 3,874 485 1,663
Three months ended March 31, 1995........... 727 215 174
Three months ended March 31, 1996........... 181 1,227 150
</TABLE>
Profits expected to be realized on contracts are based on the Company's
estimates of total contract sales value and costs at completion. These estimates
are reviewed and revised periodically throughout the lives of the contracts with
adjustments to profits resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When management
believes the cost of completing a contract will exceed contract-related
revenues, the full amount of the anticipated contract loss is immediately
recognized.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates, and statement of operations accounts are translated at average
exchange rates. Resulting translation adjustments are recorded in a separate
component of stockholders' equity, "Accumulated translation adjustment."
F-11
<PAGE> 60
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NET LOSS PER COMMON SHARE
Loss per common share is based solely on the weighted average number of
shares of common stock outstanding, as the inclusion of common stock equivalents
would be anti-dilutive.
INCOME TAXES
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities using the current
statutory tax rates.
RECLASSIFICATION
Current amounts in the prior years' financial statements have been
reclassified to conform to the 1995 presentation.
NOTE 3. ACQUISITIONS/DISPOSITIONS
Effective October 1, 1994, the Company acquired all of the common stock of
TSI, a leading provider of preclinical, toxicology and human clinical testing
services to pharmaceutical, biotechnology, medical device and chemical
companies, for 4,367,601 shares of the Company's common stock with a market
value of approximately $14,741,000 at the date of the acquisition. In exchange
for these shares, the Company received total assets of $20,306,000, assumed
$22,563,000 of liabilities and incurred costs of $2,399,000 with resulting
goodwill of $19,397,000. The Company has accounted for the acquisition using the
purchase method, therefore only 3 months of the operating activities of TSI were
reported in the 1994 Statement of Operations. The following summary represents
the unaudited pro forma results of operations as if the TSI acquisition occurred
at the beginning of 1993. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which would have actually resulted had the combination been in effect
on the date indicated or which may occur in the future.
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
YEAR ENDED
-------------------
1993 1994
------- -------
<S> <C> <C>
Revenues.................................................. $49,711 $43,410
Net loss.................................................. (3,924) (16,143)
Net loss per share........................................ $ (0.56) $ (1.63)
</TABLE>
In July 1995, the Company acquired all of the outstanding common stock of
BDL, a leading provider of testing and development services to the
biopharmaceutical, medical device and chemical industries in exchange for
830,996 of the Company's common shares with an approximate market value of
$2,378,000. In exchange for these shares, the Company received total assets with
a fair value of $2,595,000, assumed $6,628,000 of liabilities and incurred costs
of $918,000. The transaction is being accounted for under the purchase method
and the resulting goodwill of $7,329,000 will be amortized using the
straight-line method over 20 years. The Company also entered into a Consulting
and Non-Competition Agreement with the principal stockholder of BDL in exchange
for approximately 341,160 shares of the Company's common stock with an
approximate market value of $976,000. Approximately $488,000 of the value of the
Agreement was assigned to the consulting portion and was recorded as an expense
in 1995. The remaining value was assigned to the non-competition provision. The
consulting period runs for three years and the non-competition period runs for
ten years from the date of the Agreement. As a part of the transaction, Genzyme
exchanged 33,945 shares of its General Division common stock with a market value
of $1,360,000 for 475,467 of the Company's common shares issued at the
transaction.
F-12
<PAGE> 61
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In August 1995, the Company completed the closure of HSRI, a small clinical
trials monitoring unit in San Diego, California. The related closure expenses of
approximately $166,000 were recorded in the third quarter of 1995.
Effective September 1, 1995, the Company completed the sale of its GDRU
unit for $9.5 million in cash. In exchange for the cash, the Company sold assets
with a net book value of $2,960,000. The Company recognized a gain on the sale
of $1,159,000, which included a tax charge of $3,401,000 and a $2 million
writedown of goodwill identifiable with GDRU. In conjunction with this
transaction, the Company received $1,425,000 of restricted cash which becomes
unrestricted in three increments on January 31, April 30, and September 30,
1996. This transaction completed the disposition of the former TSI units that
were outside the Company's core preclinical and nonclinical testing operations.
<TABLE>
The following summary represents unaudited pro forma results of operations
as if the HSRI and GDRU dispositions and the BDL acquisition had occurred at the
beginning of 1994. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually resulted had the combination been in effect on the
date indicated or which may occur in the future.
<CAPTION>
UNAUDITED
PRO FORMA
YEAR ENDED
--------------------
1994 1995
-------- -------
<S> <C> <C>
Revenues................................................. $ 40,359 $29,709
Net loss................................................. $(12,057) $(5,102)
Net loss per share....................................... $ (1.09) $ (0.39)
</TABLE>
NOTE 4. COMMITMENTS & CONTINGENCIES
The Company leases equipment and facilities under various operating and
capital leases (see also Note 5). The deferred lease obligation represents the
cumulative difference between actual facility lease payments and lease expense
recognized ratably over the lease period. Rent expense for the years ended
December 31, 1993, 1994 and 1995 was approximately $29,000, $528,000 and
$2,553,000, respectively, and for the three months ended March 31, 1995 and 1996
was approximately $416,000 and $641,000, respectively.
<TABLE>
At December 31, 1995, the Company's future minimum payments required under
these leases are as follows:
<CAPTION>
OPERATING CAPITAL TOTAL
--------- ------- -------
<S> <C> <C> <C>
1996..................................................... $ 2,839 $1,172 4,011
1997..................................................... 2,461 1,215 3,676
1998..................................................... 1,910 340 2,250
1999..................................................... 1,515 -- 1,515
2000..................................................... 1,494 -- 1,494
Thereafter............................................... 4,557 -- 4,557
------- ------ -------
Total.................................................... $14,776 $2,727 17,503
======= =======
Less amount representing interest........................ (245)
------
Present value of minimum lease payments.................. $2,482
======
</TABLE>
On June 17, 1994, a law suit was filed in the State of Delaware on behalf
of the stockholders of TSI naming the Company, TSI and each of the directors of
TSI as defendants. The complaint alleges, among other things, that (i) the terms
of the merger between TSI and a subsidiary of GTC pursuant to the Agreement and
Plan of Merger dated June 14, 1994 among TSI, GTC and such subsidiary of GTC
(the
F-13
<PAGE> 62
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
"Merger Agreement") are unfair to the TSI stockholders, (ii) TSI's directors
breached their fiduciary duties to the TSI stockholders in authorizing TSI to
enter into the Merger Agreement and failing to conduct an auction for TSI, and
(iii) GTC aided and abetted the TSI directors in the breach of their fiduciary
duty. The lawsuit seeks an unspecified amount of damages and a court order to
unwind the Merger. The Company, TSI and the directors of TSI deny the
allegations set forth in the complaint and intend to vigorously defend the
lawsuit. On or about September 21, 1994, GTC filed a motion to dismiss all
claims asserted against it in the litigation. Plaintiffs have not filed a
substantive opposition to GTC's motion to dismiss, and the motion to dismiss
remains pending before the court.
NOTE 5. BORROWINGS
Effective July 1, 1994, the Company and Genzyme entered into the
Genzyme-GTC Credit Agreement, pursuant to which Genzyme would provide to GTC
advances up to $6.3 million. The advances accrued interest at the rate of 6% per
annum, payable quarterly. In June 1995, the Company entered into a Common Stock
Purchase Agreement with Genzyme under which the outstanding balance on the
Genzyme-GTC line of credit was reduced by $4 million in exchange for 1,333,333
shares of the Company's common stock. The remaining balance was repaid in
December 1995 and the line of credit was replaced by a term loan with a
commercial bank (described below). Interest expense of $56,000 and $180,000 for
the years ended December 31, 1994 and 1995, respectively, and $64,000 for the
three months ended March 31, 1995 was incurred in connection with this line of
credit.
At the date of the TSI acquisition, TSI had certain arrangements with a
commercial bank (the "Credit Agreement"). Under the Credit Agreement, TSI could
borrow up to $3 million based on 75% of eligible accounts receivable. In
December 1994, the bank agreed to maintain the maximum borrowing under the
credit line at $3 million. The advances accrued interest at the base rate plus
.5% per annum, payable on the first of the following month. The Company
refinanced the Credit Agreement in July 1995. Under the new facility, which
totals $7.5 million and expires on March 31, 1997, the Company may borrow up to
$4 million based on 85% of eligible accounts receivable, $2 million to pay down
term debt of BDL, and $1.5 million for an existing standby letter of credit in
support of a major facility lease. The $2 million facility was repaid from the
proceeds from the sale of GDRU. At the Company's option, interest on loans under
the credit facility (other than the standby letter of credit) shall accrue
either at the Eurodollar rate plus 3/4% or at the bank's base lending rate. The
weighted average interest rate on the line of credit was 9.52%.
The Credit Agreement was amended effective December 1995 to provide an
additional $2 million in credit based on the Company's eligible accounts
receivable. As of December 31, 1995, $6 million was outstanding under the line
of credit and none was available. The Company was in compliance with all
covenants and no amounts were due under the standby letter of credit at December
31, 1995.
In connection with the refinancing of the Credit Agreement, Genzyme
provided a guaranty to the bank under which Genzyme will become primarily liable
under the Credit Agreement in the event of a default by the Company. In
consideration of Genzyme's agreement to provide such a guaranty, the Company
granted a first lien on all assets of the Company and issued warrants to
purchase 145,000 shares of the Company's Common Stock for a period of ten years
at $2.84375 per share (market price at the date of the Agreement). Under the
terms of the bank line of credit, the Company has agreed not to pay any
dividends until the loans have been repaid. Subsequent to December 31, 1995, the
Company obtained an extension of the revolving line of credit to March 31, 1997
(see also Note 13).
In December 1995, the Company received a $2.3 million term loan from a
commercial bank which matures on December 15, 2000. At the Company's option,
interest on the loan will accrue either at the Eurodollar rate plus 1% or at the
bank's base lending rate. The loan is to be repaid in quarterly installments
commencing March 31, 1997, escalating from $50,000 per quarter for the first
year to $68,750 per quarter in the second year, $91,250 per quarter for the next
year, $133,333 for the final three quarters and a balloon
F-14
<PAGE> 63
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
payment for the remaining balance due December 15, 2000. The loan is guaranteed
by Genzyme and includes a covenant requiring the Company to maintain
stockholders equity of at least $20 million.
In June 1995, TSI received a $1 million increase in its lease line with a
commercial leasing company. Leases require monthly payments over 36 months at an
annual interest rate of 11% with a fair market value buyout (in the range of 5%
to 10% of original cost) at the end of the lease term. The Lease Agreement
required a 25% cash deposit at inception which may be reduced to 10% or fully
refunded under certain conditions.
In December 1995, an additional $1 million was made available under the
lease line (the "new line"). Leases under the new line require monthly payments
over 48 months with a fair market value buyout. No cash deposit is required
under the new line. At December 31, 1995, $1 million was available under the
lease lines.
<TABLE>
The Company's long-term debt consisted of the following:
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Note payable with escalating quarterly payments of $50,000 beginning March
1997, interest is variable, collateralized by real estate................. $ 2,300
Mortgage note payable with monthly payments of $9,615 through March 1997,
interest at 10.25%, collateralized by real estate......................... 730
Mortgage note payable with monthly payments of $4,685 through February 2012,
interest is variable, collateralized by real estate....................... 511
Note payable with monthly payments of $6,066 through December 2000, interest
at 8%, collateralized by real estate...................................... 299
Mortgage note payable, with monthly payments of $3,263 through August 2010,
interest at 9.5%, collateralized by real estate........................... 309
Capital lease obligations, with monthly payments of $97,029 through
September 1997 and December 1998, interest varies, collateralized by
property.................................................................. 2,482
Other....................................................................... 648
-------
$ 7,279
Less current portion...................................................... (1,554)
-------
$ 5,725
=======
</TABLE>
<TABLE>
Maturities of long-term debt over the next five years are as follows:
<S> <C>
1996........................................................................ $ 1,554
1997........................................................................ 2,168
1998........................................................................ 732
1999........................................................................ 498
2000........................................................................ 1,605
Thereafter.................................................................. 722
-------
$ 7,279
=======
</TABLE>
Cash paid for interest for the years ended December 31, 1993, 1994 and 1995
was $0, $216,000, and $615,000, respectively, and for the three months ended
March 31, 1995 and 1996 was $290,000 and $310,000, respectively.
F-15
<PAGE> 64
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. STOCKHOLDERS' EQUITY
COMMON STOCK AND WARRANTS
The Company's authorized capital stock consists of 24 million shares of
Common Stock, par value $0.01 per share, and 5 million shares of Preferred
Stock, par value $0.01 per share. Prior to the Company's IPO, the Board of
Directors designated 4 million shares of Preferred Stock as Series A Convertible
Preferred Stock ("Series A Stock") which were issued to Genzyme in connection
with the transfer of assets and liabilities described in Note 2, and reserved 4
million shares of the Company's Common Stock for issuance upon conversion of the
Series A Stock.
On July 16, 1993, the Company completed the IPO of 1.5 million shares of
its Common Stock priced at $8.00 per share. The proceeds to the Company, after
deducting commissions and offering expenses, were $10,571,000. The offering also
resulted in the automatic conversion of the Series A Stock held by Genzyme into
4 million shares of Common Stock.
