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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 29, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No: 0-10824
GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification no.)
100 BEAVER STREET
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (781) 398-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 23,059,527
$0.10 PAR VALUE Outstanding August 9, 2002
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
INDEX TO FINANCIAL INFORMATION AND OTHER INFORMATION
Page
Part I
Financial Information (unaudited):
Consolidated Condensed Balance Sheets as of December 31, 2001 and June 29, 2002 3
Consolidated Statements of Operations for the thirteen and twenty-six week periods ended June 23,
2001 and June 29, 2002 4
Consolidated Statements of Cash Flows for the twenty-six week periods ended June 23, 2001 and June
29, 2002 5
Notes to Consolidated Condensed Financial Statements 6-13
Management's Discussion and Analysis of Financial Condition and Results of Operations 14-19
Part II
Other Information:
Other Information 20
Signature 21
2
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------
December 31, June 29,
2001 2002
------------------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and cash equivalents $24,805,385 $27,622,726
Short-term investments 29,961,540 38,954,890
Interest receivable 1,074,726 861,397
Accounts receivable 513,885 770,527
Unbilled costs and fees 164,465 1,841,402
Prepaid expenses and other current assets 1,583,320 1,107,281
----------- -----------
Total current assets 58,103,321 71,158,223
Property and Equipment, at cost:
Laboratory and scientific equipment 20,918,535 20,667,298
Leasehold improvements 8,798,842 8,911,386
Equipment and furniture 1,267,854 1,283,160
----------- -----------
30,985,231 30,861,844
Less--Accumulated depreciation 19,091,703 19,260,004
----------- -----------
11,893,528 11,601,840
Restricted Cash 200,000 --
Long-term Investments 12,374,324 792,035
Other Assets 168,425 1,032,533
----------- -----------
$82,739,598 $84,584,631
----------- -----------
Liabilities and Shareholders' Equity:
Current Liabilities:
Current maturities of long-term obligations 3,571,578 3,181,844
Accounts payable 2,092,593 2,347,863
Accrued expenses 4,832,713 7,641,540
Deferred revenue 3,449,959 1,069,979
----------- -----------
Total current liabilities 13,946,843 14,241,226
Long-term Obligations, net of current maturities 2,060,817 16,510,927
Shareholders' Equity 66,731,938 53,832,478
----------- -----------
$82,739,598 $84,584,631
----------- -----------
See Notes to Consolidated Condensed Financial Statements.
3
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
Thirteen-Week Period Ended Twenty-Six Week Period Ended
June 23, 2001 June 29, 2002 June 23, 2001 June 29, 2002
------------------------------------------------------------------------------------------------------------------------------------
Revenues:
BioPharmaceutical $ 7,459,479 $ 1,927,960 $ 11,017,049 $ 4,361,685
GenomeVisionTM Services 3,930,400 4,056,708 8,463,078 7,787,500
------------ ------------ ------------ ------------
Total revenues 11,389,879 5,984,668 19,480,127 12,149,185
============ ============ ============ ============
Costs and Expenses:
Cost of services 3,430,803 3,696,543 7,111,619 7,089,320
Research and development 4,438,822 8,283,727 8,261,151 16,097,700
Selling, general and administrative 2,190,432 2,188,430 3,825,354 4,245,815
------------ ------------ ------------ ------------
Total costs and expenses 10,060,057 14,168,700 19,198,124 27,432,835
------------ ------------ ------------ ------------
Income (loss) from operations 1,329,822 (8,184,032) 282,003 (15,283,650)
============ ============ ============ ============
Interest Income (Expense):
Interest income 986,723 494,671 2,130,518 1,025,603
Interest expense (212,123) (628,126) (381,465) (844,216)
------------ ------------ ------------ ------------
Net interest income (expense) 774,600 (133,455) 1,749,053 181,387
------------ ------------ ------------ ------------
Net income (loss) $ 2,104,422 $ (8,317,487) $ 2,031,056 $(15,102,263)
============ ============ ============ ============
Net Income (Loss) per Common Share:
Basic $ 0.09 $ (0.36) $ 0.09 $ (0.66)
============ ============ ============ ============
Diluted $ 0.09 $ (0.36) $ 0.09 $ (0.66)
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 22,451,753 22,812,226 22,430,627 22,805,225
============ ============ ============ ============
Diluted 23,567,368 22,812,226 23,495,390 22,805,225
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements.
