<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 April 2, 2000
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
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GENZYME TRANSGENICS CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3186494
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Crossing Boulevard, Framingham, Massachusetts 01702
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(Address of principal executive offices) (Zip Code)
(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.
CLASS OUTSTANDING AT APRIL 24, 2000
----- ------------------------------
Common Stock, $0.01 par value 28,615,965
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GENZYME TRANSGENICS CORPORATION
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of April 2, 2000
and January 2, 2000 ............................................................. 3
Condensed Consolidated Statements of Operations for the Three Months
Ended April 2, 2000 and April 4, 1999 ........................................... 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended April 2, 2000 and April 4, 1999........................... 5
Notes to Unaudited Condensed Consolidated Financial Statements................... 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................................... 9
ITEM 3
Quantitative and Qualitative Disclosures
About Market Risk ............................................................... 11
PART II. OTHER INFORMATION
ITEM 2
Changes in Securities ........................................................... 12
ITEM 6
Exhibits and Reports on Form 8-K ................................................ 12
SIGNATURES ............................................................................... 13
EXHIBIT INDEX ............................................................................ 14
</TABLE>
2
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GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 2, JANUARY 2,
2000 2000
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,449 $ 7,782
Accounts receivable, net of allowance of $888 for both periods 10,061 11,335
Unbilled contract revenue, net of allowance of $75 for both periods 10,469 8,516
Other current assets 2,368 1,971
-------- --------
Total current assets 93,347 29,604
Net property, plant and equipment 34,937 34,302
Costs in excess of net assets acquired, net 16,974 17,260
Other assets 2,927 3,146
-------- --------
$148,185 $ 84,312
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,712 $ 2,977
Accounts payable - Genzyme Corporation 538 559
Payable to ATIII LLC 856 2,151
Revolving line of credit -- 15,750
Accrued expenses 8,674 9,667
Deferred contract revenue 9,668 9,218
Current portion of long-term debt and capital leases 3,102 3,149
-------- --------
Total current liabilities 25,550 43,471
Long-term debt and capital leases, net of current portion 13,285 13,897
Deferred lease obligation 778 779
-------- --------
Total liabilities 39,613 58,147
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized of which 20,000 shares have
been designated Series A convertible and 12,500 shares have been designated
as Series B convertible
Series B convertible preferred stock; $.01 par value; no shares and 6,602
shares were issued and outstanding at April 2, 2000
and January 2, 2000, respectively -- --
Common stock, $.01 par value; 40,000,000 shares authorized; 28,613,365 and
22,601,296 shares issued and outstanding
at April 2, 2000 and January 2, 2000, respectively 286 226
Dividend on preferred stock (2,727) (2,653)
Capital in excess of par value - preferred stock -- 6,647
Capital in excess of par value - common stock 180,473 87,895
Unearned compensation (254) (284)
Accumulated deficit (69,206) (65,625)
Accumulated other comprehensive loss (41)
--
-------- --------
Total stockholders' equity 108,572 26,165
-------- --------
$148,185 $ 84,312
======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE>
GENZYME TRANSGENICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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APRIL 2, APRIL 4,
2000 1999
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<S> <C> <C>
Revenues
Services $15,367 $13,076
Sponsored research and development 3,570 1,693
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18,937 14,769
Costs and operating expenses:
Services 13,307 11,483
Research and development:
Sponsored 2,982 2,577
Internal 890 1,286
Selling, general and administrative 4,498 4,552
Equity in loss of joint venture 856 866
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22,533 20,764
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Loss from operations (3,596) (5,995)
Other income (expense):
Interest income 553 7
Interest expense (482) (510)
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Loss from operations before income taxes (3,525) (6,498)
Provision for income taxes 56 51
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Net loss $(3,581) $(6,549)
======= =======
Dividend to preferred shareholders 74 --
Net loss available to common shareholders $(3,655) $(6,549)
======= =======
Net loss per common share (basic and diluted) $ (0.14) $ (0.35)
