<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-21794
GENZYME TRANSGENICS CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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<CAPTION>
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Massachusetts 04-3186494
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Mountain Road, Framingham, Massachusetts 01701
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(508) 620-9700
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Registrant's telephone number, including area code
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
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Class Outstanding at May 5, 1998
----- --------------------------
Common Stock, $0.01 par value 17,607,023
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GENZYME TRANSGENICS CORPORATION
TABLE OF CONTENTS
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PAGE #
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PART 1. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 29, 1998 and March 30, 1997.................................... 3
Condensed Consolidated Statements of Operations for
the Three Months Ended March 29, 1998 and March 30, 1997............. 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 29, 1998 and March 30, 1997............. 5
Notes to Unaudited Condensed Consolidated
Financial Statements................................................. 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 8
PART II. OTHER INFORMATION
ITEM 2
Changes in Securities................................................10
ITEM 6
Exhibits and Reports on Form 8-K.....................................11
SIGNATURES...........................................................12
EXHIBIT INDEX........................................................13
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GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,460 $ 6,383
Accounts receivable, net 7,067 10,517
Unbilled contract revenue 6,383 6,069
Other current assets 1,416 1,431
-------- -------
Total current assets 25,326 24,400
Net property, plant and equipment 27,534 26,297
Costs in excess of net assets acquired, net 19,262 19,532
Investment in Joint Venture (Note 3) (864) -
Other assets 794 751
-------- -------
$ 72,052 $ 70,980
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-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,708 $ 2,091
Accounts payable - Genzyme Corporation 2,316 3,364
Revolving line of credit - 6,000
Revolving line of credit - Genzyme Corporation - 6,000
Accrued expenses 7,072 7,900
Advance payments 5,213 5,568
Current portion of long-term debt 2,085 1,900
-------- -------
Total current liabilities 19,394 32,823
Long-term debt, net of current portion 9,578 9,862
Deferred lease obligation 621 613
Other liabilities 273 304
-------- -------
Total liabilities 29,866 43,602
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares, 20,000 shares
issued and outstanding at March 29, 1998 (Note 5) - -
Common stock, $.01 par value; 24,000,000 shares authorized;
17,563,355 and 17,403,406 shares issued and outstanding
at March 29, 1998 and December 28, 1997, respectively 176 174
Capital in excess of par value - preferred stock (Note 5) 18,855 -
Capital in excess of par value - common stock 55,464 54,478
Accumulated deficit (32,309) (27,274)
-------- -------
Total stockholders' equity 42,186 27,378
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$ 72,052 $ 70,980
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 29, March 30,
1998 1997
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<S> <C> <C>
Revenues
Services $ 11,188 $ 11,141
Sponsored research and development 2,563 3,793
--------- ------
13,751 14,934
Costs and operating expenses:
Services 9,921 9,387
Research and development:
Sponsored 1,841 2,020
Proprietary 1,839 827
Selling, general and administrative 3,886 3,593
Equity in loss of Joint Ventures (Note 3) 864 311
--------- --------
18,351 16,138
--------- ------
Loss from continuing operations (4,600) (1,204)
Other income (expense):
Interest income 12 30
Interest expense (457) (184)
--------- --------
Loss from continuing operations before
income taxes (5,045) (1,358)
Provision (benefit) for income taxes (10) 20
--------- --------
Net loss $ (5,035) $ (1,378)
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--------- --------
Dividend to preferred shareholders (Note 5) (1,156) -
--------- --------
--------- --------
Net loss available to common shareholders $ (6,191) $ (1,378)
--------- --------
--------- --------
Net loss per common share (basic and diluted) $ (0.35) $ (0.08)