4
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------
Twenty-Six Week Period Ended
June 23, 2001 June 29, 2002
----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 2,031,056 $(15,102,263)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,246,121 2,439,897
Non-cash interest expense -- 204,242
Loss (gain) on disposal of equipment and leasehold improvements 22,693 (35,527)
Amortization of deferred compensation 285,653 294,405
Changes in assets and liabilities:
Interest receivable 178,560 213,329
Accounts receivable 568,565 (256,642)
Unbilled costs and fees 686,701 (1,676,937)
Prepaid expenses and other current assets 109,074 476,039
Accounts payable 37,294 255,270
Accrued expenses (119,295) 2,839,657
Deferred revenue (1,581,782) (2,379,980)
------------ ------------
Net cash provided by (used in) operating activities 4,464,640 (12,728,510)
------------ ------------
Cash Flows from Investing Activities:
Purchases of investments (33,003,070) (14,771,862)
Proceeds from sale of investments 39,777,906 17,230,612
Purchases of property and equipment (1,893,521) (2,168,126)
Proceeds from sale of property and equipment 5,000 55,444
Decrease in restricted cash -- 200,000
Decrease (increase) in other assets 30,366 (864,108)
------------ ------------
Net cash provided by (used in) investing activities 4,916,681 (318,040)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options 667,624 12,547
Proceeds from issuance of stock under the employee stock purchase plan 124,791 259,151
Gross proceeds from convertible notes payable -- 15,000,000
Proceeds from borrowings on equipment financing arrangements 2,021,678 3,500,000
Note receivable from officer (163,000) --
Payments on long-term obligations (2,071,933) (2,907,807)
------------ ------------
Net cash provided by financing activities 579,160 15,863,891
------------ ------------
Net Increase in Cash and Cash Equivalents 9,960,481 2,817,341
Cash and Cash Equivalents, beginning of period 10,095,817 24,805,385
------------ ------------
Cash and Cash Equivalents, end of period $ 20,056,298 $ 27,622,726
------------ ------------
Supplemental Disclosure of Cash Flow Information:
Interest paid during period $ 668,564 $ 569,386
------------ ------------
Income tax paid during period $ 22,500 $ 25,002
------------ ------------
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital leases $ 2,021,678 $ --
------------ ------------
Unrealized loss on marketable securities $ -- $ 130,189
------------ ------------
Issuance of warrant in connection with convertible notes payable $ -- $ 1,736,059
------------ ------------
See Notes to Consolidated Condensed Financial Statements.
5
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
These consolidated condensed financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company's management,
the unaudited consolidated condensed financial statements have been prepared on
the same basis as the audited consolidated financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results for the interim period. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes, however, that its disclosures are adequate to make the information
presented not misleading. The accompanying consolidated condensed financial
statements should be read in conjunction with the Company's Form 10-K, which was
filed with the Securities and Exchange Commission on April 1, 2002 and amended
on June 24, 2002.
(2) Summary of Significant Accounting Policies
The accompanying consolidated condensed financial statements reflect the
application of certain accounting policies, as described in this note and
elsewhere in the accompanying notes to the consolidated condensed financial
statements.
(a) Principles of Consolidation
The accompanying consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiary, Collaborative
Securities Corp. (a Massachusetts Securities Corporation). All intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
BioPharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies. GenomeVisionTM
Services revenues are from government grants, fees received from custom gene
sequencing and analysis services and subscription fees from the PathoGenome(TM)
Database. Revenues from contract research, government grants, the PathoGenome
Database subscription fees, and custom gene sequencing and analysis services are
recognized over the respective contract periods as the services are provided.
License fees and milestone payments are recognized in accordance with Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments will
be recognized upon achievements of the milestone as long as the milestone is
deemed to be substantive and the Company has no other performance obligations
related to the milestone. License fees are recognized ratably over the term of
the license. Unbilled costs and fees represent revenue recognized prior to
billing. Deferred revenue represents amounts received prior to revenue
recognition.
(c) Net Income (Loss) Per Share
The Company follows the provisions of SFAS No. 128, Earnings per Share,
which establishes standards for computing and presenting earnings per share.
Basic earnings per share was determined by dividing net income (loss) by the
weighted average common shares outstanding during the period. Diluted earnings
per share was determined by dividing net income (loss) by the weighted average
common and common equivalent shares outstanding during the period using the
treasury stock method. Diluted loss per share is the same as basic loss per
share for the thirteen-week and twenty-six week periods ended June 29, 2002, as
the effect of the potential common stock is antidilutive. Antidilutive
securities, which consist of stock options, warrants, unvested restricted stock
and directors' deferred stock, that were not included in diluted net loss per
common share numbered 4,704,325 shares at June 29, 2002.
6
(d) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no off-balance-sheet or concentrations of credit
risk such as foreign exchange contracts, options contracts or other foreign
hedging arrangements. The Company maintains its cash and cash equivalents and
investment balances with several nonaffiliated institutions.
The Company maintains reserves for the potential write-off of accounts
receivable. To date, the Company has not written off any significant accounts
receivable.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and their aggregate percentage of
the Company's total revenues:
Number of
Significant
Customers A B C
----------- --- --- ---
Thirteen-week period ended:
June 23, 2001 3 27% 16% 47%
June 29, 2002 2 41% 23% --
Twenty-six week period ended:
June 23, 2001 3 30% 24% 29%
June 29, 2002 2 45% 27% --
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of the Company's total accounts receivable:
Percentage of Total Accounts Receivable
------------------------------------------------------
A B C D E F G H
--- --- --- --- --- --- --- ---
As of:
December 31, 2001 -- -- -- 37% 29% -- -- --
June 29, 2002 -- -- -- 3% -- 26% 18% 25%
(e) Use of Estimates
The preparation of consolidated condensed financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(f) Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all components of
comprehensive income (loss) on an annual and interim basis. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. During the twenty-six week period ended June 29, 2002, the Company
recorded approximately $130,000 to comprehensive loss related to the decrease in
the fair market value of common shares received from Versicor, Inc. in
connection with the exercise of a warrant, which are classified in short-term
investments in the accompanying balance sheet. See Note 3 for further
discussion.
