<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---------
Exchange Act of 1934. For the quarterly period ended December 31, 1998.
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
----------------
MEGABIOS CORP.
(Exact name of registrant as specified in its charter)
Delaware 94-3156660
- --------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
863A Mitten Rd., Burlingame, CA 94010
- --------------------------------------------- -------------------------------
(Address of principal offices) (Zip Code)
650-697-1900
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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
-------- ---------
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 12,912,693 as of December 31, 1998.
Page 1 of 17
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MEGABIOS CORP.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 13
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5: OTHER INFORMATION 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 16
Exhibit Index 17
</TABLE>
Page 2 of 17
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PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS AND NOTES
MEGABIOS CORP.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
---- ----
ASSETS (unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,086 $ 15,172
Short-term investments 25,070 7,794
Other receivables 950 616
Prepaid expenses and other current assets 744 539
-------- --------
Total current assets 37,850 24,121
Property and equipment, net 9,117 6,151
Long-term investments 6,083 25,460
Other receivables 130 130
Deposits and other assets 54 39
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$53,234 $55,901
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 305 $ 898
Accrued compensation 521 595
Accrued construction-in-progress 42 589
Other accrued liabilities 577 56
Deferred revenue 109 -
Current portion of long-term debt 2,163 1,017
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Total current liabilities 3,717 3,155
Long-term debt 5,286 2,464
Commitments
Stockholders' equity:
Common stock 13 13
Additional paid-in capital 79,929 79,838
Deferred compensation (681) (976)
Accumulated other comprehensive income(loss) 93 (7)
Accumulated deficit (35,123) (28,586)
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Total stockholders' equity 44,231 50,282
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$ 53,234 $ 55,901
-------- --------
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</TABLE>
See accompanying notes
Page 3 of 17
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Collaborative research and development revenue $ 613 $ 2,466 $ 1,386 $ 4,753
Operating expenses:
Research and development 3,357 3,157 6,786 5,915
General and administrative 1,018 752 2,094 1,427
----- ------ ----- -----
Total operating expenses 4,375 3,909 8,880 7,342
----- ----- ----- -----
Loss from operations (3,762) (1,443) (7,494) (2,589)
Interest income 622 777 1,301 1,175
Interest and other expense (198) (111) (344) (209)
------- ------ ------- -------
Net loss $(3,338) $ (777) $(6,537) $(1,623)
------- ------ ------- -------
------- ------ ------- -------
Basic and diluted net loss per share $(0.26) $(0.06) $(0.51) $(0.22)
------- ------ ------- -------
------- ------ ------- -------
Shares used in computing basic and diluted net
loss per share 12,798 12,400 12,767 7,517
------ ------ ------ -----
------ ------ ------ -----
</TABLE>
See accompanying notes
Page 4 of 17
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,537) $ (1,623)
Adjustments to reconcile net loss to net cash used in operations
Depreciation 1,217 886
Amortization of deferred compensation 295 168
Changes in operating assets and liabilities:
Other receivables (334) (280)
Prepaid expenses and other (205) (81)
Deferred revenue 109 (493)
Accounts payable (593) (224)
Other accrued liabilities 447 (111)
--------- ---------
Net cash used in operations (5,601) (1,758)
Cash flows from investing activities
Purchase of property and equipment (4,564) (1,495)
Deposits and other assets (15) 283
Purchase of available-for-sale investments (3,035) (14,563)
Maturities of available-for-sale investments 5,070 10,200
--------- ---------
Net cash used in investing activities (2,544) (5,575)
Cash flows from financing activities
Proceeds from issuance of long-term debt 4,590 682
Payments on long-term debt (622) (310)
Proceeds from issuance of common stock, net 91 31,541
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Net cash provided by financing activities 4,059 31,913
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Net increase (decrease) in cash and cash equivalents (4,086) 24,580
Cash and cash equivalents, beginning of period 15,172 9,044
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Cash and cash equivalents, end of period $ 11,086 $ 33,624
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 327 $ 208
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--------- ---------
Schedule of non-cash transactions:
Accrued construction-in-progress $ (547) $ --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
Page 5 of 17
<PAGE>
MEGABIOS CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by Megabios Corp. (the "Company") in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Certain information and footnote disclosures normally
included in the Company's annual financial statements as required by generally
accepted accounting principles have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair statement of the
results for the interim periods ended December 31, 1998 and 1997. The balance
sheet at June 30, 1998 is derived from the audited financial statements at that
date but does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year, although the
Company expects to incur a substantial loss for the year ended June 30, 1999.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended June 30, 1998, which are
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The payments
received under each respective agreement are not refundable. The Company is
reimbursed based on the costs associated with the number of full time equivalent
employees working on each specific contract over the term of the agreement.