--------- --------
--------- --------
Weighted average number of shares
outstanding (basic and diluted) 17,466 17,141
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 29, March 30,
1998 1997
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Cash flows for operating activities:
Net loss $ (5,035) $ (1,378)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,171 981
Equity in loss of Joint Venture 864 311
Changes in assets and liabilities, net of effects
from purchase of subsidiaries:
Accounts receivable and unbilled contract revenue 3,136 364
Inventory and other current assets 15 545
Accounts payable 617 (954)
Accounts payable - Genzyme Corporation (1,048) 565
Other accrued expenses (828) 465
Advance payments (355) 515
---------- ---------
Net cash provided by (used in) operating activities (1,463) 1,414
Cash flows for investing activities:
Purchase of property, plant and equipment (1,718) (2,486)
Other assets (78) (25)
---------- ---------
Net cash used in investing activities (1,796) (2,511)
Cash flows from financing activities:
Net proceeds from employee stock purchase plan 474 193
Net proceeds from the exercise of stock options 369 42
Proceeds from preferred stock offering 19,000 -
Repayment of long-term debt (484) (408)
Net borrowings under revolving line of credit (6,000) -
Investment and advances by Genzyme Corporation (6,000) -
Other long-term liabilities (23) (130)
---------- ---------
Net cash provided by (used in) financing activities 7,336 (303)
---------- ---------
Net increase (decrease) in cash and cash equivalents 4,077 (1,400)
Cash and cash equivalents at beginning of the period 6,383 8,894
---------- ---------
Cash and cash equivalents at end of period $ 10,460 $ 7,494
---------- ---------
---------- ---------
Noncash Investing and Financing Activities:
Property acquired under capital leases $ 385 $ 201
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Basis of Presentation:
These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 1997 and
the financial statements and footnotes included therein.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to Securities and Exchange Commission rules and
regulations.
Per share information is based upon the weighted average
number of shares of Common Stock outstanding during the
period.
The financial statements for the three months ended March 29,
1998 and March 30, 1997 are unaudited but include, in the
Company's opinion, all adjustments (consisting only of
normally recurring accruals) necessary for a fair presentation
of the results for the periods presented.
2. Accounting Policies:
The accounting policies underlying the quarterly financial
statements are those set forth in Note 2 of the financial
statements included in the Company's Annual Report on Form
10-K for the year ended December 28, 1997.
The common stock equivalents of the Company consisted of
warrants, stock options, stock to be issued under the 401-K
savings plan and convertible preferred stock. The Company was
in a net loss position at March 29, 1998 and March 30, 1997,
therefore 4 million and 1.7 million common share equivalents,
respectively, were not used to compute diluted loss per share,
as the effect was antidilutive.
3. ATIII LLC Joint Venture:
On January 1, 1998, a definitive collaboration agreement for
the ATIII LLC joint venture ("ATIII LLC") between the Company
and Genzyme Corporation ("Genzyme") was executed. Under the
terms of the agreement, Genzyme will provide 70% of the first
$33 million of development costs under this program and the
Company will fund the remaining 30%. Development costs in
excess of $33 million will be funded equally by the partners.
The Company and Genzyme will also make capital contributions
to ATIII LLC sufficient to pay 50% each of all new facility
costs to be incurred. In addition to the funding, both
partners will contribute manufacturing, marketing and other
resources to ATIII LLC at cost and will share profits from
product sales equally. The agreement covers all territories
other than Asia and may include milestone payments from
Genzyme to the Company after the product has been approved
by the United States Food and Drug Administration.
6
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4. Primedica Corporation:
In February 1998, the Company announced that it had
established Primedica Corporation, a wholly owned subsidiary,
to provide a unified identity and a dedicated structure for
further growth of its contract research organization ("CRO")
operations. Initially 100% owned by GTC, Primedica is expected
to serve as a vehicle to pursue acquisitions.