(g) Segment Reporting
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and
7
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or
decision-making group, in making decisions as to how to allocate resources and
assess performance. The Company's chief decision makers, as defined under SFAS
No. 131, are the chief executive officer and chief financial officer. To date,
the Company has viewed its operations and manages its business as principally
two operating segments: GenomeVision Services and BioPharmaceutical. As a
result, the financial information disclosed herein represents all of the
material financial information related to the Company's two operating segments.
All of the Company's revenues are generated in the United States and all assets
are located in the United States.
GenomeVision(TM)
Services BioPharmaceutical Total
--------------- ----------------- -----
Twenty-six week period ended June 23, 2001--
Revenues $ 8,463,078 $11,017,049 $19,480,127
Gross profit 1,351,459 7,437,957 8,789,416
Company-funded research & development -- 4,682,059 4,682,059
Twenty-six-week period ended June 29, 2002--
Revenues $ 7,787,500 $ 4,361,685 $12,149,185
Gross profit 698,180 1,570,004 2,268,184
Company-funded research & development -- $13,306,019 13,306,019
The Company does not allocate assets by operating segment.
(3) Cash Equivalents and Investments
The Company applies the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 2001 and June 29,
2002, the Company's investments primarily include short-term and long-term
investments which are classified as held-to-maturity, as the Company has the
positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original maturities
of 90 days or less. The Company's short-term and long-term investments include
marketable securities with original maturities of greater than 90 days. Cash
equivalents are carried at cost, which approximates market value, and consist of
debt securities. Short-term and long-term investments are recorded at amortized
cost, which approximates market value and consist of commercial paper and U.S.
government debt securities. The average maturity of the Company's investments is
approximately 5.6 months and 7.5 months at June 29, 2002 and December 31, 2001,
respectively. At June 29, 2002, the Company had a gross unrealized gain of
approximately $209,000, which is the difference between the amortized cost and
the fair market value of the held-to-maturity investments.
The Company's investments also include the purchase, pursuant to the
exercise of a warrant, of 45,000 shares of common stock of Versicor, Inc. in
connection with its collaboration agreement with Versicor, Inc. dated March 10,
1997. The Company is accounting for the shares in accordance with SFAS No. 115
as available for sale securities and as a result, the shares are recorded at
fair value. The shares are subject to restrictions under the securities
regulations and cannot be liquidated until March 2003. At June 29, 2002, the
Company had recorded an unrealized gain of approximately $405,000 in accumulated
other comprehensive income in its consolidated statements of shareholders'
equity related to the value of the shares.
At December 31, 2001 and June 29, 2002, the Company's cash and cash
equivalents and investments consisted of the following:
December 31, June 29,
2001 2002
------------ --------
Cash and cash equivalents:
Cash $ 21,801,201 $ 23,622,726
Debt securities 3,004,184 4,000,000
-------------- --------------
Total cash and cash equivalents $ 24,805,385 $ 27,622,726
============== ==============
Investments:
Short-term investments $ 29,961,540 $ 38,954,890
Long-term investments 12,374,324 792,035
-------------- --------------
Total investments $ 42,335,864 $ 39,746,925
============== ==============
8
The Company also had $200,000 in restricted cash at December 31, 2001 in
connection with certain capital lease obligations.
(4) Long-Term Obligations
On March 5, 2002, the Company sold convertible notes payable to two
institutional investors in a private placement transaction, raising $15 million
in gross proceeds. The convertible notes payable may be converted into shares of
the Company's common stock at the option of the holder, at a price of $8.00 per
share, subject to certain adjustments. The maturity date of the convertible
notes payable is December 31, 2004, provided, that if any time on or after
December 31, 2003, the Company maintains a net cash balance (i.e., cash and cash
equivalents and investments less obligations for borrowed money bearing
interest) of less than $35 million, then the holders of the convertible notes
payable can require that all or any part of the outstanding principal balance of
the convertible notes payable plus all accrued but unpaid interest be repaid.