Research and development expenses under the collaborative research agreements
approximate or exceed the revenue recognized under such agreements over the term
of the respective agreements. Deferred revenue may result when the Company does
not incur the required level of effort during a specific period in comparison to
funds received under the respective contracts. Milestone payments, if any, will
be recognized pursuant to collaborative agreements upon the achievement of
specified milestones, such as the filing of Investigational New Drug
Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
3. NET LOSS PER SHARE
Basic earnings per share is computed by dividing income or loss applicable to
common stockholders by the weighted-average number of common shares outstanding
for the period net of certain common shares outstanding which are subject to
continued vesting and the Company's right of repurchase. Basic earnings per
share excludes any dilutive effects of options.
Page 6 of 17
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MEGABIOS CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.
The following have been excluded from the calculation of loss per share because
the effect of inclusion would be antidilutive: approximately 102,291 common
shares which are outstanding but are subject to the Company's right of
repurchase which expires ratably over 4 years, and options to purchase
approximately 1,062,543 shares of common stock at a weighted average price of
$5.95 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
A reconciliation of shares used in the calculation of basic and diluted
net loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss $ (3,338) $ (777) $ (6,537) $ (1,623)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
BASIC AND DILUTED
Weighted average shares of common stock outstanding
12,900 12,695 12,869 7,812
Common shares subject to repurchase (102) (295) (102) (295)
--------------- --------------- --------------- ---------------
Weighted average shares of common stock used in
computing net loss per share 12,798 12,400 12,767 7,517
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Basic and diluted net loss per share $ (0.26) $ (0.06) $ (0.51) $ (0.22)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
4. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS
On October 26, 1998, Megabios and GeneMedicine Inc. announced the signing of a
definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of 0.571,
for newly issued shares of common stock of Megabios Corp. This will result in
the issuance of approximately 8.9 million additional Megabios Corp. shares,
valued at about $46 million based on Megabios Corp.'s closing price of $5.125
per share on December 31, 1998. In addition, all outstanding employee stock
options of GeneMedicine will convert into Megabios options at the same exchange
ratio. The Board of Directors of the combined company will consist of eight
directors, three of whom will be current directors of GeneMedicine. Benjamin F.
McGraw III will remain as chairman, president and CEO of the combined entity.
Page 7 of 17
<PAGE>
The proposed transaction will be accounted for as a purchase. A significant
portion of the excess purchase price is expected to be charged to in-process
research and development in the Company's statement of operations for the
quarter in which the transaction is completed. The merger is subject to the
approval of stockholders of both companies and appropriate governmental
agencies. The transaction is expected to close in the first calendar quarter of
1999.
5. CREDIT FACILITY
In June 1998, the Company obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, the Company had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $4.6 million was drawn from the line of credit in
the six months ended December 31, 1998. Interest on this amount is accrued and
paid monthly and will be converted into a term loan bearing interest at the
prime rate plus 0.5% on December 31, 1998. The $4.6 million draw will be payable
in 42 monthly installments beginning January 31, 1999. On January 28, 1999 the
Company amended its credit terms on the $8.0 million line of credit. Under the
amended terms, the Company extended its remaining credit facility draws to March
31, 1999, from the original date of December 31, 1998, making the remaining $2.4
million of credit available through March 31, 1999. Future draws after December
31, 1998 will be payable in 39 monthly installments beginning March 31, 1999.