In October 1994, the Company acquired TSI for 4,367,601 shares of the
Company's Common Stock (see Note 3). In addition, all warrants to purchase TSI
Common Stock then outstanding were converted into warrants to purchase the
Company's Common Stock at the acquisition exchange ratio.
In July 1995, Genzyme provided a guarantee of the Company's line of credit
(see Note 5). In consideration for the guarantee, the Company issued warrants to
purchase 145,000 shares of Common Stock at the then current market price of
$2.84375 per share.
In connection with the commercial lease line, the Company has assumed
warrants to purchase 4,000 shares of Common Stock at a price of $0.10 per share
which were originally issued to the commercial leasing company by TSI in
September 1994. In June 1995, the Company issued additional warrants to purchase
2,000 shares of Common Stock at the then current market price of $2.75 per
share, and subsequent to December 31, 1995, warrants to purchase an additional
2,000 shares at the then current market price of $6.50 per share were issued in
connection with an increase in the lease line which was made available in
December 1995 (see Note 5).
<TABLE>
A summary of the outstanding GTC warrants as of March 31, 1996, all of
which are currently exercisable, is as follows:
<CAPTION>
COMMON SHARES EXERCISE WARRANT EXPIRATION
ISSUABLE FOR PRICE PER SHARE DATE
------------- --------------- ------------------
<S> <C> <C> <C>
37,600 $ 0.05000 October 28, 1998
4,000 $ 0.10000 January 1, 2000
145,000 $ 2.84375 July 3, 2005
2,000 $ 2.75000 December 31, 2001
2,000 $ 6.50000 December 31, 2001
190,600
</TABLE>
In February 1995, Genzyme purchased an additional 500,000 shares of the
Company's Common Stock at $8.00 per share pursuant to the Common Stock Put
Agreement, and in June 1995, Genzyme entered into a Common Stock Purchase
Agreement under which it obtained 1,333,333 shares of the Company's Common Stock
in exchange for a $4 million reduction in the amount due to Genzyme under the
Genzyme-GTC Credit Agreement (see Note 10). In July 1995, the Company purchased
BDL and entered into a Consulting and Non-Competition Agreement with the
principal stockholder of BDL in exchange for 1,207,233 shares of the Company's
Common Stock (see Note 3).
F-16
<PAGE> 65
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As of December 31, 1995, the Company has reserved 1,846,755 shares of
Common Stock, subject to adjustment, for future issuance under the various
classes of warrants, Stock Option and Employee Stock Purchase Plans (see Note
7).
NOTE 7. EMPLOYEES BENEFIT PLANS
STOCK OPTIONS AND PURCHASE PLAN
In May 1993, the Board of Directors adopted and the stockholders approved
the 1993 Equity Incentive Plan (the "Equity Plan"), the 1993 Director Stock
Option Plan (the "Director Plan") and the 1993 Employee Stock Purchase Plan (the
"Purchase Plan").
Under the Equity Plan, 1,290,000 shares of Common Stock were issued or
reserved for issuance pursuant to incentive stock options, non-statutory stock
options, restricted stock awards, stock appreciation rights or stock units in
accordance with specific provisions to be established by a committee of the
Board of Directors at the time of grant. The option price for non-statutory
stock options must be at least 50% of fair value on the grant date. To date, all
options have been issued at 85% or greater of the fair value at the grant date.
The Equity Plan also permits the Company to assume outstanding options in an
acquisition without using shares reserved under the Plan. Of the foregoing
total, 224,350 shares are subject to options assumed by the Company in the
acquisition of TSI.
Under the Director Plan, 50,000 shares of Common Stock were reserved for
issuance as non-statutory stock options at the rate of 2,000 shares for each
year of service to members of the Board of Directors who are not employees of
the Company. Such options are automatically granted at fair market value upon
the election or reelection of each director.
<TABLE>
Stock option activity is summarized below:
<CAPTION>
SHARES
UNDER OPTION OPTION PRICE
------------ ---------------
<S> <C> <C>
Outstanding at December 31, 1993.................................. 266,750 $6.50 - $ 7.75
--------- --------------
Granted........................................................... 205,750 $2.75 - $ 8.00
TSI Conversions................................................... 224,350 $3.75 - $55.00
Cancelled......................................................... (32,542) $6.56 - $26.25
Exercised......................................................... --
--------- --------------
Outstanding at December 31, 1994.................................. 664,308 $2.75 - $55.00
--------- --------------
Granted........................................................... 659,975 $1.75 - $ 5.88
Cancelled......................................................... (85,818) $2.81 - $55.00
Exercised......................................................... (2,800) $2.81 - $ 3.00
--------- --------------
Outstanding at December 31, 1995.................................. 1,235,665 $1.75 - $55.00
========= ==============
</TABLE>
As of December 31, 1995, 438,631 shares of the stock options outstanding
were exercisable, for proceeds of approximately $2.6 million and 101,535 shares
were available for grant.
Under the Purchase Plan, 300,000 shares of common stock were reserved for
the grant of options to employees in one or more offerings in accordance with
provisions to be established by a committee of the Board of Directors prior to
commencement of any offering period. Participants may purchase shares of common
stock at not less than 85% of the lower of the market value at the start of each
offering or on the purchase date.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which is effective for fiscal year 1996. The Company has
determined that it will elect the disclosure-only alternative. The Company will
be required to
F-17
<PAGE> 66
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
disclose the pro forma net income or loss and per share amounts in the notes to
the financial statements using their fair value based method beginning in fiscal
1996 with comparable disclosures for fiscal 1995. The Company has not determined
the impact of these pro forma adjustments.
OTHER
The BDL employees were covered under BDL's defined contribution plan. As of
January 1, 1996, the BDL employees transferred to the GTC plan described below.
All U.S. based GTC employees, subject to certain eligibility requirements,
can participate in the Company's defined contribution plan. Currently, the
Company may match up to 50% of each participating employee's contributions to
the plan to a maximum of 3% of salary. The Company may also contribute an
additional 2% of each employee's salary as a retirement contribution. All
contributions are at the discretion of the Board of Directors. Expense
recognized under this plan was approximately $0, $275,000, and $266,000 for the
years ended December 1993, 1994 and 1995 and $63,000 and $91,000 for the three
months ended March 31, 1995 and 1996, respectively.
NOTE 8. INCOME TAXES
Income from foreign operations before income taxes for the years ended
December 31, 1993, 1994 and 1995 was $0, $57,000 and $720,000, respectively, and
for the three months ended March 31, 1995 was $395,000.
<TABLE>
The income tax provision consists entirely of current amounts. The
components of the income tax provision are as follows:
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Federal..................................................... $ -- $ 747
State....................................................... 7 308
Foreign..................................................... 21 238
---- ------
Total....................................................... $ 28 $1,293
==== ======
</TABLE>
The total tax provision is reflected in operations as a benefit of
$2,346,000 offset by a charge of $239,000 on income from discontinued operations
and a charge of $3,401,000 on the gain from the disposal of clinical operations.
<TABLE>
The 1995 provision for income taxes was at a rate different from the U.S.
Federal statutory income tax rate for the following reasons:
<S> <C>
Federal tax -- expense (benefit)....................................... (34.0)%
Goodwill............................................................... 6.0
State taxes -- net..................................................... 3.3
Gain on sale of GDRU................................................... 40.1
Joint Venture loss..................................................... 3.9
Other.................................................................. 1.4
----
Effective tax rate..................................................... 20.7%
====
</TABLE>
F-18
<PAGE> 67
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
The components of the deferred tax assets and liabilities at December 31,
1993, 1994 and 1995, respectively, are as follows:
<CAPTION>
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
Deferred tax assets/(liabilities):
Accrued compensation reserves........................ $ -- $ 897 $ 827
Other reserves....................................... -- 1,902 1,258
Net operating loss carryforwards..................... 307 17,323 17,209
----- ------- -------
Total deferred tax asset............................. $ 307 $20,122 $19,294
Valuation allowance.................................. (307) (20,122) (19,294)
----- ------- -------
Net deferred tax asset............................... $ -- $ -- $ --
===== ======= =======
</TABLE>
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets.
At December 31, 1995, the Company had U.S. net operating loss carryforwards
("NOL") of approximately $41.5 million for income tax purposes. These
carryforwards expire through 2009. Utilization of these net operating loss
carryforwards is limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986, and to the extent that the Separate Return
Limitation Year (SRLY) rules apply.
Approximately $40.6 million of the Company's NOL's were acquired in
connection with its acquisition of TSI and subsidiaries. Consequently, any
realization of the benefit of these purchased NOL's will be recorded as a
reduction of goodwill. In 1995, goodwill has been reduced by approximately $1
million as a result of the utilization of purchased NOL's to offset taxable gain
principally resulting from the sale of GDRU.
The Company paid taxes of $0, $28,000 and $238,000 in 1993, 1994 and 1995,
respectively, and $192,000 and $92,000 in the three months ended March 31, 1995
and 1996, respectively.
NOTE 9. REVENUE INFORMATION
Revenues from the U.S. government as a percentage of total revenues were
0%, 5% and 7% for the years ended December 31, 1993, 1994 and 1995,
respectively. Revenues from the Joint Venture as a percentage of total revenues
were 64%, 31% and 12% for the years ended December 31, 1993, 1994 and 1995,
respectively.
<TABLE>
A summary of export sales follows:
<CAPTION>
ASIA EUROPE TOTAL
------ ------ ------
<S> <C> <C> <C>
Year ended December 31, 1993.................................. $2,065 $ -- $2,065
Year ended December 31, 1994.................................. 3,332 478 3,810
Year ended December 31, 1995.................................. 5,311 1,311 6,622
Three months ended March 31, 1995............................. 1,042 131 1,173
Three months ended March 31, 1996............................. 931 93 1,024
</TABLE>
NOTE 10. ARRANGEMENTS WITH GENZYME CORPORATION
From the Company's inception, certain facilities and support services,
including both research and administrative support, have been provided by
Genzyme. For these services, the Company was charged $1,875,000, $2,115,000 and
$3,156,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
and $751,000 and $798,000 for the three months ended March 31, 1995 and 1996,
respectively. These charges represent an allocation of the Company's
proportionate share of Genzyme's overhead costs using formulas which management
believes are reasonable based upon the Company's use of the facilities and
services. All other costs for all periods presented, including payroll costs,
are directly attributable to the Company and have been paid by Genzyme and
charged to the Company.
F-19
<PAGE> 68
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effective July 1, 1994, the Company and Genzyme entered into the
Genzyme-GTC Credit Agreement (see Note 5), pursuant to which Genzyme agreed to
provide GTC advances up to $6.3 million. The balance of the advance was paid off
in December 1995.
In March 1996, the Company entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the AT-III program (see Note 13).
In April 1993, the Company entered into several agreements under which
Genzyme has agreed to provide various services, facilities and funding to the
Company as described below.
SERVICES AGREEMENT
Under the Services Agreement, the Company receives certain basic support
services in exchange for a fixed monthly payment ($32,491 per month during 1995)
adjusted annually. These basic services include laboratory support, as well as
assistance with certain administrative functions including purchasing, data
processing, risk management, corporate communications, and treasury activities.
If the Company requests additional services from Genzyme, the Company has agreed
to pay Genzyme fully allocated costs of those services. The Services Agreement
extends through May 1996 and is automatically renewed each year thereafter
unless terminated by either party not less than 90 days prior to the end of any
annual period. Under the Services Agreement, the Company made payments of
$144,000, $310,000 and $390,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $97,000 and $190,000 for the three months ended March
31, 1996 and 1995, respectively.
SUBLEASE AGREEMENT
Under the Sublease Agreement, the Company has leased certain laboratory,
research and office space from Genzyme through May 1998 in exchange for fixed
monthly rent payments which approximate the estimated current rental value for
such space. In addition, the Company reimburses Genzyme for its pro rata share
of appropriate facility operating costs such as maintenance, cleaning, utilities
and real estate taxes. The sublease is automatically renewed each year and
renewals are subject to earlier termination of the sublease by either party
after the initial five-year term. Under the Sublease Agreement, the Company made
payments of $29,000, $102,000 and $169,000 for the years ended December 31,
1993, 1994 and 1995, respectively, and $42,000 and $62,000 for the three months
ended March 31, 1995 and 1996, respectively, and is committed to make annual
minimum rental payments of $92,000 in each of the years 1996 and 1997 and
$54,000 in 1998.
TECHNOLOGY TRANSFER AGREEMENT
Under the Technology Transfer Agreement, Genzyme transferred substantially
all of its transgenic assets and liabilities to the Company including its
ownership in the Joint Venture, assigned its relevant contracts and licensed to
the Company technology owned or controlled by it and relating to the production
of recombinant proteins in the milk of transgenic animals (the "Field") and the
purification of proteins produced in that manner. The license is worldwide and
royalty-free as to Genzyme although the Company is obligated to Genzyme's
licensors for any royalties due them.
Genzyme may not use the transferred technology or any other technology it
subsequently acquires relating to the Field except through the Company until at
least May 1, 1996. After such date, and as long as Genzyme's ownership of the
Company remains below 50%, Genzyme may use the transferred technology and the
new technology only on its own behalf and without any royalty obligation to the
Company.