Interest on the convertible notes payable accrues at 6% annually and the
interest is payable, in cash or in stock, semi-annually on June 30 and December
31 of each year. On June 30, 2002, the first interest payment on the convertible
notes payable was due and was paid by issuing 120,986 shares of the Company's
common stock to the holders of the notes payable. The investors also received a
warrant to purchase up to an aggregate of 487,500 shares of common stock at an
exercise price of $8.00 per share, subject to certain adjustments. The warrant
is exercisable at the time the convertible notes payable are converted or if
certain other redemptions or repayments of the convertible notes payable occur
and will terminate upon the earlier of four years from date of such conversion
or December 31, 2008. The warrant was valued, using the Black-Scholes option
pricing model, at approximately $1,736,000. The amount was recorded as a
discount to long-term obligations and will be amortized to interest expense over
the term of the convertible notes payable. Additionally, the Company issued a
warrant to purchase up to 100,000 shares of common stock at an exercise price of
$15.00 per share to its placement agent. The warrant is exercisable over a
three-year term commencing upon issuance. This warrant was valued, using the
Black-Scholes option pricing model, at $244,000. This amount is included in
deferred issuance costs and will be amortized to interest expense over the term
of the convertible notes payable.
In February 2002, the Company entered into an additional line of credit
for $3,500,000, of which $500,000 was used to refinance a portion of an existing
line of credit. This line of credit is payable in twelve consecutive quarterly
payments at the prevailing LIBOR rate (2.06% at June 29, 2002) plus 1 1/2%. The
Company is required to maintain certain financial covenants pertaining to
minimum cash balances. As of June 29, 2002, $3.2 million was outstanding under
the credit line, and the Company was in compliance with all of the covenants.
In February 2000, the Company entered into an equipment line of credit
under which it may finance up to $4,000,000 of laboratory, computer and office
equipment. In December 2000, the Company increased the line of credit by
$2,712,000 to $6,712,000. The Company, at its discretion, can enter into either
operating or capital leases. The borrowings under the operating leases are
payable in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of June 29, 2002, the Company had approximately $30,000
outstanding under operating leases and approximately $3,025,000 outstanding
under capital leases. The interest rates under the capital leases range from
7.55% to 10.37%. The Company had no additional borrowing capacity under this
line of credit at June 29, 2002. There are no financial covenants related to
this agreement.
(5) Alliances--Biopharmaceutical
(a) AstraZeneca
In August 1995, the Company entered into a strategic alliance with
AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and
diagnostic products effective against peptic ulcers or any other disease caused
by H. pylori. The Company granted Astra exclusive access to the Company's H.
pylori genomic sequence database and exclusive worldwide rights to make, use and
sell products based on the Company's H. pylori technology. The agreement
provided for a four-year research alliance (which ended in August 1999) to
further
9
develop and annotate the Company's H. pylori genomic sequence database, identify
therapeutic and vaccine targets and develop appropriate biological assays.
Under this agreement, Astra agreed to pay the Company, subject to the
achievement of certain product development milestones, up to $23.3 million (and
possibly a greater amount if more than one product is developed under the
agreement) in license fees, expense allowances, research funding and milestone
payments. The Company has received a total of $13.5 million in license fees,
expense allowances, milestone payments and research funding under the Astra
agreement through June 29, 2002.
The Company will also be entitled to receive royalties on Astra's sale of
products protected by the claims of patents licensed exclusively to Astra by the
Company pursuant to the agreement or the discovery of which was enabled in a
significant manner by the genomic database licensed to Astra by the Company. The
Company has the right, under certain circumstances, to convert Astra's license
to a nonexclusive license in the event that Astra is not actively pursuing
commercialization of the technology.
(b) Schering-Plough
In December 1995, the Company entered into a strategic alliance and
license agreement (the December 1995 agreement) with Schering Corporation and
Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by
Schering-Plough of the genomic sequence of Staph. aureus to identify and
validate new gene targets for development of drugs to target Staph. aureus and
other pathogens that have become resistant to current antibiotics. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's proprietary Staph. aureus genomic sequence database. The Company
agreed to undertake certain research efforts to identify bacteria-specific genes
essential to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough paid an initial license fee and
agreed to fund the research program through March 31, 2002. Under this
agreement, Schering-Plough agreed to pay the Company a minimum of $21.4 million
in an up-front license fee, research funding and milestone payments. Subject to
the achievement of additional product development milestones, Schering-Plough
agreed to pay the Company up to an additional $24.0 million in milestone
payments.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough and on the technology developed in the
course of the research program. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed. As of March 30, 2002, the Company had
completed its research obligations under this alliance and had turned over
validated drug targets and assays to Schering-Plough for high-throughput
screening. A total of $21.4 million has been received through June 29, 2002.
Under the December 1995 agreement, the Company recognized revenue of
approximately $434,000 and $1,000 during the thirteen-week periods ended June
23, 2001 and June 29, 2002, respectively, which consisted of alliance research
revenue. For the twenty-six week periods ended June 23, 2001 and June 29, 2002,
the Company recognized revenue of approximately $831,000 and $127,000,
respectively, which consisted of alliance research revenue.