6. NEW ACCOUNTING STANDARDS
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No.130 "Reporting of Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however the adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities which, prior to adoption, were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS 130. For the quarters ended December 31,
1998 and 1997, total comprehensive loss amounted to $3.4 million and $777,000
respectively. For the six month periods ended December 31, 1998 and 1997, total
comprehensive losses were $6.4 million and $1.6 million, respectively.
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superceded SFAS 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS 131 establishes standards for the way
that public business enterprises report selected financial information about
operating segments in annual financial statements. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 will have no impact on the
Company's results of operations, or financial position.
Page 8 of 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
The Company develops proprietary gene delivery systems and provides preclinical
development expertise to create gene-based therapeutics designed for the
treatment or prevention of genetic and acquired diseases. The Company has
developed several in vivo, non-viral gene delivery systems to address a number
of potential therapeutic applications using a variety of therapeutic genes. The
Company's clinical development and commercialization strategy is to enter into
corporate partnerships with pharmaceutical and biotechnology companies. The
Company has established corporate partnerships with Glaxo Wellcome, Pfizer Inc.
("Pfizer") and Eli Lilly & Co. ("Lilly"). In December 1997, Pfizer decided to
discontinue its research and development program to develop gene-based
therapeutics to treat cancer via angiogenesis inhibition. Under the terms of the
agreement with Pfizer, Pfizer continued funding the program through May 31,
1998. Megabios has continued to advance the angiogenesis inhibition program and
is actively seeking a new corporate partner. The corporate partnerships with
Glaxo Wellcome and Lilly are ongoing.
To date, substantially all revenue has been generated by collaborative research
and development agreements with corporate partners, and no revenue has been
generated from product sales. Under the terms of its corporate collaborations,
the Company receives research and development funding on a quarterly basis in
advance of associated research and development costs. The Company expects that
future revenue will be derived in the short-term from research and development
agreements and milestone payments and in the long-term from royalties on product
sales.
The Company has incurred significant losses since inception and expects to incur
substantial losses for the foreseeable future, primarily due to the expansion of
its research and development programs and because the Company does not expect to
generate revenue from the sale of products in the foreseeable future, if at all.
The Company expects that operating results will fluctuate from quarter to
quarter and that such fluctuations may be substantial. As of December 31, 1998,
the Company's accumulated deficit was approximately $35.1 million.
On October 26, 1998, Megabios and GeneMedicine Inc. announced the signing of a
definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of 0.571,
for newly issued shares of common stock of Megabios Corp. This will result in
the issuance of approximately 8.9 million additional Megabios Corp. shares,
valued at about $46 million based on Megabios Corp.'s closing price of $5.125
per share on December 31, 1998.
The proposed transaction will be accounted for as a purchase and is expected to
close in the first calendar quarter of 1999. A write off of approximately $26
million for in-process research and development acquired from GeneMedicine will
be included in the Megabios statement of operations in the quarter in which the
merger is consummated. The tangible assets acquired will be amortized over
Page 9 of 17
<PAGE>
their estimated useful lives of 3 years. The merger is subject to the approval
of stockholders of both companies and appropriate governmental agencies.
To position the Company for the pending merger and to conserve cash, the Company
announced in January, 1999, that it had reduced its research and development
workforce by 16 employees at the manager level or below, bringing the total
number of employees at the Company to 58.
After the merger is completed, the Company will conduct operations in both
California and Texas and the total workforce of the combined Company will exceed
that of either Megabios or GeneMedicine alone. The Company therefore, expects an
increase in both research and administrative expenditures to fund its ongoing
operations.