F-20
<PAGE> 69
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
RESEARCH AND DEVELOPMENT AGREEMENT
In 1993, the Company and Genzyme entered into a Research and Development
Agreement which defines the relationship among the parties whereby each entity
may perform research for the other. This agreement is in effect through May 1998
and may be renewed by mutual consent. Genzyme has agreed to use the Company to
perform all research in the field of production of recombinant proteins in
transgenic animals. The Company has a similar obligation to use Genzyme to
purify proteins produced transgenically. Each party must request such services
from the other company before seeking them from a third party although the
Company may perform purification services on its own behalf. These obligations
are qualified by the ability of each party to perform the requested services in
accordance with the performance, scheduling, cost and other specifications
reasonably established by the requesting party. Each company will receive
payments from the other equal to the performing party's fully allocated cost of
performing such services, which shall not be less than 80% of the annual budgets
established by the parties under the agreement plus, in most cases, a fee equal
to 10% of such costs. The Company currently provides development services to
Genzyme for which it recognized revenues of $1,072,000, $883,000 and $485,000 in
1993, 1994 and 1995, respectively, and $215,000 and $19,000 for the three months
ended March 31, 1995 and 1996, respectively.
Also, see Note 5 and Note 13.
NOTE 11. OTHER AGREEMENTS
TUFTS UNIVERSITY SCHOOL OF VETERINARY MEDICINE ("TUFTS")
Since 1988, pursuant to a cooperation agreement, the Company has funded an
ongoing program to develop transgenic animals at Tufts. During the term of the
agreement, which extends through September 1998, Tufts has agreed to work
exclusively with the Company for commercial applications within the field of
transgenic protein production in milk. The Company is obligated to make minimum
payments in the aggregate of $500,000 during 1996. The Company paid Tufts
$766,000, $868,000, and $665,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $59,000 and $170,000 for the three months ended March
31, 1995 and 1996, respectively. Sales of products derived from transgenic goats
produced by Tufts, or from their offspring, are subject to royalties payable to
Tufts.
NOTE 12. JOINT VENTURE
In 1990, Genzyme entered into a joint venture with Sumitomo Metal
Industries to develop proteins produced transgenically (the "Joint Venture").
The Joint Venture has engaged the Company, as the successor to Genzyme's
transgenics business, to perform research and development for which the Company
is reimbursed a portion of its costs and receives additional payments based on
achievement of specified milestones. GTC does not have any intercompany profits
or losses as a result of its transactions with the Joint Venture. This
three-year program ended during 1993 and the parties decided to extend the
contract for an additional three years. Under the arrangement the Company
recognized revenues of $2,065,000, $2,947,000 and $3,874,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $727,000 and $182,000 for
the three months ended March 31, 1995 and 1996, respectively. The Company's
initial $1,077,000 investment in the Joint Venture represented a 25% ownership
interest. In 1992, the Company invested an additional $381,000, less than 25% of
the aggregate new investment resulting in a decline of its ownership to 19.7%.
In March 1994, the Company and its partner agreed to extend the Joint Venture
contract and contribute an additional $1.2 million and $4.6 million,
respectively, increasing the Company's ownership percentage to 22%. In October
1995, the Company contributed an additional $807,000 to maintain the Company's
ownership percentage at 22%. In addition, assuming the achievement of certain
milestones, the partners will contribute additional funds which will bring the
total contribution to $7.7 million. At December 31, 1995, the Company had
received advance payments of $155,000 from the Joint Venture.
F-21
<PAGE> 70
GENZYME TRANSGENICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Joint Venture has a license, exclusive as to Asia and non-exclusive as
to Europe, to use the Company's transgenic technology and to market and sell
products and transgenic animals produced by the Joint Venture based on that
technology. The Company retained the exclusive right to market and sell such
products within the Americas. Each party is obligated to make royalty payments
based on its sales of products developed by the Joint Venture and, additionally,
the Company is obligated to pay royalties on sales of other transgenically
produced proteins in Asia.
<TABLE>
Summarized financial information (unaudited) for the Joint Venture is as
follows:
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Balance Sheet Data:
Current assets................................................. $2,964 $2,900
Noncurrent asset............................................... 8 4
Current liabilities............................................ 23 2
Partners' capital.............................................. 2,949 2,902
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Statement of Operations Data:
Research and development expenses..................... $1,637 $2,859 $3,183
Administrative expense................................ 482 313 1,083
Revenue............................................... (65) (32) (961)
------ ------ ------
Net loss.............................................. $2,054 $3,140 $3,305
====== ====== ======
</TABLE>
NOTE 13. SUBSEQUENT EVENTS
In February 1996, the Company obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
On March 28, 1996 the Company entered into a Convertible Debt and
Development Funding Agreement with Genzyme under which Genzyme agreed to provide
a revolving line of credit in the amount of $10 million and has agreed to fund
development costs of the Antithrombin III ("AT-III") program through March 31,
1997. Under the Agreement, GTC granted to Genzyme co-marketing rights to AT-III
in all territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit carries a rate of 7% and is convertible into the Company's
Common Stock (at the average market price for the 20-day period ending two days
before any conversion), at GTC's option, to maintain GTC's tangible net worth at
the end of each quarter at a level between $4.0 million and $4.2 million or by
Genzyme at any time for up to the full amount outstanding.
F-22
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Genzyme Transgenics Corporation:
We have audited the accompanying consolidated balance sheets of TSI
Corporation as of July 3, 1994 and September 30, 1994 and the related
consolidated statements of operations, cash flows and stockholders' equity for
the fiscal year ended July 3, 1994 and the period from July 4 to September 30,
1994, respectively. These financial statements are the responsibility of
management. Our responsibility is to express an opinion of these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 6 to the consolidated financial statements, TSI
Corporation was acquired by Genzyme Transgenics Corporation (GTC) on October 1,
1994 and has been operated by the management of GTC since that date. The
transaction involved the exchange of 4,367,601 shares of GTC common stock with a
market value of approximately $14,741,000 at the date of acquisition for all the
outstanding shares of TSI Corporation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TSI Corporation
as of July 3, 1994 and September 30, 1994 and the consolidated results of its
operations and its cash flows for the fiscal year ended July 3, 1994 and the
period from July 4 to September 30, 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 5, 1996
F-23
<PAGE> 72
TSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 3, SEPTEMBER 30,
1994 1994
------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 787 $ --
Accounts receivable, net of allowance of $380 and $402 at July 3,
1994 and September 30, 1994, respectively..................... 4,124 3,653
Raw materials inventory.......................................... 464 477
Unbilled contract revenue........................................ 2,835 2,308
Prepaid expense.................................................. 527 516
Net assets held for sale......................................... 808 485
------- -------
Total current assets..................................... 9,545 7,439
Property, plant and equipment, net................................. 12,024 12,184
Costs in excess of net assets acquired, net........................ 5,559 5,505
Other assets....................................................... 290 695
------- -------
$27,418 $25,823
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 2,735 $ 2,666
Revolving line of credit...................................... 1,215 2,320
Accrued payroll and related costs............................. 1,530 1,714
Other accrued expenses........................................ 3,378 3,653
Advance payments.............................................. 5,001 3,839
Accrued and deferred income taxes............................. 453 568
Current portion of accrued restructuring...................... 589 536
Current portion of long-term debt............................. 646 680
------- -------
Total current liabilities................................ 15,547 15,976
Long-term debt, net of current portion........................ 2,358 3,594
Long-term accrued restructuring, net of current portion....... 619 508
Deferred lease obligation..................................... 198 501
------- -------
Total liabilities........................................ 18,722 20,579
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized;
Convertible preferred stock; $.01 par value; 2,070,000 shares
authorized; 9,644 shares issued and outstanding.............. -- --
Common stock, $.02 par value; 50,000,000 shares authorized;
21,810,893 and 21,814,893 shares issued and outstanding at
July 3, 1994 and September 30, 1994, respectively............ 436 436
Additional paid in capital.................................... 57,124 57,142
Treasury stock, 112,455 shares outstanding.................... (209) (209)
Accumulated deficit........................................... (48,286) (51,749)
Accumulated translation adjustment............................ (369) (376)
------- -------
Total stockholders' equity.................................... 8,696 5,244
------- -------
$27,418 $25,823
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE> 73
TSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED JULY 4 TO
JULY 3, SEPTEMBER 30,
1994 1994
------------ --------------
<S> <C> <C>
Revenues:
Services....................................................... $ 40,224 $ 6,790
Products....................................................... 8,690 1,720
Research and development....................................... 682 --
----------- ----------
49,596 8,510
Costs and operating expenses:
Services....................................................... 32,755 6,800
Products....................................................... 8,603 1,481
Research and development....................................... 618 --
General and administrative..................................... 11,539 3,475
Restructuring.................................................. (770) --
----------- ----------
52,745 11,756
----------- ----------
Loss from operations............................................. (3,149) (3,246)
Interest expense................................................. (380) (111)
----------- ----------
Loss before provision for income taxes........................... (3,529) (3,357)
Provision for income taxes....................................... 353 106
----------- ----------
Net loss......................................................... $ (3,882) $ (3,463)
=========== ==========
Net Loss per Common Share........................................ $ (0.18) $ (0.16)
=========== ==========
Number of common shares outstanding for purposes of computing net
loss per common share.......................................... 21,307,847 21,813,355
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE> 74
TSI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- ADDITIONAL ACCUMULATED
PAR PAR PAID-IN TREASURY TRANSLATION
SHARES VALUE SHARES VALUE CAPITAL STOCK ADJUSTMENT
-------- -------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............ 58,410 $ 1 20,864,197 $417 $ 56,104 $ (75) $ (342)
Proceeds from exercise of stock
options............................. 513,300 10 333 (134)
Issuance of common stock in connection
with bank financing................. 20,000 1 27
Issuance of warrants in connection
with bank financing................. 270
Issuance of common stock for Equity
Incentive Program................... 164,731 3 187
Issuance of common stock in
conjunction with Employee Stock
Purchase Plan....................... 70,993 1 78
Issuance of common stock in
conjunction with TSI Savings and
Retirement Plan..................... 129,165 3 125
Conversion of convertible preferred to
common stock........................ (48,766 ) (1) 48,766 1
Shares retired........................ (259)
Translation adjustment................ (27)
Net loss..............................
Adjustment for change in fiscal
year-end of foreign subsidiary......
------- --- ---------- ---- -------- ------ ------
BALANCE JULY 3, 1994.................. 9,644 -- 21,810,893 $436 $ 57,124 $ (209) $ (369)
Issuance of common stock as
compensation........................ 4,000 18
Translation adjustment................ (7)
Net loss..............................
------- --- ---------- ---- -------- ------ ------
BALANCE SEPTEMBER 30, 1994............ 9,644 -- 21,814,893 $436 $ 57,142 $ (209) $ (376)
======= === ========== ==== ======== ====== ======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
---------- ----------
<S> <C> <C>
BALANCE, DECEMBER 31, 1993............ $(44,606) $11,499
Proceeds from exercise of stock
options............................. 209
Issuance of common stock in connection
with bank financing................. 28
Issuance of warrants in connection
with bank financing................. 270
Issuance of common stock for Equity
Incentive Program................... 190
Issuance of common stock in
conjunction with Employee Stock
Purchase Plan....................... 79
Issuance of common stock in
conjunction with TSI Savings and
Retirement Plan..................... 128
Conversion of convertible preferred to
common stock........................ --
Shares retired........................ --
Translation adjustment................ (27)
Net loss.............................. (3,882) (3,882)
Adjustment for change in fiscal
year-end of foreign subsidiary...... 202 202
-------- -------
BALANCE JULY 3, 1994.................. $(48,286) $ 8,696
Issuance of common stock as
compensation........................ 18
Translation adjustment................ (7)
Net loss.............................. (3,463) (3,463)
-------- -------
BALANCE SEPTEMBER 30, 1994............ $(51,749) $ 5,244
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 75
TSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM
ENDED JULY 4 TO
JULY 3, SEPTEMBER 30,
1994 1994
------------ --------------
<S> <C> <C>
Cash flows for operating activities:
Net loss....................................................... $(3,882) $(3,463)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization............................... 2,392 415
Deferred tax provision...................................... -- 2
Loss on disposal of fixed assets............................ 394 --
Common stock issued for operating expenses.................. 616 --
Accrued restructuring....................................... (2,945) (164)
Changes in assets and liabilities, net of effects from purchase
of subsidiaries:
Accounts receivable and unbilled contract revenue........... 2,141 998
Inventory and other current assets.......................... 20 (2)
Decrease in net assets held for sale........................ 1,407 323
Accounts payable............................................ (44) (69)
Accrued payroll and related costs........................... (217) 184
Accrued income taxes........................................ 69 113
Other accrued expenses...................................... 1,008 293
Advance payments............................................ 3 (1,162)
------- -------
Net cash provided by (used in) operating activities.... 962 (2,532)
Cash flows for investing activities:
Purchase of property, plant and equipment...................... (911) (501)
------- -------
Net cash used in investing activities.................. (911) (501)
Cash flows from financing activities:
Net proceeds from the issuance of common stock................. 288 --
Proceeds from long-term debt................................... -- 1,956
Repayment of long-term debt.................................... (702) (686)
Net borrowings under revolving line of credit.................. (785) 1,105
Deposit on capital leases...................................... -- (425)
Other long-term liabilities.................................... (125) 303
------- -------
Net cash provided by (used in) financing activities.... (1,324) 2,253
------- -------
Net decrease in cash and cash equivalents........................ (1,273) (780)
Effect of exchange rates on cash................................. (28) (7)
Adjustment for change of fiscal year-end of foreign subsidiary... 202 --
Cash and cash equivalents at beginning of the period............. 1,886 787
------- -------
Cash and cash equivalents at end of period....................... $ 787 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 76
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS
(ALL TABULAR $ IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF BUSINESS:
TSI Corporation (together with its subsidiaries, "TSI") is a leading
provider of preclinical, toxicology and human clinical testing services to
pharmaceutical, biotechnology, medical device and chemical companies. TSI also
manufactures certain biological products that it markets to diagnostic companies
and research organizations.