In December 1996, the Company entered into its second strategic alliance
and license agreement (the December 1996 agreement) with Schering-Plough. This
agreement calls for the use of genomics to discover new pharmaceutical products
for treating asthma. As part of the agreement, the Company will employ its
high-throughput disease gene identification, bioinformatics, and genomics
sequencing capabilities to identify genes and associated proteins that can be
utilized by Schering-Plough to develop pharmaceuticals and vaccines for treating
asthma. Under this agreement, the Company has granted Schering-Plough exclusive
access to (i) certain gene sequence databases made available under this research
program, (ii) information made available to the Company under certain
third-party research agreements, and (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this alliance.
10
Under this agreement (and subsequent extensions), Schering-Plough paid an
initial license fee and an expense allowance to the Company and agreed to fund
the research program through at least December 2002. In addition, upon
completion of certain scientific developments, Schering-Plough has made or will
potentially make milestone payments, as well as pay royalties based upon sales
of therapeutics products developed from this collaboration. If all milestones
are met and the research program continues for its full term, total payments to
the Company will approximate $81.0 million, excluding royalties. Of the total
potential payments, approximately $36.5 million represents license fees and
research payments, and $44.5 million represent milestone payments based on
achievement of research and product development milestones. A total of $39.8
million has been received through June 29, 2002.
Under the December 1996 agreement, the Company recognized revenue of
approximately $944,000 and $1,359,000 for the thirteen-week periods ended June
23, 2001 and June 29, 2002, respectively, which consisted of alliance research
revenue. For the twenty-six week period ended June 23, 2001, the Company
recognized revenue of approximately $3,061,000, which consisted of alliance
research revenue and a milestone payment. For the twenty-six week period ended
June 29, 2002, the Company recognized revenue of approximately $3,090,000, which
consisted of alliance research revenue.
In September 1997, the Company entered into a third strategic alliance and
license agreement (the September 1997 agreement) with Schering-Plough to use
genomics to discover and develop new pharmaceutical products to treat fungal
infections.
Under this agreement, the Company employed its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough has received exclusive access to the genomic information
developed in the alliance related to two fungal pathogens, Candida albicans and
Aspergillus fumigatus. Schering-Plough has also received exclusive worldwide
rights to make, use and sell products based on the technology developed during
the course of the research program. In return, Schering-Plough agreed to fund a
research program through March 31, 2002. If all milestones are met, total
payments to the Company will approximate $33.2 million, excluding royalties. Of
the total potential payments, approximately $10.2 million represents contract
research payments and $23.0 million represents milestone payments based on
achievement of research and product development milestones. As of March 30,
2002, the Company had completed its research obligations under this alliance and
had turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. A total of $12.2 million has been received through
June 29, 2002.
Under the September 1997 agreement, the Company recognized approximately
$410,000 and $0 in revenue during the thirteen-week periods ended June 23, 2001
and June 29, 2002, respectively, which consisted of alliance research revenue.
For the twenty-six week periods ended June 23, 2001 and June 29, 2002, the
Company recognized revenue of approximately $794,000 and $6,000, respectively,
which consisted of alliance research revenue.
Under certain circumstances, the Company may have an obligation to give
Schering-Plough a right of first negotiation to develop with the Company certain
of its asthma and infectious disease related discoveries if it decides to seek a
third party collaborator to develop such discovery.
(c) bioMerieux
In September 1999, the Company entered into a strategic alliance with
bioMerieux to develop, manufacture and sell in vitro diagnostic products for
human clinical and industrial applications. As part of the alliance, bioMerieux
purchased a subscription to the Company's PathoGenome Database (see Note 6(a)),
paid an up-front license fee, agreed to fund a research program for at least
four years and pay royalties on future products. In addition, bioMerieux
purchased $3.75 million of the Company's common stock. The total amount of
research and development funding, excluding subscription fees, approximates $5.2
million for the four-year term of this agreement. The research and development
funding will be recognized as the research services are performed over the
four-year term of the agreement. Approximately $3.4 million has been received
through June 29, 2002.
The Company recognized approximately $297,000 in revenue during both
thirteen-week periods ended June 23, 2001 and June 29, 2002, which consisted of
alliance research revenue and amortization of the up-front license
11
fees. The Company recognized approximately $579,000 and $594,000 in revenue
during the twenty-six week periods ended June 23, 2001 and June 29, 2002,
respectively, which consisted of alliance research revenue and amortization of
the up-front license fees.
(d) Wyeth
In December 1999, the Company entered into a strategic alliance with Wyeth
to develop novel therapeutics for the prevention and treatment of osteoporosis.
The alliance will focus on developing therapeutics, utilizing targets based on
the characterization of a gene associated with a unique high bone mass trait.
The agreement provides for the Company to employ its established
capabilities in positional cloning, bioinformatics and functional genomics in
conjunction with Wyeth's drug discovery capabilities and its expertise in bone
biology and the osteoporotic disease process to develop new pharmaceuticals.
Under the terms of the agreement, Wyeth paid the Company an up-front license
fee, and funded a multi-year research program, which includes milestone payments
and royalties on sales of therapeutics products developed from this alliance. If
the research program continues for its full term and substantially all of the
milestone payments are met, total payments to the Company, excluding royalties,
would exceed $118 million. Approximately $8.6 million has been received through
June 29, 2002.