RESULTS OF OPERATIONS
The Company's collaborative research and development revenue for the three and
six months ended December 31, 1998 totaled approximately $613,000 and $1.4
million, respectively, compared to $2.5 million and $4.8 million for the
corresponding period in 1997. The 1998 revenue was attributable to amounts
earned for research and development performed under the Company's corporate
collaboration with Lilly. The 1997 revenue was primarily attributable to amounts
earned for research and development performed under the Company's corporate
collaborations with Pfizer and Lilly for the three and six months totaling
approximately $1.3 million and $1.2 million, and $2.5 million and $2.3 million,
respectively. No revenue from milestones or royalties from product sales have
been earned under any corporate collaboration to date.
Research and development expenses for the three and six months ended December
31, 1998 increased to $3.4 million and $6.8 million, respectively compared to
$3.2 million and $5.9 million for the same periods in 1997. The increase was
primarily attributable to increased headcount expenses, increased purchases of
laboratory supplies and materials, depreciation on additional equipment and
leasehold improvements and the increased use of consultants and other services
to support the Company's research and development activities. The Company
expects research and development expenses to increase as the Company continues
to expand its independent and collaborative research and development programs.
General and administrative expenses for the three and six months ended December
31, 1998 increased to $1.0 million and $2.1 million, respectively, compared to
$752,000 and $1.4 million in the corresponding periods of 1997. The increase in
1998 compared to 1997 was primarily attributable to increased administrative
headcount, consulting fees and costs related to the 1998 Annual Report. The
Company expects general and administrative expenses to increase due to business
development activities and support of expanded research and development
activities.
Interest income decreased to $622,000 for the three months ended December 31,
1998 from $777,000 for the same period in 1997. Interest income however, for the
six months ended December 31, 1998, increased to $1.3 million from $1.2 million
for the same period in 1997. The decrease in interest income for the three
months ended December 31, 1998, resulted primarily from the decrease in average
cash and investment balances resulting from the use of cash to fund operations
and capital expenditures and lower interest rates. The increase in interest
income for the six months ended December 31, 1998, resulted primarily from the
increase in average cash and investment balances as a result of $31.4 million in
net proceeds from the Company's initial public offering in September 1997.
Page 10 of 17
<PAGE>
Interest and other expense for the three and six months ended December 31, 1998
increased to $198,000 and $344,000, respectively, compared to $111,000 and
$209,000 for the same periods in 1997. The increase was due to interest expense
on higher outstanding balances under the Company's equipment financing lines of
credit.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $42.2 million in cash, cash equivalents
and investments compared to $48.4 million at June 30, 1998.
Net cash used in the Company's operations was $5.6 million for the quarter ended
December 31, 1998, compared to $1.8 million for the same period in 1997. This
cash was used primarily to fund increasing levels of research and development
and the general and administrative activities. The Company's capital
expenditures were $4.6 million in the quarter ended December 31, 1998 as
compared to $1.5 million in the same quarter of 1997. The majority of the
expenditures made as of December 31, 1998 relate to construction of the
Company's pilot manufacturing facility. The facility was completed in January
1999.
In June 1998, the Company obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, the Company had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $4.6 million was drawn from the line of credit in
the six months ended December 31, 1998. Interest on this amount is accrued and
paid monthly and will be converted into a term loan bearing interest at the
prime rate plus 0.5% on December 31, 1998. The $4.6 million draw will be payable
in 42 monthly installments beginning January 31, 1999. On January 28, 1999 the
Company amended its credit terms on the $8.0 million line of credit. Under the
amended terms, the Company extended its remaining credit facility draws to March
31, 1999, from the original date of December 31, 1998, making the remaining $2.4
million of credit available through March 31, 1999. Any future draws after
December 31, 1998 will be payable in 39 monthly installments beginning March 31,
1999.
The Company anticipates that its cash and cash equivalents, committed funding
from existing corporate collaborations, amounts available under its existing
line of credit, and interest income will enable the Company to maintain its
current and planned operations through fiscal 2001. However, there can be no
assurance that the Company will not require additional funding prior to such
time.