5. Private Placement:
In March 1998, the Company completed a private placement of
$20 million of Series A Convertible Preferred Stock (the
"Preferred Stock") to three institutional investors. The
Preferred Stock carries a $1,000 face value per share, and is
subject to mandatory redemption, if not previously converted,
in three years. Such redemption may be in the form of cash or
stock, at the Company's option. The Preferred Stock may be
converted into the Company's common stock at a price of $14.55
per share through December 20, 1998. Thereafter, it may be
converted into common stock at a per share price equal to the
lower of $14.55 or the average of any five closing bid prices
over the twenty days prior to conversion. Dividends will only
accrue if the holders are unable to convert their Preferred
Stock into common stock in certain circumstances. In
connection with the financing, warrants to purchase 450,000
shares of the Company's common stock were issued. Each warrant
has a four year term at an exercise price of $15.1563 per
share. The warrants, valued at approximately $1.2 million,
were recognized as a dividend payment to preferred
shareholders during the first quarter of 1998. As a result of
this financing, the amount available under the line of credit
in the Convertible Debt and Development Funding Agreement with
Genzyme has decreased from approximately $8.3 million to $6.4
million.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended March 29, 1998 and March 30, 1997
Total revenues for the three-month period ending March 29, 1998 were
$13.8 million, compared with $14.9 million in the comparable period of
1997, a decrease of $1.1 million or 7%. Service revenues increased to
$11.2 million in the first quarter of 1998 from $11.1 million in the
first quarter of 1997. Sponsored research and development revenue
decreased to $2.6 million in the first quarter of 1998 from $3.8
million in the first quarter of 1997, a decrease of $1.2 million or
32%. The decrease is a result of the impact on revenue of the formation
in January 1998 of the ATIII LLC joint venture ("ATIII LLC") between
Genzyme Corporation ("Genzyme") and the Company for the development of
the lead compound, transgenic antithrombin III ("AT-III")
establishment, in January 1998. Had the AT-III development program been
structured on the same basis during the first quarter of 1998 as during
the same quarter of 1997, transgenic revenues for both quarters would
have been approximately the same.
Cost of services for the first quarter of 1998 were $9.9 million
compared to $9.4 million in the comparable period of 1997, an increase
of $500,000 or 5% principally due to the timing of study performance
within the respective quarters. Sponsored research and development
expenses decreased to $1.8 million in the first quarter of 1998 from
$2.0 million in the first quarter of 1997, a decrease of $200,000 or
10%. The decrease is due to the impact of the formation of ATIII LLC.
Had the AT-III development program been structured on the same basis
during the first quarter of 1998 as during the same quarter in 1997,
the sponsored research and development expenses would have increased by
approximately $1.4 million over the same quarter in 1997. Proprietary
research and development expenses increased to $1.8 million in the
first quarter of 1998 from $827,000 in the first quarter of 1997, an
increase of $1 million or 121%. The increase is due to increased work
on the cancer vaccine program and increased internal research.
Gross profit for the first quarter of 1998 amounted to $2 million
versus $3.5 million in the first quarter of 1997. Gross profit on
services for the first quarter of 1998 was $1.3 million, a gross
margin of 12%, versus $1.8 million, a gross margin of 16%, in the
first quarter of 1997. The decrease in gross margin is due to timing
of study performance within the respective quarters, and due to
increased revenue recognized on contract signed in the first quarter
of 1997 for which costs had previously been incurred.
Selling, general and administrative ("SG&A") expenses increased to $3.9
million in the first quarter of 1998 from $3.6 million in the first
quarter of 1997, an increase of $300,000 or 8%. The increase is due to
increased marketing efforts and to the addition of administrative
personnel required to support the growth in transgenic research and
development programs.
8
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Interest income decreased to $12,000 in the first quarter of 1998,
from $30,000 in the first quarter of 1997, due to lower average funds
available for investment. Interest expense increased to $457,000 in
the first quarter of 1998 from $184,000 in the first quarter of 1997
due to higher average amounts borrowed in 1998.