The Company recognized revenue of approximately $5,375,000 for the
thirteen-week period ended June 23, 2001, which consisted of alliance research
revenue, milestone payments and amortization of a license fee. The Company
recognized revenue of approximately $261,000 for the thirteen-week period ended
June 29, 2002, which consisted of alliance research revenue.
The Company recognized revenue of approximately $5,735,000 for the
twenty-six week period ended June 23, 2001, which consisted of alliance research
revenue, milestone payments and amortization of a license fee. The Company
recognized revenue of approximately $523,000 for the twenty-six week period
ended June 29, 2002, which consisted of alliance research revenue.
(6) GenomeVision(TM)Services
GenomeVision(TM) Services revenues are from government grants, fees
received from custom gene sequencing and analysis and subscription fees from
PathoGenome(TM) Database.
(a) Database Subscriptions
The Company has entered into a number of PathoGenome Database
subscriptions. The database subscriptions provide nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome Database, and
associated information relating to microbial organisms. These agreements call
for the Company to provide periodic data updates, analysis tools and software
support. Under the subscription agreements, the customer pays an annual
subscription fee and will pay royalties on any molecules developed as a result
of access to the information provided by the PathoGenome Database. The Company
retains all rights associated with protein therapeutic, diagnostic and vaccine
use of bacterial genes or gene products.
(b) National Human Genome Research Institute
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company is
entitled to receive funding from the National Human Genome Research Institute
(NHGRI) of up to $17.4 million through February 2003, of which all funds have
been appropriated.
In October 1999, the NHGRI named the Company as a pilot center to the
Mouse Genome Sequencing Network. The Company is entitled to receive $13.4
million in funding through February 2003 with respect to this agreement, of
which all funds have been appropriated. In August 2000, the Company was named
one of two primary centers for the Rat Sequencing Program from NHGRI. As part of
the agreement, the Company will use remaining funding under the mouse award, as
well as a portion of the remaining funding under the human award, to participate
in this rat genome initiative.
12
Funding under our government grants and research contracts is subject to
appropriation each year by the U.S. Congress and can be discontinued or reduced
at any time. In addition, we cannot be certain that we will receive additional
grants or contracts in the future.
(7) Product Development
In October 2001, the Company acquired an exclusive license in the United
States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia
S.p.A (Biosearch Italia). The Company has assumed responsibility for the product
development in the United States of Ramoplanin, currently in Phase III clinical
trials. The agreement provides the Company with exclusive rights to develop and
market oral Ramoplanin in the U.S. and Canada. Biosearch Italia will provide the
bulk material for manufacture of the product and will retain all other rights to
market and sell Ramoplanin.
Under the terms of this agreement, the Company paid Biosearch Italia an
initial license fee of $2 million and is obligated to make payments of up to $8
million in a combination of cash and notes convertible into Company stock upon
the achievement of specified milestones. In addition, the Company is obligated
to purchase bulk material from Biosearch Italia and fund the completion of
clinical trials and pay a royalty on product sales. The combined total of bulk
product purchases and royalties is expected to be 26% of the Company's net
product sales.
The Company expended approximately $3.2 million and $6.3 million during
the thirteen and twenty-six week periods ended June 29, 2002, respectively, on
clinical development expenses related to Ramoplanin.
(8) Subsequent Event
In July 2002, the Company and ArQule agreed to restructure their joint
venture to identify novel anti-infective drug compounds. Under the
restructuring, the Company will take full operational and financial
responsibility for advancing the novel small molecule compounds identified
through this collaboration, thus ending ArQule's involvement in this joint
venture.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a biopharmaceutical company focused on the discovery and
development of pharmaceutical and diagnostic products. We have eight established
product development programs. Our lead product candidate, Ramoplanin, is in
Phase III clinical trials for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE). We have six alliances with
pharmaceutical companies including Schering-Plough, AstraZeneca, Wyeth and
bioMerieux and a joint venture with ArQule. In addition to these eight projects,
we have a portfolio of earlier stage internal drug discovery programs. We also
maintain an active service business, GenomeVisionTM Services, providing drug
discovery services to pharmaceutical and biotechnology companies and to the
National Human Genome Research Institute.
We receive payments under our bioPharmaceutical business from our product
discovery alliances based on license fees, contract research and milestone
payments during the term of the alliance. We also receive payments under our
GenomeVision Services business from selling, as a contract service business,
high quality genomic sequencing information to our customers, including
pharmaceutical companies, biotechnology companies, governmental agencies, and
academic institutions. In addition, under our GenomeVision Services business,
subscribers to our PathoGenomeTM Database pay access fees for the information
they obtain. We anticipate that our alliances will result in the discovery and
commercialization of novel pharmaceutical, vaccine and diagnostic products. In
order for a product to be commercialized based on our research, it will be
necessary for our product discovery partner to conduct preclinical tests and
clinical trials, obtain regulatory clearances, manufacture, sell, and distribute
the product. Accordingly, we do not expect to receive royalties based upon
product revenues for many years, if at all.