The Company's future capital requirements will depend on many factors, including
scientific progress in its research and development programs, the size and
complexity of such programs, the scope and results of preclinical studies and
clinical trials, the ability of the Company to establish and maintain corporate
collaborations, the time and costs involved in obtaining regulatory approvals,
the time and costs involved in filing, prosecuting and enforcing patent claims,
competing technological and market developments, the cost of manufacturing
preclinical and clinical materials and other factors not within the Company's
control. The Company is seeking additional collaborative agreements with
corporate partners and may seek additional funding through public or private
equity or debt financing. There can be no assurance, however, that any such
agreements may be entered into or that they will reduce the Company's funding
requirements or that additional funding will be available.
Page 11 of 17
<PAGE>
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain, which could materially adversely affect the Company's
business, financial condition and results of operations.
IMPACT OF THE YEAR 2000
A major issue currently faced by all industries is the Year 2000 ("Y2K")
computer issue. The problem arises from the use in computer hardware and
software of the last two digits rather than four digits to define the year. As a
result, computer programs are unable to distinguish a year which begins with
"20" or "19". This, can then cause failures in computer systems and
applications, or create erroneous results unless steps are taken to prevent such
failures and errors. The Y2K problem is also compounded by the fact that many
computer and telecommunication systems are interdependent, both within the
United States and throughout the world. Thus, due to interdependence, the
failure of one system may lead other systems to fail, even if these systems are
themselves Y2K compliant.
In order to address this issue, the Company has put a Y2K plan in place to
identify, evaluate and modify its current systems or replace and implement new
systems. Identification includes reviewing and assessing the potential systems
within the Company and at key third party vendors that would be affected by the
Y2K issue. A Y2K Committee, comprised of members of all the Company's
departments and senior management, has been established to evaluate, assess and
prioritize the Company's internal systems and key vendors' systems. The Company
is in the evaluation stage and has determined that it will be required to
upgrade or replace a portion of its accounting software to a Y2K compliant
version. The upgrade is expected to be completed by March 31, 1999.
Completion of the Company's Y2K plan is targeted for the calendar fourth quarter
of 1999. The Company believes that, with upgrades of existing software and/or
conversions to new software, the Y2K issue will not pose significant operational
problems for its business activities. However, if such upgrades or conversions
are not made, or are not completed in a timely fashion, the Y2K issue could have
a material impact on the operations of the Company, the precise degree of which
cannot be known at this time. For example, a failure of the Company's accounting
systems would result in delays of payments to employees, vendors and other
suppliers. Moreover, failure of certain internal systems may result in delays in
work being conducted in the Company's laboratories, or even the loss of certain
work and delay of completion of certain research projects. The Company currently
has no contingency plans to deal with major Y2K failures, though such plans will
be developed by the end of the third calendar quarter of 1999.
The Company has also initiated communications with its significant suppliers to
determine the extent to which the Company's operations are vulnerable to those
third parties' failure to solve their own Y2K issues. When evaluation is
completed, the Company will modify, or replace if necessary, any other internal
systems and enter into new business relationships with Y2K compliant vendors in
the ordinary course of business. The Company plans to establish contingency
plans by the end of the calendar third quarter 1999 to utilize vendors whose
systems are Y2K compliant in the event that the Company's primary vendors fail
to adequately address their Y2K issues. However, if such suppliers or other
third parties with which the Company transacts business experience failures in
their computer systems or
Page 12 of 17
<PAGE>
equipment due to Y2K non-compliance, it could effect the Company's ability to
process transactions or engage in ordinary business activities.
The financial impact of the required upgrades and/or conversion of computer
software relating to the Y2K issue cannot be known precisely at this time, but
the Company currently anticipates that the cost will be less than $100,000. The
actual financial impact could, however, exceed this estimate. Also, the
estimated costs of implementing the Y2K plan do not take into account the costs,
if any, that might be incurred as a result of Y2K related failures that occur
despite the Company's implementation of its Y2K plan.