The accompanying financial statements have been presented on the assumption
that TSI is a going concern. TSI has incurred significant losses and negative
operating cash flows in the fiscal year ended July 3, 1994 and the period from
July 4 to September 30, 1994. TSI had negative working capital of $6,002,000 and
$8,537,000 at July 3, 1994 and September 30, 1994, respectively.
In fiscal year 1993, TSI restructured certain operations to reduce general
and administrative expenses and increase revenues from continuing operations.
During fiscal year 1994, TSI enacted an operating plan to reduce further general
and administrative expenses by centralizing common functions within operating
divisions, reengineering operating processes and commonizing to the extent
possible within its laboratories.
On October 1, 1994, TSI was acquired by Genzyme Transgenics Corporation
("GTC") (see Note 13).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of TSI and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated. Overseas subsidiaries have been consolidated using a fiscal year-end
of May 31. Effective for fiscal 1994, TSI changed the fiscal year-end of its
U.K. subsidiary, G.D.R.U. Limited ("GDRU"), from May 31 to a 52/53 week year-end
coinciding with its domestic operations. Therefore, the accompanying
consolidated statement of operations for the fiscal year ended July 3, 1994
includes the operating results of GDRU for the twelve-month period ended May 31,
1994. The consolidated statement of cash flows for the fiscal year ended July 3,
1994 includes the cash flows of GDRU for the thirteenth-month period ending July
3, 1994. For the month of June 1994, GDRU had revenues of $761,000 and earned
net income of $202,000 which is reflected as an adjustment to retained earnings.
CASH EQUIVALENTS
Cash equivalents are stated at cost, which approximates market, and have
original maturities of three months or less.
INVENTORY
Inventory is valued at lower of cost or market (first-in, first-out
method).
PROPERTY, PLANT AND EQUIPMENT
Property and Equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
remaining term of the lease.
F-28
<PAGE> 77
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
The following is a summary of property and equipment and related
accumulated amortization and depreciation as of July 3, 1994 and September 30,
1994:
<CAPTION>
YEARS OF
LIFE JULY 3, 1994 SEPTEMBER 30, 1994
----------- ------------ ------------------
<S> <C> <C> <C>
Land......................................... -- $ 200 $ 200
Buildings.................................... 20 -- 30 3,294 3,415
Leasehold improvements....................... lease life 3,685 4,109
Laboratory, manufacturing and office
equipment.................................. 3 -- 10 8,653 8,579
Construction in process...................... 98 128
------- -------
15,930 16,431
Accumulated amortization and depreciation.... (3,906) (4,247)
------- -------
Net property, plant and equipment............ $12,024 $12,184
======= =======
</TABLE>
Depreciation expense was $2,089,000 and $341,000 for the fiscal year ended
July 3, 1994 and the period from July 4 to September 30, 1994, respectively.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
The excess consideration paid and costs incurred over the net value of
assets acquired is being amortized over a 30-year period. Accumulated
amortization as of July 3, 1994 and September 30, 1994 was $1,003,000 and
$1,057,000, respectively. Related amortization expense for the fiscal year ended
July 3, 1994 and the period from July 4 to September 30, 1994 was $303,000 and
$54,000, respectively.
ACCRUED EXPENSES
<TABLE>
Accrued expenses at July 3, 1994 and September 30, 1994 included the
following:
<CAPTION>
JULY 3, 1994 SEPTEMBER 30, 1994
------------ ------------------
<S> <C> <C>
Contract lost reserves............................ $1,934 $2,007
Other accrued expenses............................ 1,444 1,646
------ ------
$3,378 $3,653
====== ======
</TABLE>
REVENUE RECOGNITION
For both services and research and development revenues TSI accounts for
cost reimbursement contracts and fixed price contracts using the
percentage-of-completion method. Unbilled contract revenue represents
recoverable costs and accrued profit which had not been billed at the balance
sheet date. Advance payments represent cash received from customers in advance
of the work being performed. Product revenues are generally recognized upon
shipment. Research and development revenues in fiscal 1994 consisted of $682,000
from Exemplar Corporation ("Exemplar"), a research and development company
formed in 1991 (see Note 12).
Profits expected to be realized on contracts are based on TSI's estimates
of total contract sales value and costs at completion. These estimates are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to profits resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When management
believes the cost of completing a contract will exceed contract-related
revenues, the full amount of the anticipated contract loss is immediately
recognized. Total contract loss reserves at July 3, 1994 and September 30, 1994
were $1,934,000 and $2,007,000, respectively.
F-29
<PAGE> 78
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates, and statement of operations accounts are translated at average
exchange rates. Resulting translation adjustments are recorded in a separate
component of stockholders' equity, "Accumulated translation adjustment."
INCOME TAXES
TSI follows the asset and liability method of accounting for income taxes
as set forth in Statement of Financial Accounting Standards No. 109 ("FAS 109"),
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities using the current statutory tax rates.
NET LOSS PER COMMON SHARE
Net loss per share is computed by dividing the net loss by the weighted
average number of common shares and common stock equivalents outstanding when
the effect would be dilutive. Common stock equivalents include stock options.
The difference between weighted average shares for primary and fully diluted net
loss per share was not significant for the periods presented.
3. LOSS ON DISPOSAL OF ASSETS:
In March 1993, TSI recorded a charge of $1,320,000 in connection with the
planned disposal of the Laboratory Animal Services ("LAS") and The TSI Center
for Diagnostic Products ("CDP") operations. In September 1993, TSI announced a
$5 million disposal of operations charge to reduce the net assets of its German
preclinical testing and regulatory consulting subsidiary, IBR Forschungs GmbH
("IBR"), to net realizable value. Operations at IBR ceased during the second
quarter of fiscal 1994 and on December 1, 1993 it entered into liquidation
proceedings. At July 3, 1994 and September 30, 1994, IBR's remaining net assets
of $808,000 and $485,000, respectively, primarily working capital and property,
plant and equipment, have been classified as net assets held for sale in the
accompanying consolidated balance sheets and represent the net realizable value
of these assets upon their disposition.
4. WRITEDOWN OF COSTS IN EXCESS OF NET ASSETS ACQUIRED AND RESTRUCTURING CHARGE:
In March 1993, the Board of Directors replaced several members of TSI's
executive management group, including the chief executive officer, in
conjunction with a review and evaluation of the performance of TSI's various
business units. At that time, TSI announced a restructuring of certain
operations, principally the Health and Sciences Research, Inc. ("HSRI")
subsidiary. Since improved operating results were not imminent, TSI determined
that the HSRI operation could not compete profitably as a provider of clinical
services for all four phases of the clinical testing marketplace and decided to
refocus the HSRI operations on the phase II and III markets only. The other HSRI
services were discontinued and the related personnel and facilities considered
redundant. Given the initial losses incurred from the date of purchase and the
expected future cash requirements if operations were not reduced, TSI determined
that the original goodwill associated with the purchase of HSRI was worthless.
The majority of the writedown and restructuring charge recorded in fiscal 1993
represented costs associated with the HSRI operation.
In May 1994, TSI reached agreement with a landlord securing the termination
of the lease of its former corporate offices and research and development
facility which was originally scheduled to expire on June 30, 2001. The lease
termination was effective May 31, 1994. Additionally, in May 1994, TSI reached
an agreement settling an arbitration claim against the former owner of HSRI.
Under the terms of the settlement,
F-30
<PAGE> 79
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the former owner agreed to pay TSI $1 million which was recorded as a gain in
the fourth quarter of fiscal 1994, of which $650,000 was paid at the date of
agreement, $100,000 was received on September 9, 1994 and $250,000 was received
on December 9, 1994.
In May 1994, TSI further restructured its HSRI operations which continued
to incur operating losses following the restructuring in March 1993. As a result
of this action, TSI provided an $854,000 restructuring charge in the fourth
quarter of fiscal 1994. This charge consisted principally of costs for
relocating and reducing HSRI's facilities. The exit costs recognized for this
transaction were severance of $106,000 for the termination of sixteen employees
and lease obligations on a vacated facility of $748,000. Severance in the amount
of $40,000 was charged to the reserve during fiscal 1994. In addition, TSI
reduced its estimated restructuring reserve requirement by $624,000. The
$770,000 net amount of these transactions is reflected as an offset to other
operating expenses.
As of September 30, 1994, there was $1,044,000 of accrued restructuring
remaining, of which $508,000 was classified as long-term. During the period from
July 4 to September 30, 1994, $53,000 was paid out of accrued restructuring for
severance and $111,000 was paid for the facility lease.
5. ACQUISITIONS:
Effective July 1, 1991, TSI acquired all of the common stock of Argus
Research Laboratories, Inc. and The Center for Photobiology at Argus, Inc., two
privately-held preclinical testing companies located in Horsham, Pennsylvania
(collectively, "Argus") for $2.0 million in cash. TSI has accounted for these
acquisitions using the purchase method. In addition to the purchase price, TSI
entered into a 10-year noncompete agreement with the principal stockholder of
Argus for a total of $750,000. TSI paid $375,000 at the acquisition date and is
obligated to pay $25,000 per year at the end of years 1-5 and $50,000 per year
at the end of years 6-10. The excess of the total acquisition costs over the
fair value of net assets acquired was $1,750,000 which was written off in
conjunction with the 1994 restructuring (see Note 4).
6. COMMITMENTS AND CONTINGENCIES:
TSI leases equipment and facilities under various operating and capital
leases (see also Note 7). The deferred lease obligation represents the
cumulative difference between actual facility lease payments and lease expense
recognized ratably over the lease period.
At July 3, 1994 and September 30, 1994, the total cost of equipment under
capital lease was $1,872,000 and $2,309,000, respectively, with $374,000 and
$302,000, respectively, of accumulated depreciation.
Rent expense for the fiscal year ended July 3, 1994 and the period from
July 4, to September 30, 1994 was approximately $2,030,000 and $195,000,
respectively.
F-31
<PAGE> 80
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
TSI's future minimum payments required under these leases are as follows:
<CAPTION>
FISCAL
YEAR OPERATING CAPITAL TOTAL
------ --------- ------- -------
<S> <C> <C> <C>
1995............................... $ 1,765 $ 687 $ 2,452
1996............................... 1,753 686 2,439
1997............................... 1,710 664 2,374
1998............................... 1,618 255 1,873
1999............................... 1,211 -- 1,211
Thereafter......................... 5,126 -- 5,126
------- ------ -------
Total.............................. $13,183 $2,292 $15,475
======= ------ =======
Less amount representing interest (328)
------
Present value of minimum lease payments $1,964
======
</TABLE>
On June 17, 1994, a lawsuit was filed by a stockholder of TSI against TSI,
GTC and the directors of TSI alleging, among other things, that the terms of the
merger agreement are unfair to TSI's stockholders and that TSI's directors
breached their fiduciary duties in authorizing TSI to enter into the merger
agreement. The lawsuit seeks an unspecified amount of damages and a court order
to enjoin the merger. Each of the directors of TSI, TSI and GTC deny the
allegations and continue to believe that the merger is fair to, and in the best
interests of, the stockholders of TSI. They intend to vigorously defend the
lawsuit. The plaintiffs did not actually file a motion for a preliminary
injunction and the merger was consummated on October 1, 1994. No further
proceedings in the litigation have occurred since that time.
7. BORROWINGS:
TSI has a revolving line of credit arrangement with a commercial bank. In
October 1993, the bank provided TSI with a commitment to extend the revolving
line of credit until August 1, 1994. Under the terms of the extension, TSI
continued to have a $1 million standby letter of credit and could borrow up to
70 percent of the amount of the eligible accounts receivable of its U.S.
subsidiaries, subject to a maximum borrowing of $2 million. In consideration for
the extension, TSI agreed to pay a fee of $100,000 payable at the rate of
$10,000 per month from October 1993 to April 1994 with the balance due in August
1994. In addition, TSI issued the bank 20,000 shares of TSI's common stock and a
warrant to purchase an additional 188,000 shares of common stock exercisable at
$0.01 per share. The warrant became exercisable as to 40,000 shares on March 27,
1994, 58,000 shares on July 3, 1994 and 90,000 shares on July 8, 1994.
In June 1994, the bank agreed to modify and extend the existing credit
agreement through August 1, 1995. Under the terms of the extension, TSI could
borrow up to $3 million based upon 75% of eligible accounts receivable. The
amount of the bank line decreased to $2 million on December 31, 1994. In
addition, the bank agreed to increase the existing standby letter of credit from
$1.0 million to $1.5 million prior to June 30, 1994. As of September 30, 1994,
TSI was in compliance with the amended covenants. Amounts outstanding under the
line of credit were $2,320,000 as of September 30, 1994. No amounts were due
under the standby letter of credit as of September 30, 1994.
Under the terms of the bank line of credit, TSI has agreed not to pay any
dividends until the loans have been repaid.
In September 1994, TSI received a $2 million lease line with a commercial
leasing company. Leases require monthly payments over 36 months at 10% with a
fair market value buyout (in the range of 5% to 10% of original cost) at the end
of the lease term. The Lease Agreement required a 25% cash deposit at inception.