======= =======
Weighted average number of common shares
outstanding (basic and diluted) $26,008 $18,650
======= =======
Comprehensive loss:
Net loss (3,581) (6,549)
Other comprehensive income/(loss):
Unrealized holding gain (losses) on available for sale securities 41 (9)
------- -------
Total other comprehensive income/(loss) 41 (9)
------- -------
Comprehensive loss $(3,540) $(6,558)
======= =======
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
APRIL 2, APRIL 4,
2000 1999
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Cash flows for operating activities:
Net loss $ (3,581) $(6,549)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,632 1,355
Amortization of unearned compensation 387 25
Equity in loss of joint venture 856 866
Loss on disposal of fixed assets 2 1
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue (679) 882
Inventory and other current assets (356) (93)
Accounts payable (265) 51
Accounts payable - Genzyme Corporation (21) (158)
Payable to ATIII LLC (1,295) (2,418)
Other accrued expenses (426) 599
Deferred contract revenue 450 1,706
-------- -------
Net cash used in operating activities (3,296) (3,733)
Cash flows for investing activities:
Purchase of property, plant and equipment (1,713) (1,548)
Investment in joint venture (856) --
Other assets 62 209
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Net cash used in investing activities (2,507) (1,339)
Cash flows from financing activities:
Net proceeds from the issuance of common stock 75,228 --
Net proceeds from the exercise of warrants 6,820 --
Net proceeds from employee stock purchase plan 189 279
Net proceeds from the exercise of stock options 2,756 30
Proceeds from long-term debt -- 545
Repayment of long-term debt (772) (628)
Net borrowings (payments) under revolving line of credit (15,750) 4,654
Other long-term liabilities (1) (20)
-------- -------
Net cash provided by financing activities 68,470 4,860
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Net increase (decrease) in cash and cash equivalents 62,667 (212)
Cash and cash equivalents at beginning of the period 7,782 11,740
-------- -------
Cash and cash equivalents at end of period $ 70,449 $11,528
======== =======
</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 January 2, 2000 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.
The financial statements for the three months ended April 2,
2000 and April 4, 1999 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 January 2, 2000.
Per share information is based upon the weighted average
number of shares of Common Stock outstanding during the
period. Common stock equivalents consisting of warrants and
stock options, totaled 3 million at April 2, 2000 and common
stock equivalents consisting of warrants, stock options and
convertible preferred stock, totaled 6.6 million at April 4,
1999. Since the Company was in a net loss position at April 2,
2000 and April 4, 1999, these common stock equivalents were
not used to compute diluted loss per share, as the effect was
antidilutive.
Included in the net loss is an equity in loss of joint venture
of $856,000 which represents the Company's commitment to fund
its 30% share of the losses incurred in 2000 of the joint
venture between the Company and Genzyme Corporation ("ATIII
LLC"). Total net losses of the ATIII LLC were $2.9 million and
the ATIII LLC did not record any revenues.
3. INCOME TAXES:
Due to the profitability of some if its contract research
laboratories in certain states, the Company has recorded a
provision for income taxes for the period ended April 2, 2000.
This is solely a provision for state, not federal, income
taxes.
6
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4. FACILITY CONSOLIDATION COSTS:
During the first quarter of 2000, the Company paid out
$282,000 relating to the facility consolidation reserve
recorded in 1999, which had a balance of $943,000 at January
2, 2000. Of this amount, $64,000 related to severance and
$218,000 related to rental and lease terminations.
The Company also recorded a reduction to the reserve of
$24,000 as severance and employee related items are now
expected to be lower. Similarly, the Company has increased the
rental and lease termination reserves for an additional
$78,000 based on changed circumstances. These reductions and
changes have been included in selling, general and
administrative expenses for the first quarter of 2000. The
remaining balance of the severance accrual and the rental and
lease termination accrual as of April 2, 2000 was $164,000 and
$135,000, respectively.
5. PUBLIC OFFERING:
In February 2000, the Company completed a public offering of
3.5 million shares of common stock at $20 per share. The
Company granted the underwriters an option to purchase an
additional 525,000 shares of its common stock to cover
overallotments, which was exercised. In total, the Company
issued 4,025,000 shares, including underwriter's
overallotment, with net proceeds to the Company of $75.2
million. Subsequent to the completion of the public offering,
the Company paid down the outstanding balance of $15.8 million
on its revolving credit line which remains available for
future borrowing.