Our primary sources of revenue are from alliance agreements with
pharmaceutical company partners, subscription agreements to our PathoGenome
Database and government research grants and contracts. Currently, we have six
product discovery alliances, of which we currently receive contract research
funding from three of these alliances. In August 1995, we entered into an
alliance with AstraZeneca to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infections or any other disease
caused by H. pylori. In August 1999, the contract research under the alliance
concluded and the program transitioned into AstraZeneca's pipeline. We are
entitled to receive additional milestone payments and royalties based upon the
development by AstraZeneca of any products from the research alliance. In
December 1995, we entered into an alliance with Schering-Plough. Under this
alliance, Schering-Plough can use our Staph. aureus genomic database to identify
new gene targets for the development of novel antibiotics. As of March 30, 2002,
we had completed our research obligations under this alliance and had turned
over validated drug targets and assays to Schering-Plough for high-throughput
screening. In December 1996, we entered into our second research alliance with
Schering-Plough to identify genes and associated proteins that Schering-Plough
can utilize to develop new pharmaceuticals for treating asthma. In September
1997, we established our third research alliance with Schering-Plough for the
development of new pharmaceutical products to treat fungal infections. As of
March 30, 2002, we had completed our research obligations under this alliance
and had turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. In September 1999, we entered into a strategic
alliance with bioMerieux to develop, manufacture and sell in vitro pathogen
diagnostic products for human clinical and industrial applications. As part of
the strategic alliance, bioMerieux purchased a subscription to our PathoGenome
Database and made an equity investment. In December 1999, we entered into a
strategic alliance with Wyeth to develop drugs based on our genetic research to
treat osteoporosis.
In May 1997, we introduced our PathoGenome Database and sold our first
subscription. Since that date, we have continued to contract with subscribers on
a non-exclusive basis, and, as of June 29, 2002, we had seven subscribers. Under
our agreements, the subscribers receive non-exclusive access to information
relating to microbial organisms in our PathoGenome Database. Subscriptions to
the database generate revenue over the term of the subscription with the
potential for royalty payments to us from future product sales. We do expect to
see a revenue decline in subscription fees over the next two years as
subscribers substantially complete data mining of PathoGenome.
14
Since 1989, the United States government has awarded us a number of
research grants and contracts related to government genomics programs. The scope
of the research covered by grants and contracts encompasses technology
development, sequencing production, technology automation, and disease gene
identification. These programs strengthen our genomics technology base and
enhance the expertise of our scientific personnel. In July 1999, we were named
as one of the nationally funded DNA sequencing centers of the international
Human Genome Project. We are entitled to receive funding from the National Human
Genome Research Institute (NHGRI) of up to $17.4 million through February 2003,
of which all funds have been appropriated and $13.5 million had been received
through June 29, 2002. In October 1999, the NHGRI named us as a pilot center to
the Mouse Genome Sequencing Network. We are entitled to receive $13.4 million in
funding over forty-one months with respect to this agreement, of which all funds
have been appropriated and $12.8 million had been received through June 29,
2002. In August 2000, we were named one of two primary centers for the Rat
Sequencing Program from NHGRI. As part of the agreement, we will use remaining
funding under the mouse award, as well as a portion of the remaining funding
under the human award, to participate in this rat genome initiative.
In October 2001, we acquired an exclusive license in the United States and
Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A
(Biosearch). We have assumed responsibility for the product development in the
United States of Ramoplanin, currently in Phase III clinical trials. The
agreement provides us with exclusive rights to develop and market oral
Ramoplanin in the U.S. and Canada. Biosearch will retain all other rights to
market and sell Ramoplanin. In addition, we are obligated to purchase bulk
material from Biosearch, fund the completion of clinical trials, and pay a
royalty on product sales. The combined total of bulk product purchases and
royalties is expected to be approximately 26% of our net product sales.
We have incurred significant operating losses since our inception. As of
June 29, 2002, we had an accumulated deficit of approximately $97.2 million. Our
losses are primarily from costs associated with prior operating businesses and
research and development expenses. These costs have often exceeded our revenues
generated by our alliances, subscription agreements and government grants. Our
results of operations have fluctuated from period to period and may continue to
fluctuate in the future based upon the timing, amount and type of funding. We
expect to incur additional operating losses in the future.
We are subject to risks common to companies in our industry including
unproven technology and business strategy, reliance upon collaborative partners
and others, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, rapid technological change, history of operating losses, need for
future capital, competition, patent and proprietary rights, dependence on key
personnel, healthcare reform and related matters, availability of, and
competition for, unique family resources, and volatility of our stock.
Critical Accounting Policies
We considered the disclosure requirements of FR-60 regarding critical
accounting policies and FR-61 regarding liquidity and capital resources, certain
trading activities and related party/certain other disclosures, and concluded
that there were no material changes during the quarter that would warrant
further disclosure under these releases.