As of September 30, 1994, $1,956,000 of the lease line had been utilized.
F-32
<PAGE> 81
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
At September 30, 1994, TSI's long-term debt consisted of the following:
<S> <C>
Mortgage note payable with monthly payments of $8,809 through March
1996, interest at 12%, collateralized by real estate.............. $ 761
Mortgage note payable with monthly payments of $4,581 through
February 2012, interest is variable, collateralized by real
estate............................................................ 519
Note payable with monthly payments of $6,066 through December 2000,
interest at 8%, collateralized by real estate..................... 354
Mortgage note payable, with monthly payments of $3,263 through
August 2010, interest at 9.5% secured by real estate.............. 321
Capital lease obligations, with monthly payments of $55,098 through
September 1997, interest at 10.28% collateralized by equipment.... 1,964
Other............................................................... 355
------
4,274
Less current portion................................................ (680)
------
$3,594
======
</TABLE>
<TABLE>
Maturities of long-term debt over the next five fiscal years are as
follows:
<S> <C>
1995.............................................................. $ 680
1996.............................................................. 1,479
1997.............................................................. 786
1998.............................................................. 443
1999.............................................................. 196
Thereafter........................................................ 690
------
$4,274
======
</TABLE>
Cash paid for interest for the fiscal year ended July 3, 1994 and the
period from July 4 to September 30, 1994 was $330,000 and $111,000,
respectively.
8. STOCKHOLDERS' EQUITY:
COMMON STOCK AND WARRANTS
In May 1990, TSI issued Class D warrants for 100,000 shares of common stock
to Biogen, Inc. in exchange for certain technology. Each warrant allows the
holder to purchase one share of common stock at $3.61, subject to adjustment.
The warrants expire on May 31, 1995. As of September 30, 1994, 16,851 Class D
Warrants were exercised.
In September 1991, TSI issued warrants to purchase 640,000 shares of common
stock in connection with the equity financing of Exemplar Corporation. Each
warrant allows the holder to purchase one share of TSI common stock for $8.00
per share and is exercisable until January 31, 1996.
In connection with the refinancing of TSI's line of credit in October 1993,
TSI has issued the bank 20,000 shares of TSI's common stock and a warrant to
purchase an additional 188,000 shares of common stock which became exercisable
at $0.01 per share in July 1994. TSI recorded a charge during fiscal 1994 of
$298,000 in connection with these issuances.
As of September 30, 1994, TSI has reserved 3,965,125 shares of common
stock, subject to adjustment, for future issuance under the various classes of
warrants, convertible preferred stock and stock option and employee stock
purchase plans (see Note 9).
F-33
<PAGE> 82
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
CONVERTIBLE PREFERRED STOCK
On May 2, 1989, the effective date of TSI's initial public offering, the
Board of Directors authorized the issuance of convertible preferred stock, $0.01
par value, on a pro rata basis to holders of common stock on that date.
Convertible preferred shareholders have no voting rights, are not entitled to
dividends, and have a liquidation preference of $0.01 per share.
Each share of convertible preferred stock became convertible into one share
of common stock upon the achievement of certain targeted market values of TSI's
common stock, as defined. On July 1, 1995, TSI may redeem all shares then
outstanding at par value. During fiscal 1992, all outstanding shares of
convertible preferred stock became eligible for conversion at the option of the
holders thereof and, as of September 30, 1994, 2,013,716 shares had been
converted into common stock and 46,640 shares had been canceled.
SHAREHOLDERS' RIGHTS PLAN
In February 1991, the Board of Directors adopted a Shareholder Rights Plan
which provided for a dividend distribution of one preferred share purchase right
for each share of common stock outstanding on March 1, 1991. Under certain
circumstances, each right entitles the holder to purchase from TSI 1/100 of a
new series of preferred stock, designated Series A Junior Participating
Preferred Stock, at a price of $19.80 per 1/100 of a share.
The rights are not exercisable and cannot be transferred separately from
the common stock until ten days after (i) a person acquires 20% or more (other
than in an Approved Transaction, as defined) or makes a tender offer for 30% or
more of TSI's common stock, or (ii) TSI's Board of Directors shall declare a
person owning 10% or more of TSI's Common Stock to be an Adverse Person, as
defined.
If, after the rights become exercisable, (i) TSI is the surviving entity in
a merger with a 20% or more stockholder, (ii) a 20% or more stockholder engages
in certain "self-dealing" transactions with TSI, (iii) any person acquires 30%
or more of TSI's common stock without a plan approved by TSI's Board of
Directors or (iv) a 20% or more stockholder increases such ownership percentage
through recapitalization or reclassification of securities, each right not owned
by such person will entitle its holder to purchase, at the right's exercise
price, common stock having a value of two times the exercise price of the right.
In addition, if TSI either (i) is acquired in a merger or other business
combination in which TSI is not the surviving entity, or (ii) sells or transfers
50% or more of its assets or earning power to another party, each right will
entitle its holder to purchase, upon exercise, common stock of the acquiring
company having a value equal to two times the exercise price of the right. The
rights expire on February 28, 2001 unless redeemed by TSI for $0.01 per right at
any time prior to the tenth day following a person's acquisition of 20% or more
of TSI's common stock.
Preferred shares purchasable upon exercise of the rights will be entitled
to a minimum quarterly dividend of $1 per share, or 100 times any dividend
declared on common stock, and will have a minimum liquidation preference of $100
per share, or 100 times any liquidation payment made to common stock. So long as
the rights are not separately transferable, TSI will issue one right with each
new share of common stock issued.
9. EMPLOYEE BENEFIT PLANS:
STOCK OPTION PLAN
Under TSI's 1988 Amended and Restated Stock Option Plan (the "1988 Plan"),
incentive stock options and nonqualified options to purchase common shares may
be issued to key employees, directors and consultants at the discretion of the
stock option committee. The 1988 Plan was amended on December 7, 1993 to
increase the number of shares that may be subject to options under the plan from
2.1 million to 3 million shares. As of September 30, 1994, TSI had available
1,242,425 shares for the grant of options under the 1988
F-34
<PAGE> 83
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Plan. These options are issued at the fair market value on the date of grant and
vest over periods of up to five years.
<TABLE>
The stock option activity under the 1988 Plan was as follows:
<CAPTION>
NUMBER OF RANGE OF
SHARES OPTION PRICE
--------- ----------------
<S> <C> <C>
Balance, June 27, 1993.................................. 1,965,250 $0.67 -$12.00
Granted................................................. 592,550 $1.25 -$4.375
Exercised............................................... (513,300 ) $0.67 -$ 1.00
Cancelled............................................... (862,290 ) $1.3125-$12.00
--------- --------------
Balance, July 3, 1994................................... 1,182,210 $0.67 -$11.00
--------- --------------
Granted................................................. --
Exercised............................................... --
Cancelled............................................... --
--------- --------------
Balance, September 30, 1994............................. 1,182,210 $0.67 -$11.00
========== ==============
</TABLE>
As of September 30, 1994, options with respect to 282,670 shares were
exercisable under the 1988 Plan.
1991 DIRECTOR STOCK OPTION PLAN
Under TSI's 1991 Director Stock Option Plan (the "Director Plan"),
nonqualified options to purchase common stock are automatically granted to
non-employee directors on the date of each director's election or reelection to
the board of directors at the annual rate of 5,000 shares per year, subject to
reduction for periods in which options previously granted under the 1988 Stock
Option Plan first became exercisable. Options under the Director Plan may be
granted with respect to a maximum of 150,000 shares of TSI's common stock. The
options become exercisable over five years at an exercise price equal to 100% of
the fair market value of the common stock on the date of grant. As of September
30, 1994, TSI had available 88,750 shares for the grant of options under the
Director Plan.
<TABLE>
The Director Plan stock option activity was as follows:
<CAPTION>
NUMBER OF RANGE OF
SHARES OPTION PRICE
--------- ---------------
<S> <C> <C>
Balance, June 27, 1993................................... 46,250 $6.125 -$12.00
Granted.................................................. 15,000 $0.9375
Exercised................................................ --
Cancelled................................................ --
------ --------------
Balance, July 3, 1994.................................... 61,250 $0.9375-$12.00
Granted.................................................. --
Exercised................................................ --
Cancelled................................................ --
------ --------------
Balance, September 30, 1994.............................. 61,250 $0.9375-$12.00
====== ==============
</TABLE>
As of September 30, 1994, options with respect to 26,250 shares were
exercisable under the Director Plan.
EMPLOYEE STOCK PURCHASE PLAN
The 1991 Employee Stock Purchase Plan authorized the grant of rights to
purchase shares of common stock to eligible employees at the discretion of TSI's
Board of Directors. The purchase price per share of
F-35
<PAGE> 84
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
common stock in an offering is 85% of the lower of its fair market value at the
beginning of the offering period or the applicable exercise date. There are
600,000 shares of common stock which have been authorized for issuance under
this plan of which 130,303 shares have been issued to date including 70,993
shares during fiscal 1994 and none in the quarter ending September 30, 1994.
1994 EQUITY INCENTIVE PROGRAM
On October 1, 1993, TSI adopted the 1994 Equity Incentive Plan (the
"Incentive Plan") under which all full-time employees and consultants as of that
date were eligible to receive shares of TSI's common stock based on the
achievement of company-wide and division performance targets for the fiscal
quarter ended December 26, 1993. In March 1994, TSI issued 164,731 common shares
in connection with this program and recorded a charge to operations of $190,000
in fiscal 1994. The Incentive Plan was discontinued subsequent to the December
26, 1993 quarter.
OTHER
TSI's U.S. employees, subject to certain eligibility requirements, can
participate in TSI's defined contribution plan. Currently, TSI may match up to
50% of each participating employee's contributions to the plan to a maximum of
3% of salary. TSI may also contribute an additional 2% of each employee's salary
as a discretionary retirement contribution. All contributions are at the
discretion of the Board of Directors and can be paid in cash or TSI's common
stock. TSI recognized $396,000 and $69,000 of expense for the fiscal year ended
July 3, 1994 and the period from July 4, 1994 to September 30, 1994,
respectively, in relation to the plan.
GDRU maintains two defined contribution pension plans, one for directors
and the other for employees. TSI recognized approximately $117,000 and $29,000
of expense under these plans in the fiscal year ended July 3, 1994 and the
period from July 4, 1994 to September 30, 1994, respectively.
10. INCOME TAXES:
Net income from foreign operations before income taxes totaled
approximately $600,000 and $205,000 for the fiscal year ended July 3, 1994 and
the period from July 4, 1994 to September 4, 1994, respectively. Current income
tax expense resulting from foreign operations was approximately $250,000 and
$77,000 for the fiscal year ended June 3, 1994 and the period from July 4, 1994
to September 30, 1994, respectively.
Current state income tax expense was approximately $103,000 and $29,000 for
the fiscal year ended July 3, 1994 and the period from July 4, 1994 to September
30, 1994, respectively.
<TABLE>
The components of the deferred tax assets and liabilities at July 3, 1994
and September 30, 1994, respectively, are as follows:
<CAPTION>
SEPTEMBER
JULY 3, 1994 30, 1994
------------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Restructuring reserves........................... $ 543 $ 572
Other reserves................................... 1,074 1,213
Net operating loss carryforwards................. 13,033 14,103
-------- --------
Total deferred tax assets........................ 14,650 $ 15,888
Less: valuation allowance........................ (14,650) (15,888)
--------- --------
Net deferred tax asset........................... $ -- $ --
========= ========
</TABLE>
F-36
<PAGE> 85
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, TSI has placed a valuation allowance
against its otherwise recognizable deferred tax assets.
TSI had U.S. net operating loss (NOL) carryforwards of approximately $33
million and $35 million at July 3, 1994 and September 30, 1994, respectively.
These loss carryforwards expire through 2008. Utilization of these NOL's are
limited pursuant to the provisions of Section 382 of the Internal Revenue Code
of 1986 and to the extent that the Separate Return Limitation Year (SRLY) rules
apply.
11. BUSINESS SEGMENT INFORMATION:
TSI operates in two business segments. The services segment includes
testing and research services provided to pharmaceutical and biotechnology
companies and to government agencies. The products segment consists of
diagnostic and research products.