Although the Company is not aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of third party systems, the Company could experience
material unanticipated negative consequences and/or material costs caused by
undetected errors or defects in such systems or by the Company's failure to
adequately prepare for the results of such errors or defects, including the
costs of related litigation, if any. The impact of such consequences could have
a material adverse effect on the Company's business, financial condition or
results of operations.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's registration statement, filed on
Form S-1 filed under the Securities Act of 1933 (No. 333-32593), was
September 15, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on
September 15, 1997 and all securities were sold in the offering. The
managing underwriters for the offering were Montgomery Securities and
Hambrecht & Quist LLP.
Pursuant to the Registration Statement, the Company sold 2,875,000
shares of its Common Stock for an aggregate offering price of
$34,500,000.
The Company incurred expenses of approximately $3.1 million of which
$2.4 million represented underwriting discounts and commissions and
$700,000 represented other expenses. All such expenses were direct or
indirect payments to others. The net offering proceeds to the Company
after total expenses was $31.4 million.
The Company has not used any of the net proceeds from the offering.
All net proceeds have been invested in cash, cash equivalents and
short-term investments. The use of proceeds from the offering does
not represent a material change in the use of proceeds described in
the prospectus.
Page 13 of 17
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ON DECEMBER 8,
1998, in connection with the Company's Annual Meeting of
Stockholders, the following proposals were voted on as follows:
PROPOSAL 1: Election of Directors.
PROPOSAL 2: Approval of the amendment and restatement of the
Company's 1997 Stock Option Plan (the "Stock Plan") to increase the
number of shares reserved under the Stock Plan and adopt certain
other changes to address recent developments in federal securities
and tax laws.
PROPOSAL 3: Approval of the adoption of the Company's Non-Employee
Directors Stock Option Plan.
PROPOSAL 4: Ratification of Ernst & Young LLP as the Company's
independent auditors.
The voting of stockholders with respect to each of the foregoing proposals was
as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
<S> <C> <C> <C>
Election as Director:
Benjamin F. McGraw III 8,391,594 574 0
Frank J. Caufield 8,391,594 574 0
Proposal 2 4,910,123 939,162 58,800
Proposal 3 5,361,813 507,990 85,080
Proposal 4 8,315,606 16,762 59,800
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form
10-Q submitted to the Securities and Exchange Commission).
b. Reports on Form 8-K
On October 28, 1998 and October 29, 1998 the Registrant filed a
current report on Form 8-K and Form 8-K/A, respectively, to report
that the Registrant announced an agreement to merge with
GeneMedicine, Inc. in a transaction intended to qualify as a tax-free
reorganization.
Page 14 of 17
<PAGE>
On November 24, 1998 the Registrant filed a current report on Form
8-K to report that the Boards of Directors of Megabios and
GeneMedicine approved and executed Amendment No. 1 to Agreement and
Plan of Merger and Reorganization, dated November 24, 1998. Pursuant
to the terms of the Amendment, Megabios agreed to assume certain
outstanding warrants to purchase GeneMedicine common stock and
GeneMedicine agreed that its obligations under GeneMedicine's
Employee Stock Purchase Plan (the "Purchase Plan") will be settled
and participants' rights under the Purchase Plan will terminate prior
to consummation of the merger.
Page 15 of 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Megabios Corp.
--------------
(registrant)
Date: February xx, 1999 /s/ Benjamin F. McGraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: February xx, 1999 /s/ Bennet Weintraub
--------------------
Bennet Weintraub
Chief Financial Officer and Vice President
Finance (Principal Financial and
Accounting Officer)
Page 16 of 17
<PAGE>
MEGABIOS CORP.
EXHIBIT INDEX
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only
in the electronic format of this Quarterly Report on Form 10-Q
submitted to the Securities and Exchange Commission).
Page 17 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,086
<SECURITIES> 25,070
<RECEIVABLES> 950
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,850
<PP&E> 15,210
<DEPRECIATION> 6,093
<TOTAL-ASSETS> 53,234
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 79,942
<OTHER-SE> (35,711)
<TOTAL-LIABILITY-AND-EQUITY> 53,234
<SALES> 1,386
<TOTAL-REVENUES> 1,386
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 328
<INCOME-PRETAX> (6,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,537)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