The Company recognized $864,000 of Joint Venture losses incurred on
ATIII LLC during the first quarter of 1998. In the first quarter of
1997, the Company incurred $311,000 of Joint Venture losses on the
Sumitomo Metal Industries joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $10.5 million at March 29,
1998. During the first three months of 1998 the Company had a $4.1
million net increase in cash. Sources of funds during the period
included proceeds of $19 million from the issuance of preferred stock,
net of expenses and $843,000 of proceeds received from the issuance of
common stock. Cash inflows were offset by $1.5 million of cash used in
operations (due primarily to the net loss of $5 million offset by a
decrease in non-cash working capital of $1.5 million and $2 million of
non-cash charges), $1.7 million invested in capital equipment, further
expansion of the transgenic production facility and the expansion of
the laboratory facilities, $12 million used to pay down the revolving
line of credits and $484,000 used to pay down long-term debt.
The Company had working capital of $5.9 million at March 29, 1998
compared to a deficit of $8.4 million at December 28, 1997. As of March
29, 1998 the Company had approximately $6.4 million available under the
Genzyme Convertible Debt and Development Agreement, $6 million
available under a line of credit with a commercial bank and $2.6
million available under various capital lease lines. Under the
Company's 1998 operating plan, existing cash balances along with funds
available under the bank and lease lines and the Convertible Debt and
Development Agreement are expected to be sufficient to fund the Company
through March 31, 1999.
Management's current expectations regarding the sufficiency of the
Company's cash resources are forward-looking statements, and the
Company's cash requirements may vary materially from such expectations.
Such forward-looking statements are dependent on several factors,
including the results of the Company's 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 and
regulatory requirements. 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 on terms acceptable to the Company, if at
all. If additional financing cannot be obtained on acceptable terms, to
continue its operations the Company 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.
9
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PART II
ITEM 2. Changes in Securities
In March 1998, the Company completed a private placement of 20,000
shares of Series A Convertible Preferred Stock, par value $0.01 per
share (the "Preferred Stock"), and of warrants initially exercisable
for 400,000 shares of Common Stock (the "Investor Warrants") with three
institutional investors at an aggregate purchase price of $20,000,000.
Also, a warrant initially exercisable for 50,000 shares of Common Stock
was issued to the placement agent used in connection with such sale
(the "Agent Warrant" and, together with the Investor Warrants, the
"Warrants"). Because the issuance of the Preferred Stock and the
Warrants did not involve a public offering, the Company relied upon the
exemption from registration with the Securities and Exchange Commission
(the "Commission") under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act").
A registration statement filed with the Commission registering the
shares of Common Stock underlying the Preferred Stock and the Warrants
was declared effective on April 16, 1998. From such date, and up until
December 20, 1998, each share of Preferred Stock will be convertible
into that number of shares of Common Stock equal to the per share face
value of the Preferred Stock ($1,000) divided by a conversion price of
$14.55 per share, subject to certain anti-dilution price adjustment
protection. At such conversion price, the 20,000 shares of Preferred
Stock would be convertible into 1,374,569 shares of Common Stock. On
and after December 21, 1998, the conversion price per share of
Preferred Stock will become the lower of (i) $14.55 and (ii) the
average closing price of the Company's Common Stock as quoted by the
Nasdaq National Market for any five trading days during the twenty
trading days immediately preceding the date of conversion. As a result,
the number of shares of Common Stock issuable upon conversion of the
Preferred Stock may increase above, but will not decrease below,
1,374,569 shares. The Warrants are exercisable at any time up until
March 20, 2002 at a per share exercise price equal to $15.1563, subject
to certain anti-dilution price adjustment protection.
Pursuant to the terms of the Preferred Stock and Investor Warrants, at
any given time, the shares of Preferred Stock will be convertible and
the Investor Warrants will be exercisable by the holder only to the
extent that the number of shares of Common Stock thereby issuable,
together with the number of shares of Common Stock owned by such holder
and its affiliates, does not exceed 4.9% of the then outstanding Common
Stock as determined in accordance with Section 13(d) of the Exchange
Act.