<TABLE>
Business segment information for the fiscal year ended July 3, 1994 and the
period from July 4, 1994 to September 30, 1994 is summarized in the table below:
<CAPTION>
PERIOD FROM JULY 4 TO
JULY 3, 1994 SEPTEMBER 30, 1994
------------- ----------------------
<S> <C> <C>
Revenues:
Services................................ $40,906 $ 6,790
Products................................ 8,690 1,720
------- --------
Total revenues.................. $49,596 $ 8,510
======= ========
Operating income (loss):
Services................................ $ 1,535 $ (2,889)
Products................................ (928) (148)
General corporate expenses.............. (3,756) (209)
------- --------
Total operating loss............ (3,149) (3,246)
------- --------
Interest expense.......................... (380) (111)
------- --------
Loss before income taxes.................. $(3,529) $ (3,357)
======= ========
Identifiable assets:
Services................................ $24,311 $ 22,298
Products................................ 1,533 2,235
General corporate assets................ 1,574 1,290
------- --------
Total........................... $27,418 $ 25,823
======= ========
Capital additions:
Services................................ $ 730 $ 501
Products................................ 180 --
Depreciation and amortization:
Services................................ $ 2,144 $ 393
Products................................ 248 22
</TABLE>
<TABLE>
A summary of export sales for the fiscal year ended July 3, 1994 and the
period from July 4, 1994 to September 30, 1994 is as follows:
<CAPTION>
ASIA EUROPE TOTAL
------ ------- ------
<S> <C> <C> <C>
July 3, 1994............................................ $1,337 $1,544 $2,881
September 30, 1994...................................... 283 1,367 1,650
</TABLE>
F-37
<PAGE> 86
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
TSI operates in two geographic areas. Information on TSI's geographic
operations for the fiscal year ended June 3, 1994 and the period from July 4 to
September 30, 1994 is set forth in the table below:
<CAPTION>
PERIOD FROM JULY 4 TO
JULY 3, 1994 SEPTEMBER 30, 1994
------------- ----------------------
<S> <C> <C>
Revenues:
Domestic operations..................... $ 40,073 $ 6,615
European operations..................... 9,523 1,895
-------- --------
Total revenues.................. $ 49,596 $ 8,510
======== ========
Operating income (loss):
Domestic operations..................... $ (4,241) $ (3,451)
European operations..................... 1,092 205
-------- --------
Total operating loss............ $ (3,149) $ (3,246)
======== ========
Identifiable assets:
Domestic operations..................... $ 22,116 $ 21,855
European operations..................... 3,728 2,678
General corporate assets................ 1,574 1,290
-------- --------
Total assets.................... $ 27,418 $ 25,823
======== ========
</TABLE>
12. RESEARCH AND DEVELOPMENT AGREEMENT:
In June 1991, the company entered into a research and development agreement
with Exemplar to perform specific research programs on behalf of Exemplar. The
agreement provided for TSI to license certain technology rights to Exemplar for
$300,000. Under the agreement, total research and development funding including
license fees would not exceed $7.5 million.
On September 27, 1991, Exemplar completed the sale of $8 million of its
callable common stock. In connection with the equity financing of Exemplar, TSI
issued warrants to purchase 646,000 shares of TSI common stock at $8.00 per
share in return for the option to purchase all of the outstanding common stock
of Exemplar at prices which increase over time to a maximum of $33 million. The
warrants and options are exercisable from July 1, 1992 through January 31, 1996.
In November 1993, TSI reached an agreement with Exemplar to terminate TSI's
obligations under the research and development agreement as well as its option
to purchase the stock of Exemplar. As part of the termination agreement, TSI's
research and development group was transferred to Exemplar. Accordingly, TSI
does not expect any significant research and development revenues and expenses
in the future.
In early fiscal 1994, TSI recognized approximately $682,000 of research and
development revenues under the Exemplar agreement. There was no revenue under
this agreement in the period from July 4 to September 30, 1994.
13. SUBSEQUENT EVENT:
On October 1, 1994, TSI was acquired by GTC in a merger transaction in
which GTC issued two-tenths (0.2) of one share of GTC common stock for each
share of TSI common stock resulting in the issuance of approximately 4,367,600
shares of the GTC's common stock. The transaction was accounted for as a
purchase.
F-38
<PAGE> 87
TSI CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
In connections with TSI's acquisition agreement with GTC, GTC entered into
agreements with certain creditors of TSI and its subsidiaries under which GTC:
-- guaranteed TSI's $1.5 million standby letter of credit to a landlord of
a TSI subsidiary;
-- guaranteed TSI's outstanding equipment lease obligations to certain
equipment lessors (approximately $1.9 million at September 30, 1994);
and
-- guaranteed the sums due under a promissory note issued by TSI in the
principal amount of $800,000.
In addition, as required by TSI's lender, GTC agreed to guarantee, upon
completion of the merger, TSI's obligation under a $3.0 million revolving credit
agreement (that will decrease to $2.0 million on December 31, 1994) due August
1, 1995.
F-39
<PAGE> 88
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors and Stockholders
TSI Corporation
We have audited the accompanying consolidated balance sheet of TSI
Corporation as of June 27, 1993 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TSI Corporation at June 27, 1993 and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
August 26, 1993, except for
Note 14, as to which the
date is October 8, 1993
F-40
<PAGE> 89
TSI CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 27, 1993
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents....................................................... $ 1,886
Accounts receivable, net of allowance for doubtful accounts of $388............. 5,579
Inventory....................................................................... 476
Unbilled contract revenue....................................................... 3,521
Other current assets............................................................ 535
Net assets held for sale/disposition............................................ 2,215
-------
Total current assets......................................................... 14,212
Net property, plant and equipment............................................... 13,603
Costs in excess of net assets acquired, net..................................... 5,811
Other assets.................................................................... 333
-------
$33,959
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 2,779
Revolving line of credit........................................................ 2,000
Accrued payroll and related costs............................................... 1,747
Other accrued expenses.......................................................... 2,370
Advance payments................................................................ 4,998
Accrued income taxes............................................................ 261
Deferred income taxes........................................................... 123
Current portion of accrued restructuring........................................ 2,564
Current portion of long-term debt............................................... 766
-------
Total current liabilities.................................................... 17,608
Long-term debt.................................................................. 2,940
Long-term accrued restructuring................................................. 1,589
Deferred lease obligation....................................................... 323
-------
Total liabilities............................................................ 22,460
Stockholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized:
Convertible preferred stock: $.01 par value; 2,070,000 shares authorized:
58,410 shares issued and outstanding.................................... 1
Common stock, $.02 par value; 50,000,000 shares authorized; 20,864,197 shares
issued and outstanding...................................................... 417
Capital in excess of par value............................................... 56,104
Treasury stock............................................................... (75)
Accumulated translation adjustment........................................... (342)
Accumulated deficit.......................................................... (44,606)
-------
Total stockholders' equity................................................. 11,499
-------
$33,959
=======
</TABLE>
See accompanying notes.
F-41
<PAGE> 90
TSI CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 27, 1993
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenues:
Services........................................................................ $ 44,482
Products........................................................................ 10,962
Research and development........................................................ 2,662
Interest........................................................................ 194
--------
58,300
Costs and operating expenses:
Services........................................................................ 37,207
Products........................................................................ 9,951
Research and development........................................................ 2,829
General and administrative...................................................... 16,813
Writedown of costs in excess of net assets acquired............................. 9,586
Restructuring................................................................... 6,061
--------
82,447
--------
Loss from Operations.............................................................. (24,147)
Other income (expense):
Interest expense................................................................ (699)
Other non-recurring expense:
Disposal of operations....................................................... (6,327)
--------
Loss before income taxes........................................................ (31,173)
Provision for income taxes...................................................... 850
--------
Net loss........................................................................ $(32,023)
========
Net loss per common share....................................................... $ (1.54)
========
Number of common shares outstanding for purposes of computing net loss per
share........................................................................20,788,000
==========
</TABLE>
See accompanying notes.
F-42
<PAGE> 91
TSI CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 27, 1993
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL ACCUMULATED
------------------- ---------------------- IN EXCESS TREASURY TRANSLATION ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE PAR VALUE STOCK ADJUSTMENT DEFICIT TOTAL
------- ---------- ---------- ---------- ---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28,
1992................... 136,867 $1 20,717,265 $414 $55,901 $(75) $213 $(12,583) $43,871
Proceeds from the
exercise of stock
options................ 9,200 5 5
Conversion of convertible
preferred stock to
common stock........... (73,135) 73,135 2 (2) --
Issuance of common stock
in connection with
exercise of Unit
Purchase Options....... 11,986 28 28
Issuance of common stock
in connection with
Employee Stock Purchase
Plan................... 59,310 1 226 227
Registration fees for
Exemplar Warrants...... (54) (54)
Shares retired........... (5,322) (6,699) --
Translation adjustment... (555) (555)
Net loss................. (32,023) (32,023)
------- -- ---------- ---- -------- ---- ----- -------- -------
Balance June 27, 1993.... 58,410 $1 20,864,197 $417 $56,104 $(75) $(342) $(44,606) $11,499
======= == ========== ==== ======= ==== ===== ======== =======
</TABLE>
See accompanying notes.
F-43
<PAGE> 92
TSI CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 27, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................................ $(32,023)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................ 3,666
Writedown of costs in excess of net assets acquired.......................... 9,942
Deferred tax provision....................................................... (123)
Write-off of other intangibles............................................... 885
Loss on disposal of fixed assets............................................. 172
Accrued restructuring........................................................ 4,153
Increase in restricted cash included in net assets held for
sale/disposition............................................................ (480)
Changes in assets and liabilities, net of effects from purchase of
subsidiaries:
Accounts receivable and unbilled contract revenue.......................... (805)
Inventory.................................................................. (128)
Other current assets....................................................... 319
Accounts payable........................................................... (1,031)
Accrued payroll and related costs.......................................... 500
Accrued income taxes....................................................... 225
Other accrued expenses..................................................... 5,293
Advance payments........................................................... 4,142
--------
Net cash used in operating activities................................... (5,293)
Cash flows from investing activities:
Purchase of property, plant and equipment.................................... (3,987)
Short-term investments....................................................... 9,424
Other assets................................................................. 20
Purchase of subsidiaries, net of cash acquired............................... (6,718)
--------
Net cash used in investing activities................................... (1,261)
Cash flows from financing activities:
Net proceeds from the issuance of common stock............................... 206
Repayment of long-term debt.................................................. (1,988)
Net borrowings under revolving line of credit................................ (2,417)
Other long-term liabilities.................................................. 428
--------
Net cash used in financing activities................................... (3,771)
--------
Net decrease in cash and cash equivalents....................................... (10,325)
Effect of exchange rates on cash................................................ (350)
Cash and cash equivalents at beginning of the period............................ 12,561
--------
Cash and cash equivalents at end of period...................................... $ 1,886
========
</TABLE>
See accompanying notes.
F-44
<PAGE> 93
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 27, 1993 (ALL TABULAR $ IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF BUSINESS
TSI Corporation (together with its subsidiaries, TSI) is a leading provider
of preclinical, toxicology and human clinical testing services to
pharmaceutical, biotechnology, medical device and chemical companies. TSI also
manufactures certain biological products that it markets to diagnostic companies
and research organizations.
The accompanying financial statements have been presented on the assumption
that TSI is a going concern. TSI has incurred significant losses and incurred
negative operating cash flows in the fiscal year ended June 27, 1993. TSI had
negative working capital of $3.4 million as of June 27, 1993.
During fiscal 1994, TSI enacted an operating plan to reduce general and
administrative expenses by centralizing common functions within operating
divisions, reengineering operating processes and commonizing to the extent
possible within its laboratories. Management intends to continue to implement
further centralization and productivity improvements in the future. As a result
of the actions described above, coupled with the refinancing of the credit line,
as described in Note 14, management expects that TSI will be able to meet its
financial obligations at a minimum through fiscal 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of TSI and its
wholly owned subsidiaries. All significant intercompany transactions have been
eliminated. To assist in the consolidation of the financial statements, overseas
subsidiaries have been consolidated using a fiscal year end of May 31. The
effect of intervening events between May 31, 1993 and TSI's year end are not
material to the financial statements.
CASH EQUIVALENTS
Cash equivalents are stated at cost which approximates market and have
original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are stated at lower of cost or market.
INVENTORY
Inventory is valued at lower of cost or market (first in, first out method)
and at June 27, 1993 consisted solely of raw materials.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of five to thirty years.
Leasehold improvements are amortized using the straight-line method over the
remaining term of the lease.
F-45
<PAGE> 94
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following is a summary of property and equipment and related
accumulated amortization and depreciation as of June 27, 1993.
<TABLE>
<S> <C>
Land................................................................... $ 200
Buildings.............................................................. 3,287
Leasehold improvements................................................. 3,808
Laboratory, manufacturing and office equipment......................... 9,993
Construction in process................................................ 500
-------
17,788
Accumulated depreciation............................................... (4,185)
-------
Net property, plant, and equipment..................................... $13,603
=======
</TABLE>
COSTS IN EXCESS OF NET ASSETS ACQUIRED
The excess consideration paid and costs incurred over the net value of
assets acquired is being amortized over a 30-year period. The carrying value of
goodwill is periodically reviewed by management. Currently, expected operating
results of each entity for which goodwill has been recorded is compared with the
anticipated results of operations at the time of acquisition. When material
adverse changes in operations are noted, management will then determine the
amount by which the related goodwill has been impaired. Accumulated amortization
as of June 27, 1993 was $784,000. In 1993, TSI wrote off $9,586,000 of such
costs as part of the restructuring (See Note 4).
REVENUE RECOGNITION
For both services and research and development revenues, TSI accounts for
cost reimbursement contracts and fixed price contracts using the percentage of
completion method. TSI measures the progress of its contracts by comparing the
costs incurred to date to total estimated contract costs of completion. All
indirect costs, including general and administrative expenses, associated with
the completion of the contracts are allocated to individual contracts based on
direct labor incurred by contract. Unbilled contract revenue represents
recoverable costs and fees on cost reimbursement contracts which had not been
billed at the balance sheet date. Fees withheld (retainage) included in unbilled
revenue were approximately $38,354 as of June 27, 1993. Product revenue is
generally recognized upon shipment.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at year-end
exchange rates, and statement of operations accounts are translated at average
exchange rates. Resulting translation adjustments are recorded in a separate
component of stockholders' equity, "Accumulated translation adjustments".
NET LOSS PER COMMON SHARE
Loss per common share is based solely on the weighted average number of
shares of common stock outstanding, as the inclusion of common stock equivalents
would be anti-dilutive.