In conjunction with the offering, the Company issued a Notice
of Redemption to Genzyme for all outstanding shares of the
Company's Series B Convertible Preferred Stock (the "Series B
Preferred Stock"). Prior to the effectiveness of this
redemption, Genzyme converted the Series B Preferred Stock
into 1,048,021 shares of common stock. The Company paid a cash
dividend of $157,000 in conjunction with the conversion of
which $83,000 and $74,000 was recorded in the fourth quarter
of 1999 and the first quarter of 2000, respectively. After the
conversion of the Series B Preferred Stock and completion of
the public offering, Genzyme owned approximately 31% of the
Company's common stock. If Genzyme converted all outstanding
warrants, the ownership would be 37%. As a result of the
offering, the $6.3 million Genzyme Credit Line was eliminated.
As of April 2, 2000, Genzyme owned approximately 29.6% of the
Company's common stock.
7
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6. SERIES A CONVERTIBLE PREFERRED STOCK WARRANT EXERCISE:
In March 2000, the Company issued a warrant call notice for
450,000 warrants issued in connection with the Series A
Convertible Preferred Stock (the "Series A Preferred Stock").
Each warrant has an exercise price of $15.16 per share. All of
the warrants were exercised in March with proceeds to the
Company of $6.8 million.
7. SEGMENT INFORMATION:
Below is the Company's segment information for its two
reportable segments: contract research organization
("Primedica") and research and development ("Transgenics").
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THREE MONTHS ENDED
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APRIL 2, APRIL 4,
2000 1999
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Revenues:
Primedica - external customers $15,367 $13,076
Primedica - intersegment 273 431
Transgenics 3,570 1,693
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19,210 15,200
Elimination of intersegment revenues (273) (431)
======= =======
$18,937 $14,769
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Loss from operations:
Primedica $ (469) $ (893)
Transgenics (1,497) (3,256)
Unallocated amounts:
Corporate expenses (774) (980)
Equity in loss of joint venture (856) (866)
======= =======
$(3,596) $(5,995)
======= =======
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 2, 2000 AND APRIL 4, 1999
Total revenues for the three-month period ending April 2, 2000 were $18.9
million, compared with $14.8 million for the comparable period in 1999, an
increase of $4.1 million or 28%. Service revenues increased to $15.4 million in
the first quarter of 2000 from $13.1 million in the first quarter of 1999, an
increase of $2.3 million or 18%. The increase in service revenues is due to a
concerted effort to focus on faster growing, higher value-added service areas.
Research and development revenue increased to $3.6 million in the first quarter
of 2000 from $1.7 million in the first quarter of 1999, an increase of $1.9
million or 112%. The increase in research and development revenue is due to
revenue being earned on an increasing number of transgenic programs.
Cost of services for the first quarter of 2000 were $13.3 million compared to
$11.5 million for the comparable period in 1999, an increase of $1.8 million or
16% primarily due to the increase in revenues. Sponsored research and
development expenses increased to $3 million in the first quarter of 2000 from
$2.6 million in the first quarter of 1999, an increase of $400,000 or 15%. The
increase in expense was due to an increase in sponsored research activity
resulting from an increase in the number of transgenic programs. Proprietary
research and development expenses decreased to $900,000 in the first quarter of
2000 from $1.3 million in the first quarter of 1999, a decrease of $400,000 or
31%. The decrease is primarily due to a shifting of resources to sponsored
research and development.
Gross profit, defined as revenues less service costs and research and
development costs, for the first quarter of 2000 amounted to $1.8 million versus
a loss of $577,000 in the first quarter of 1999. The increase is due to improved
service gross profit, improved sponsored research and development gross profit
and a decrease in internal research costs. Gross profit on services for the
first quarter of 2000 was $2.1 million, a gross margin of 13%, versus $1.6
million, a gross margin of 12%, in the first quarter of 1999. The increase in
services gross margin is primarily due to the increase in revenues. Gross profit
on sponsored research and development for the first quarter of 2000 was
$588,000, a gross margin of 16%, versus a loss of $884,000 in the first quarter
of 1999. The increase in sponsored research and development gross margin is due
to increased revenues on sponsored transgenic research and development programs
which cover a greater portion of the fixed operating costs.
Selling, general and administrative ("SG&A") expenses decreased to $4.5 million
in the first quarter of 2000 from $4.6 million in the first quarter of 1999, a
decrease of $100,000 or 2%. The decrease is due to SG&A cost reductions at
Primedica resulting from the facility consolidation.