No dividend may be declared or paid upon the Company's Common Stock,
nor shall any outstanding Common Stock be repurchased or redeemed,
without the consent of a majority of the holders of the then
outstanding Preferred Stock. Also, upon a liquidation, dissolution or
winding up of the Company, the Preferred Stock will rank prior to the
Company's Common Stock.
10
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ITEM 6: Exhibits and Reports on From 8-K
(a) Exhibits
See the Exhibit Index immediately following the signature
page.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
March 29, 1998.
11
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GENZYME TRANSGENICS CORPORATION AND SUBSIDIARY
FORM 10-Q
MARCH 29, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: May 13, 1998 GENZYME TRANSGENICS CORPORATION
BY: /s/ John B. Green
----------------------------
John B. Green
Duly Authorized Officer,
Vice President and
Chief Financial Officer
12
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EXHIBIT INDEX
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Exhibit Description
4.1 Certificate of Vote of Directors Establishing a Series of a
Class of Stock (Series A Convertible Preferred Stock). Filed
as Exhibit 3.1.4 to the Company's Annual Report on Form 10-K
for the year ended December 28, 1997 and incorporated herein
by reference.
4.2 Specimen Series A Convertible Preferred Stock Certificate.
Filed as Exhibit 4.2 to the Company's Annual Report on Form
10-K for the year ended December 28, 1997 and incorporated
herein by reference.
4.3 Form of Common Stock Purchase Warrant issued to the Purchasers
of Series A Convertible Preferred Stock, dated as of March 20,
1998, together with a schedule of holders. Filed as Exhibit
4.9 to the Company's Annual Report on Form 10-K for the year
ended December 28, 1997 and incorporated herein by reference.
4.4 Form of Common Stock Purchase Warrant issued to Shoreline
Pacific Institutional Finance and affiliates, dated as of
March 20, 1998. Filed as Exhibit 4.10 to the Company's Annual
Report on Form 10-K for the year ended December 28, 1997 and
incorporated herein by reference.
4.5 Securities Purchase Agreement, dated as of March 20, 1998,
between the Company and certain purchasers named therein.
Filed as Exhibit 10.54 to the Company's Annual Report on Form
10-K for the year ended December 28, 1997 and incorporated
herein by reference.
10.1 Amended and Restated Operating Agreement of ATIII LLC dated as
of January 1, 1998. Filed as Exhibit 10.52.1 to the Company's
Annual Report on Form 10-K for the year ended December 28,
1997 and incorporated herein by reference.
10.2 Purchase Agreement between GTC and Genzyme dated as of January
1, 1998. Filed as Exhibit 10.52.2 to the Company's Annual
Report on Form 10-K for the year ended December 28, 1997 and
incorporated herein by reference.*
10.3 Collaboration Agreement among Genzyme, GTC and ATIII LLC,
dated as of January 1, 1998. Filed as Exhibit 10.52.3 to the
Company's Annual Report on Form 10-K for the year ended
December 28, 1997 and incorporated herein by reference.*
27 Financial Data Schedule. Filed herewith.
-----------------------------------
* Certain confidential information contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 promulgated under the Securities and
Exchange Act of 1934, as amended.
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> MAR-29-1998
<CASH> 10,460
<SECURITIES> 0
<RECEIVABLES> 7,462
<ALLOWANCES> 395
<INVENTORY> 630
<CURRENT-ASSETS> 25,326
<PP&E> 35,009
<DEPRECIATION> 7,475
<TOTAL-ASSETS> 72,052
<CURRENT-LIABILITIES> 19,394
<BONDS> 9,578
0
0
<COMMON> 176
<OTHER-SE> 42,010
<TOTAL-LIABILITY-AND-EQUITY> 72,052
<SALES> 13,751
<TOTAL-REVENUES> 13,751
<CGS> 13,601
<TOTAL-COSTS> 18,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445
<INCOME-PRETAX> (5,045)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (5,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,191)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
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