3. LOSS ON DISPOSAL OF ASSETS
In March 1993, TSI recorded a charge of $1,320,000 in connection with the
planned disposal of the LAS and CDP operations. In the fourth quarter of fiscal
1993, TSI recorded an additional charge of $5,007,000 relating to the writeoff
of net assets of IBR, resulting in a total loss on disposal for fiscal 1993 of
$6,327,000 (see Note 14). The charge reflects the expected loss from the
disposition of net assets and anticipated operating losses through the estimated
dates of disposal. At June 27, 1993, certain of the assets of LAS had been sold,
while the remainder is expected to be disposed of in July 1993. TSI continues to
pursue
F-46
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TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
opportunities to sell its CDP operations and anticipates its disposition in
fiscal 1995. The remaining net assets of these operations of $2,215,000,
primarily working capital and property, plant and equipment, have been
reclassified to net assets held for sale in the accompanying consolidated
balance sheet, and represent the estimated net realizable value of these assets
upon disposition.
4. WRITEDOWN OF COSTS IN EXCESS OF NET ASSETS ACQUIRED AND
RESTRUCTURING CHARGE
In March 1993, the Board of Directors replaced several members of TSI's
executive management group, including the Chief Executive Officer, in
conjunction with a review and evaluation of the performance of TSI's various
business units. At that time, TSI announced a restructuring of certain
operations, principally the HSRI subsidiary. For the first nine months of
operation after its acquisition, HSRI had net revenues of $4.5 million, and
incurred a $900,000 operating loss, exclusive of $1.7 million of contract losses
provided for at the date of acquisition. The loss resulted from the expansion of
HSRI's operations to match anticipated revenue substantially in excess of actual
revenues. Since improved operating results were not imminent, TSI determined
that the HSRI operation could not compete profitably as a provider of clinical
services for all four phases of the clinical testing marketplace and decided to
re-focus the HSRI operation on the Phase II and III markets only. The other HSRI
services were discontinued and the related personnel and facilities considered
redundant. Given the initial losses incurred from the date of purchase, and the
expected future cash requirements if operations were not reduced, TSI determined
that the original goodwill associated with the purchase of HSRI was worthless.
Management's determination was based principally on the fact that anticipated
revenues and related profitability, included in management's assessment of the
purchase price which generated the goodwill, were not realizable from HSRI's
operations. As a result, TSI wrote down the carrying value of costs in excess of
net assets acquired by $9,586,000 and provided $6,061,000 for restructuring
costs during the year ended June 27, 1993. The restructuring charge consisted
principally of $2,000,000 for the relocation and consolidation of various
facilities, $1,001,000 for severance costs, $900,000 for estimated losses on
certain contracts and a write-down of $600,000 for certain intangible assets.
The majority of the write down and restructuring charge, approximately
$8,000,000, represents costs associated with the HSRI operation.
5. ACQUISITIONS
Effective July 1, 1991, TSI acquired all of the common stock of Argus
Research Laboratories, Inc. and The Center for Photobiology at Argus Inc., two
privately held preclinical testing companies located in Horsham, Pennsylvania
(collectively, "Argus"), for $2.0 million in cash. TSI has accounted for these
acquisitions using the purchase method. In addition to the purchase price, TSI
entered into a 10-year non-compete agreement with the principal stockholder of
Argus for a total of $750,000. TSI paid $375,000 at the acquisition date and is
obligated to pay $25,000 per year at the end of years 1-5 and $50,000 per year
at the end of years 6-10. The excess of the total acquisition cost over the fair
value of net assets acquired was $1,750,000 which was written off in conjunction
with the restructuring (see Note 4).
In December 1990, TSI acquired CDP for 585,546 shares of TSI's common stock
(fair market value of $2,000,000 at the acquisition date). CDP is a manufacturer
of diagnostic intermediates, including human bulk serum, plasma derived serums,
and other products used in the manufacture of human diagnostics. The transaction
was accounted for using the pooling of interests method. In fiscal 1993, TSI
announced a plan to sell CDP and has provided for a loss in connection with this
sale (see Note 3).
In October 1991, TSI acquired GDRU for 1,055,555 shares of TSI's common
stock (fair market value of approximately $13,000,000 at the acquisition date).
GDRU is a leading provider of Phase I human clinical contract testing services
in the United Kingdom. The transaction was accounted for using the pooling of
interests method. During fiscal 1991, GDRU acquired 33% of the common stock of
Centre du Recherche Sur le Medicament Toulouse Midi-Pyrenees (CRM) for
approximately $155,000. The acquisition was accounted for under the equity
method. In July 1991, GDRU acquired an additional 30% interest in CRM for
F-47
<PAGE> 96
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
approximately $107,000 and subsequently consolidated the accounts of CRM. In
fiscal 1993, TSI wrote off the investment in CRM and has included this charge in
the restructuring charge (see Note 4). Operations at CRM were discontinued in
1993.
Effective March 31, 1992 TSI acquired all of the shares of PharmaKinetics
Laboratories (Deutschland) GmbH (IBR) for $1,950,000 cash and 158,528 shares of
TSI's common stock (fair market value $991,000 at the date of acquisition). The
acquisition was accounted for under the purchase method. The excess of the total
acquisition cost over the fair value of net assets acquired was $1,328,000. The
net assets of IBR were written off in the fourth quarter of fiscal 1993 (see
Note 3).
Effective June 29, 1992, TSI acquired all of the common stock of Health and
Sciences Research Incorporated (HSRI) for $6,000,000 cash. The acquisition was
accounted for under the purchase method. The excess of the total acquisition
cost over the fair value of net assets acquired was $8,405,000. HSRI's operating
results for all of fiscal 1993 are included in the June 27, 1993 statement of
operations. In fiscal 1993, TSI wrote off the remaining excess of the total
acquisition cost over the fair value of the net assets acquired as part of the
restructuring (see Note 4).
6. LEASE COMMITMENTS
TSI leases equipment and facilities under various operating and capital
leases. The deferred lease obligation represents the cumulative difference
between actual facility lease payments and lease expense recognized ratably over
the lease period.
<TABLE>
At June 27, 1993, TSI's future minimum payments required under these leases
are as follows:
<CAPTION>
OPERATING CAPITAL TOTAL
--------- ------- -------
<S> <C> <C> <C>
1994..................................................... $ 2,088 $ 697 $ 2,785
1995..................................................... 1,893 532 2,425
1996..................................................... 1,386 136 1,522
1997..................................................... 1,369 -- 1,369
1998..................................................... 1,368 -- 1,368
Thereafter............................................... 2,925 -- 2,925
------- ------ -------
Total.................................................. $11,029 $1,365 $12,394
======= =======
Less amount representing interest........................ (101)
------
Present value of minimum lease payments.................. $1,264
======
</TABLE>
In 1993, TSI incurred $1,134,000 of capital lease obligations in connection
with the acquisition of certain capital equipment. At June 27, 1993, the total
cost of equipment under capital lease was $2,303,000 with $445,000 of
accumulated depreciation.
Rent expense for the year ended June 27, 1993 was approximately $2,675,000.
7. BORROWINGS
In September 1991, TSI entered into a one-year revolving line of credit
arrangement with a commercial bank. The line of credit allowed for TSI to borrow
up to $4,000,000 at the bank's base lending rate plus 1/2%, through September
30, 1992. The line of credit was extended to October 31, 1992 and was
renegotiated for a one-year period allowing TSI to borrow up to $7,000,000 at
the bank's base lending rate plus 1% through October 29, 1993.
As of March 28, 1993, TSI was in default of several covenants under this
bank line of credit. The bank agreed to waive such defaults in connection with
an agreement amending the line of credit to make it payable
F-48
<PAGE> 97
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
on demand by the bank, to require the bank's approval for any future advances
and to increase the interest rate effective April 1, 1993 to the bank's base
lending rate plus 2%. The line is secured by the inventory, accounts receivable,
patents and trademarks of TSI and its U.S. subsidiaries, and a pledge of the
capital stock of its U.S. subsidiaries and GDRU. As of June 27, 1993, TSI was in
compliance with the amended covenants and had borrowed the maximum amount
available under the line.
Amounts outstanding under the line of credit aggregated $2,000,000 as of
June 27, 1993. In addition, the bank issued a $1,000,000 standby letter of
credit under the line of credit in December 1992. No amounts were due under the
letter of credit as of June 27, 1993.
Subsequent to June 27, 1993, TSI refinanced its revolving line of credit
(see Note 14).
<TABLE>
TSI's long-term debt at June 27, 1993 consisted of the following:
<S> <C>
Mortgage note payable with monthly payments of $8,809 through July 1994,
interest at 12%, secured by real estate............................... $ 773
Mortgage note payable with monthly payments of $4,581 through February
2012, interest is variable, secured by real estate.................... 531
Note payable with monthly payments of $6,066 through December 2000,
interest at 8%, secured by real estate................................ 413
Mortgage note payable, with monthly payments of $3,263 through August
2010, interest at 9.5%, secured by real estate........................ 331
Capital lease obligations............................................... 1,264
Other................................................................... 394
-------
3,706
Less current portion.................................................... (766)
-------
$ 2,940
=======
</TABLE>
All indebtedness of the German subsidiary IBR has been included in net
assets held for sale/disposition in the accompanying consolidated balance sheet
as of June 27, 1993.
Under the terms of the October 1992 line of credit, TSI has agreed not to
pay any dividends until the loans have been repaid.
<TABLE>
Maturities of long-term debt over the next five years are as follows:
<S> <C>
1994..................................................................... $ 766
1995..................................................................... 1,351
1996..................................................................... 235
1997..................................................................... 105
1998..................................................................... 134
Thereafter............................................................... 1,115
------
$3,706
======
</TABLE>
Cash paid for interest for the year ended June 27, 1993 was $614,000.
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND WARRANTS
In connection with its initial public offering in May 1989, TSI provided
the underwriter with a Unit Purchase Option to purchase, after subsequent
adjustments, up to 88,210 units (each unit consisting of three shares of common
stock and two Class A Warrants) at $4.75 per unit subject to adjustment. Each
Class A
F-49
<PAGE> 98
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Warrant entitles the holder to purchase one share of common stock and two Class
B Warrants at a total price of $2.00, subject to adjustment, at any time after
the date of issuance until May 1994. Each Class B Warrant entitles the holder to
purchase one share of common stock at a price of $3.35, subject to adjustment,
at any time through May 1994. In March 1992, 218,868 shares of common stock were
issued pursuant to the exercise of 64,905 Unit Purchase Options and 23,900 Class
A Warrants attached thereto. An additional 11,986 shares of common stock were
issued in December 1992 pursuant to the exercise of an additional 396 Unit
Purchase Options, including all Class A and Class B Warrants attached thereto,
as well as 8,422 Class A Warrants which were attached to Unit Purchase Options
exercised in March 1992. At June 27, 1993, 22,909 Unit Purchase Options, 97,347
Class A Warrants, and 64,926 Class B Warrants were outstanding.
In May 1990, TSI issued Class D Warrants for 100,000 shares of common stock
to Biogen, Inc. in exchange for certain technology. Each warrant allows the
holder to purchase one share of common stock at $3.61, subject to adjustment.
The warrants expire on May 31, 1995. In February 1992, 16,851 Class D Warrants
were exercised.
In March and April 1991, substantially all of the Class B Warrants that
were issued in conjunction with TSI's initial public offering, the Class C
Warrants issued in conjunction with the financing of the Mason acquisition and
TSI's Class E Warrants were exercised. In addition, the 746,269 shares of
redeemable convertible preferred stock also issued in conjunction with the Mason
acquisition were exchanged for an equal number of shares of common stock.
In September 1991, TSI issued warrants to purchase 640,000 shares of common
stock in connection with the equity financing of Exemplar Corporation. Each
warrant allows the holder to purchase one share of TSI common stock for $8.00
per share and is exercisable until January 31, 1996.
During 1988 and 1989, TSI issued restricted shares of common stock to
employees, consultants, directors, scientific advisors and others at fair market
value on the date of grant. Generally, these shares vest ratably over five
years. These shares are restricted by terms of employee stock purchase
agreements between TSI and the stockholder under which TSI has the right to
repurchase any unvested restricted shares at their original purchase price. As
of June 27, 1993, there were 71,123 of these restricted shares outstanding, of
which 70,396 were vested.
In connection with the anticipated refinancing of TSI's line of credit in
October 1993, TSI has agreed to issue 208,000 shares of common stock to a
commercial bank.
As of June 27, 1993, TSI has reserved 3,433,332 shares of common stock,
subject to adjustment, for future issuance under the various classes of
warrants, convertible preferred stock, Unit Purchase Options, Stock Option and
Employee Stock Purchase Plans (see Note 9).
CONVERTIBLE PREFERRED STOCK
On May 2, 1989, the effective date of TSI's initial public offering, the
Board of Directors authorized the issuance of convertible preferred stock, $.001
par value, on a pro rata basis to holders of common stock on that date.
Convertible preferred shareholders have no voting rights, are not entitled to
dividends, and have a liquidation preference of $.001 per share.
Each share of convertible preferred stock became convertible into one share
of common stock upon the achievement of certain targeted market values of TSI's
common stock, as defined. On July 1, 1995, TSI may redeem all shares then
outstanding at par value. During fiscal 1992, all outstanding shares of
convertible preferred stock became eligible for conversion at the option of the
holders thereof, and as of June 27, 1993, 1,964,950 shares had been converted
into common stock.