Interest income increased to $553,000 in the first quarter of 2000, from $7,000
in the first quarter of 1999, due to the investment of the proceeds generated by
the public offering in February 2000.
9
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Interest expense decreased to $482,000 in the first quarter of 2000 from
$510,000 in the first quarter of 1999 due to a decreased balance on outstanding
borrowings in 2000.
The Company recognized $856,000 of joint venture losses incurred on the joint
venture ("ATIII LLC") between the Company and Genzyme Corporation ("Genzyme")
during the first quarter of 2000 as compared to $866,000 incurred during the
first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $70.4 million at April 2, 2000.
During the first quarter of 2000, the Company had a $62.7 million net increase
in cash. Sources of funds during the period included $82 million of proceeds
from issuance of common stock from the $75.2 million public offering and the
exercise of $6.8 million of warrants and $2.9 million of proceeds from the
issuance of common stock under various employee stock plans. Uses of funds
during the period included $3.3 million used in operations, $1.7 million
invested in capital equipment, further expansion of the transgenic production
facility and laboratory facilities, $856,000 invested in ATIII LLC, $772,000
used to pay down long-term debt and $15.8 million used to pay down the bank
revolving credit lines, which remain fully available for future borrowing. As a
result of the offering, the Genzyme credit line was eliminated.
The Company had working capital of $67.8 million at April 2, 2000 compared to a
deficit of $13.9 million at January 2, 2000. As of April 2, 2000 the Company had
$15.8 million available under a line of credit with a commercial bank, $2.9
million available under various capital lease lines and $793,000 available under
a term loan for facility expansion. Under the Company's 2000 operating plan,
existing cash balances along with funds available under the bank and lease lines
are expected to be sufficient to fund the Company through the next few years.
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.
10
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk since January
2, 2000. The Company's market risk disclosures are discussed in the Genzyme
Transgenics Corporation Form 10-K under the heading Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.
11
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PART II
ITEM 2: CHANGES IN SECURITIES
In February 2000, the Company issued a Notice of Redemption to
Genzyme for all outstanding shares of the Company's Series B Preferred
Stock. Prior to redemption, Genzyme converted 6,602 shares of its
Series B Convertible Preferred Stock into 1,048,021 shares of common
stock on February 8, 2000. The Company believes that the common stock
issued upon conversion of the Series B Preferred Stock qualified as a
transaction by an issuer not involving a public offering within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), based on the fact there was one holder.
In March 2000, the Company issued a warrant call notice for
outstanding warrants to purchase 450,000 shares of common stock that
had been issued in connection with the Series A Preferred Stock. Each
warrant had an exercise price of $15.1563 per share. As of March 31,
2000, all the warrants were exercised with proceeds to the Company of
$6.8 million. The Company believes that the common stock issued upon
exercise of the warrants qualified as a transaction by an issuer not
involving a public offering within the meaning of Section 4(2) of the
Securities Act.
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
April 2, 2000.
12
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GENZYME TRANSGENICS CORPORATION AND SUBSIDIARY
FORM 10-Q
APRIL 2, 2000
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 3, 2000 GENZYME TRANSGENICS CORPORATION
BY: /s/ John B. Green
---------------------------
John B. Green
Duly Authorized Officer,
Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule. (EDGAR only.)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-02-2000
<CASH> 70,449
<SECURITIES> 0
<RECEIVABLES> 10,949
<ALLOWANCES> 888
<INVENTORY> 476
<CURRENT-ASSETS> 93,347
<PP&E> 50,573
<DEPRECIATION> 15,636
<TOTAL-ASSETS> 148,185
<CURRENT-LIABILITIES> 25,550
<BONDS> 13,285
0
0
<COMMON> 286
<OTHER-SE> 108,286
<TOTAL-LIABILITY-AND-EQUITY> 148,185
<SALES> 18,937
<TOTAL-REVENUES> 18,937
<CGS> 17,179
<TOTAL-COSTS> 22,533
<OTHER-EXPENSES> (553)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 482
<INCOME-PRETAX> (3,525)
<INCOME-TAX> 56
<INCOME-CONTINUING> (3,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,655)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