F-50
<PAGE> 99
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In November 1990, TSI increased the authorized shares of preferred stock
from 2,070,000 shares to 25,000,000 shares, changed the par value from $.001 to
$.01 per share, and established the convertible preferred stock as a series of
the preferred stock.
SHAREHOLDERS' RIGHTS PLAN
In February 1991, the Board of Directors adopted a Shareholder Rights Plan
which provided for a dividend distribution of one preferred share purchase right
for each share of common stock outstanding on March 1, 1991. Under certain
circumstances, each right entitles the holder to purchase from TSI 1/100 of a
new series of Preferred Stock, designated Series A Junior Participating
Preferred Stock, at a price of $19.80 per 1/100 of a share.
The rights are not exercisable and cannot be transferred separately from
the common stock until ten days after (i) a person acquires 20% or more (other
than in an Approved Transaction), or makes a tender offer for 30% or more of
TSI's common stock, or (ii) TSI's Board of Directors shall declare a person
owning 10% or more of TSI's Common Stock to be an Adverse Person.
If, after the rights become exercisable, (i) TSI is the surviving entity in
a merger with a 20% or more stockholder, (ii) a 20% or more stockholder engages
in certain "self-dealing" transactions with TSI, (iii) any person acquires 30%
or more of TSI's common stock, without a plan approved by TSI's Board of
Directors or (iv) a 20% or more stockholder increases such ownership percentage
through recapitalization or reclassification of securities, each right not owned
by such person will entitle its holder to purchase, at the right's exercise
price, common stock having a value of two times the exercise price of the right.
In addition, if TSI either (i) is acquired in a merger or other business
combination in which TSI is not the surviving entity, or (ii) sells or transfers
50% or more of its assets or earning power to another party, each right will
entitle its holder to purchase, upon exercise, common stock of the acquiring
company having a value equal to two times the exercise price of the right. The
rights expire on February 28, 2001 unless redeemed by TSI for $.01 per right at
any time prior to the tenth day following a person's acquisition of 20% or more
of TSI's common stock. Preferred shares purchasable upon exercise of the rights
will be entitled to a minimum quarterly dividend of $1 per share, or 100 times
any dividend declared on common stock, and will have a minimum liquidation
preference of $100 per share or 100 times any liquidation payment made to common
stock. So long as the rights are not separately transferable, TSI will issue one
right with each new share of common stock issued.
9. EMPLOYEES BENEFIT PLANS
STOCK OPTION PLAN
Under TSI's 1988 Amended and Restated Stock Option Plan (the "1988 Plan"),
incentive stock options and non-qualified options to purchase common shares may
be issued to key employees, directors, and consultants at the discretion of the
Stock Option Committee. The 1988 Plan was amended on November 21, 1991 to
increase the number of shares that may be subject to options under the plan from
1,400,000 to 2,100,000 shares. As of June 27, 1993, TSI had available 72,685
shares for the grant of options under the 1988 Plan. These options are issued at
the fair market value on the date of grant and vest over periods of up to five
years.
F-51
<PAGE> 100
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
The stock option activity under the 1988 Plan was as follows:
<CAPTION>
NUMBER OF RANGE OF
SHARES OPTION PRICE
--------- ---------------
<S> <C> <C>
Balance, June 28, 1992................................... 1,804,710 $0.67 - $12.00
Granted................................................ 575,600 $1.50 - $ 4.38
Cancelled.............................................. (405,860) $1.00 - $11.00
Exercised.............................................. (9,200) $1.00 - $ 4.87
--------- --------------
Balance, June 27, 1993................................... 1,965,250 $0.67 - $12.00
========= ==============
</TABLE>
As of June 27, 1993, 962,890 options were exercisable under the 1988 Plan.
1991 DIRECTOR STOCK OPTION PLAN
Under TSI's 1991 Director Stock Option Plan (the "Director Plan"),
non-qualified options to purchase common stock are automatically granted to
non-employee directors on the date of each director's election or reelection to
the board of directors at the annual rate of 5,000 shares per year, subject to
reduction for periods in which options previously granted under the 1988 Stock
Option Plan first become exercisable. Options under the Director Plan may be
granted with respect to a maximum of 150,000 shares of TSI's common stock. The
options become exercisable over five years at an exercise price equal to 100% of
the fair market value of the common stock on the date of grant. As of June 27,
1993, TSI had available 103,750 shares for the grant of options under the
Director Plan.
<TABLE>
The Director Plan stock option activity was as follows:
<CAPTION>
NUMBER OF RANGE OF
SHARES OPTION PRICE
--------- -----------------
<S> <C> <C>
Balance, June 28, 1992.................................. 31,250 $10.25 - $12.00
Granted............................................... 30,000 $6.125
Cancelled............................................. (15,000) $12.00
------- ---------------
Balance, June 27, 1993.................................. 46,250 $6.125 - $12.00
======= ===============
</TABLE>
As of June 27, 1993, options with respect to 11,250 shares were exercisable
under the Director Plan.
STOCK PURCHASE PLAN
The 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") authorized
the grant of rights to purchase shares of common stock to eligible employees at
the discretion of TSI's Board of Directors.
The purchase price per share of common stock in an offering is 85% of the
lower of its fair market value at the beginning of the offering period or the
applicable exercise date. There are 600,000 shares of common stock which have
been authorized for issuance under this plan, of which 59,310 shares have been
issued to date. As of June 27, 1993, $117,000 had been withheld under the plan
for the offering period which ends September 30, 1993.
Other
TSI's U.S. employees, subject to certain eligibility requirements, can
participate in TSI's defined contribution plan. Currently, TSI may match up to
50% of each participating employee's contributions to the plan to a maximum of
3% of salary. TSI may also contribute an additional 2% of each employee's salary
as a retirement contribution. All contributions are at the discretion of the
Board of Directors. In 1993, TSI recognized $300,000 of expense in connection
with the plan.
F-52
<PAGE> 101
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
GDRU maintains two defined contribution pension plans, one for directors
and the other for employees. Expense recognized under these plans was
approximately $130,000 in 1993.
IBR has a retirement agreement with the founder of the IBR Group. The
agreement provides for retirement payments in the annual amount of $45,000,
which commenced in July 1988.
10. INCOME TAXES
<TABLE>
A reconciliation of the statutory U.S. federal income tax provision to the
income tax provision reported in the financial statements for the year ended
June 27, 1993 is as follows:
<S> <C>
U.S. federal statutory tax benefit....................................... $(10,599)
Net operating losses not available for benefit........................... 11,058
Foreign taxes greater than U.S. statutory tax............................ 391
--------
Income tax provision..................................................... $ 850
========
</TABLE>
Loss from foreign operations before income taxes and minority interest
totaled $(3,658,000) in 1993.
Deferred income taxes in the amount of $123,000 in 1993 have been provided
for differences between tax and financial statement accounting methods,
principally related to contract revenue recognition of foreign operations.
At June 27, 1993, TSI had net operating loss carryforwards for financial
reporting purposes of approximately $33,000,000 and for tax purposes of
approximately $28,000,000. The difference results primarily from the write-off
of goodwill. Tax loss carryforwards expire through 2008. These carryforwards are
subject to possible limitations on annual utilization under current Internal
Revenue Service regulations.
Cash paid for taxes was $80,000 in the year ended June 27, 1993.
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109 "Accounting for Income Taxes" (FAS 109). TSI will adopt FAS 109 in the
first quarter of fiscal 1994. Adoption of FAS 109 is not expected to have a
material effect on TSI's financial statements.
11. BUSINESS SEGMENT INFORMATION
TSI operates in two business segments. The services segment includes
testing and research services provided to pharmaceutical and biotechnology
companies and to government agencies. The products segment consists of
diagnostic and research products.
F-53
<PAGE> 102
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
Business segment information is summarized in the table below:
<S> <C>
Revenues:
Services...................................................................... $ 47,144
Products...................................................................... 10,962
Interest...................................................................... 194
--------
Total revenues........................................................ $ 58,300
========
Operating Loss:
Services...................................................................... $(15,016)
Products...................................................................... 682
General corporate expenses.................................................... (9,813)
--------
Total operating loss.................................................. (24,147)
Interest expense................................................................ (699)
Other non-recurring expense..................................................... (6,327)
--------
Loss before income taxes........................................................ $(31,173)
========
Identifiable Assets:
Services...................................................................... $ 25,659
Products...................................................................... 4,383
General corporate assets...................................................... 3,917
--------
Total................................................................. $ 33,959
========
Capital Additions:
Services...................................................................... $ 4,587
Products...................................................................... 534
Depreciation and Amortization:
Services...................................................................... $ 3,254
Products...................................................................... 412
</TABLE>
EXPORT SALES
A summary of export sales follows:
<TABLE>
<CAPTION>
ASIA EUROPE TOTAL
- ------ ------ ------
<S> <C> <C>
$923 $2,074 $2,997
</TABLE>
F-54
<PAGE> 103
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
TSI operates in two geographic areas. Information on TSI's geographic
operations is set forth in the table below:
<S> <C>
Revenues:
Domestic operations............................................. $ 38,634
European operations............................................. 19,666
--------
Total revenues.......................................... $ 58,300
========
Operating Loss:
Domestic operations............................................. $(26,473)
European operations............................................. 2,326
--------
Total operating loss.................................... $(24,147)
========
Identifiable Assets:
Domestic operations............................................. $ 24,262
European operations............................................. 3,565
General corporate assets........................................ 6,132
--------
Total Assets............................................ $ 33,959
========
</TABLE>
Significant Customers
Revenues from the U.S. government accounted for 8% of total revenues in
1993. Services business segment includes 65% of all U.S. government revenues.
12. RESEARCH AND DEVELOPMENT AGREEMENT
On June 26, 1991, TSI entered into a research and development agreement
with Exemplar Corporation ("Exemplar"), a newly formed company, to perform
specific research programs on behalf of Exemplar. The agreement also provides
for TSI to license certain technology rights to Exemplar for $300,000. Total
research and development funding including license fee will not exceed $7.5
million.
On September 27, 1991, Exemplar completed the sale of $8,000,000 of its
callable common stock. In connection with the equity financing of Exemplar, TSI
issued warrants to purchase 640,000 shares of TSI Common Stock at $8.00 per
share in return for the option to purchase all of the outstanding common stock
of Exemplar at prices which increase over time to a maximum of $33,000,000. The
warrants and option are exercisable from July 1, 1992 through January 31, 1996.
In fiscal 1993, TSI recognized approximately $2,662,000 of research and
development revenues including license fees under the Exemplar agreement. There
was no unbilled revenue under this agreement at June 27, 1993.
13. CONTINGENCY
As a result of the current state of the insurance market, TSI has chosen
not to seek product liability coverage for its products. In reaching its
conclusion, management has balanced the likely costs and terms of such coverage
and its availability against the risks involved in foregoing such coverage and
the protection such coverage would likely afford. Management believes that many
of its competitors operate without such coverage.
14. SUBSEQUENT EVENTS
In September 1993, TSI announced a $5,000,000 disposal of operations charge
taken in the fourth quarter of fiscal 1993 to reduce the net assets of its
German preclinical testing and regulatory consulting subsidiary, IBR Forschungs
GmbH to net realizable value. The recent loss of significant sales to one
customer,
F-55
<PAGE> 104
TSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
lower demand for IBR's services and the current high costs of doing business in
Germany contributed to a situation in which IBR could not expect to operate
profitably without a major financial commitment, which TSI chose not to make.
During the second quarter of fiscal 1994, operations at IBR ceased and it
entered into liquidation proceedings.
On October 8, 1993, the bank provided TSI with a commitment to extend the
revolving line of credit until August 1, 1994. Under the terms of the extension,
TSI continued to have a $1,000,000 standby letter of credit and could borrow up
to 70% of the amount of the eligible accounts receivable of its U.S.
subsidiaries, subject to a maximum borrowing of $2,000,000. In consideration for
the extension, TSI agreed to pay a fee of $100,000, payable at the rate of
$10,000 per month from October 1993 to April 1994, with the balance due in
August 1994 or upon an earlier refinancing. In addition, the company issued
20,000 shares of TSI's common stock and a warrant to purchase an additional
188,000 shares of common stock to the bank, which becomes exercisable at $0.01
per share in quarterly increments until July 1994 if the line of credit and
TSI's equipment lease line remain outstanding. Warrants to purchase 40,000
shares are currently exercisable with the remainder to become exercisable in
July 1994. The bank line continues to be secured by the capital stock of the
U.S. subsidiaries and GDRU.
F-56
<PAGE> 105
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 106
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 107
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Available Information........................ 2
Prospectus Summary........................... 3
Risk Factors................................. 5
Use of Proceeds.............................. 10
Price Range of Common Stock and Dividend
Policy..................................... 11
Capitalization............................... 12
Dilution..................................... 13
Selected Consolidated Financial Data of
GTC........................................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of GTC.......................... 15
Selected Consolidated Financial Data of
TSI........................................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of TSI.......................... 20
Business..................................... 22
Management................................... 35
Certain Transactions......................... 41
Share Ownership.............................. 41
Description of Capital Stock................. 43
Shares Eligible for Future Sale.............. 45
Underwriting................................. 47
Legal Matters................................ 48
Experts...................................... 48
Index to Financial Statements................ F-1
</TABLE>
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3,000,000 SHARES
GENZYME
TRANSGENICS
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST
NEEDHAM & COMPANY, INC.
------------------------
JULY 30, 1996
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