Results of Operations
Thirteen-Week Periods Ended June 23, 2001 and June 29, 2002
Revenues
Total revenues decreased 47% from $11,390,000 for the thirteen-week period
ended June 23, 2001 to $5,985,000 for the thirteen-week period ended June 29,
2002. BioPharmaceutical revenues decreased 74% from $7,459,000 for the
thirteen-week period ended June 23, 2001 to $1,928,000 for the thirteen-week
period ended June 29, 2002 primarily due to $5 million in milestone payments
earned in the second quarter of last year under our product discovery alliance
with Wyeth and the absence of such milestone payments in the second quarter of
the current year.
Revenues from GenomeVision Services increased slightly from $3,930,000 for
the thirteen-week period ended June 23, 2001 to $4,057,000 for the thirteen-week
period ended June 29, 2002.
15
Costs and Expenses
Total costs and expenses increased 41% from $10,060,000 for the
thirteen-week period ended June 23, 2001 to $14,169,000 for the thirteen-week
period ended June 29, 2002 primarily due to the increase in research and
development expenses described below.
Cost of services increased 8% from $3,431,000 for the thirteen-week period
ended June 23, 2001 to $3,697,000 for the thirteen-week period ended June 29,
2002 due partially to an increase in the amount of services provided in the
Company's GenomeVision Services business.
Research and development expenses include internal research and
development, research funded pursuant to arrangements with our strategic
alliance partners, as well as clinical development costs and expenses. Research
and development expenses increased 87% from $4,439,000 for the thirteen-week
period ended June 23, 2001 to $8,284,000 for the thirteen-week period ended June
29, 2002. This planned increase was primarily due to expenses incurred in the
clinical development of Ramoplanin of approximately $3,229,000, as well as
increased investment in our internal drug discovery programs, specifically in
the area of anti-infectives and chronic human diseases, of $1,327,000. These
increases in research and development expenses were partially offset by a
decline in research funded under our product discovery alliances of
approximately $711,000.
Selling, general and administrative expenses decreased slightly from
$2,190,000 for the thirteen-week period ended June 23, 2001 to $2,188,000 for
the thirteen-week period ended June 29, 2002.
Interest Income and Expense
Interest income decreased 50% from $987,000 for the thirteen-week period
ended June 23, 2001 to $495,000 for the thirteen-week period ended June 29, 2002
reflecting fluctuations in interest rates, as well as lower levels of funds
available for investment.
Interest expense increased 196% from $212,000 for the thirteen-week period
ended June 23, 2001 to $628,000 for the thirteen-week period ended June 29,
2002. The increase was due to an increase in our outstanding balances under
long-term obligations from approximately $7.8 million at June 23, 2001 to $21.2
million at June 29, 2002. The increase in our long-term obligations resulted
primarily from the sale of convertible notes payable in March 2002 in a private
placement transaction, which resulted in gross proceeds of $15 million. Interest
expense also includes approximately $204,000 related to the amortization of
warrants issued in connection with the convertible notes payable.
Twenty-Six Week Periods Ended June 23, 2001 and June 29, 2002
Revenues
Total revenues decreased 38% from $19,480,000 for the twenty-six week
period ended June 23, 2001 to $12,149,000 for the twenty-six week period ended
June 29, 2002. BioPharmaceutical revenues decreased 60% from $11,017,000 for the
twenty-six week period ended June 23, 2001 to $4,362,000 for the twenty-six week
period ended June 29, 2002 primarily due to milestone payments earned in the
twenty-six week period of last year under our product discovery alliances with
Schering-Plough and Wyeth and the absence of such milestone payments in the
corresponding period of the current year.
Revenues from GenomeVision Services decreased 8% from $8,463,000 for the
twenty-six week period ended June 23, 2001 to $7,788,000 for the twenty-six week
period ended June 29, 2002 primarily due to a decrease in subscription fees
earned on our PathoGenome database business as a result of third parties not
renewing our database subscription.
Costs and Expenses
Total costs and expenses increased 43% from $19,198,000 for the twenty-six
week period ended June 23, 2001 to $27,433,000 for the twenty-six week period
ended June 29, 2002 primarily due to an increase in research and development
expenses described below.
16
Cost of services remained relatively constant from $7,112,000 for the
twenty-six week period ended June 23, 2001 to $7,089,000 for the twenty-six week
period ended June 29, 2002.
Research and development expenses include internal research and
development, research funded pursuant to arrangements with our strategic
alliance partners, as well as clinical development costs and expenses. Research
and development expenses increased 95% from $8,261,000 for the twenty-six week
period ended June 23, 2001 to $16,098,000 for the twenty-six week period ended
June 29, 2002. This planned increase was primarily due to expenses incurred in
the clinical development of Ramoplanin of approximately $6,338,000, as well as
increased investment in our internal drug discovery programs, specifically in
the area of anti-infectives and chronic human diseases, of $2,286,000. These
increases in research and development expenses were partially offset by a
decline in research funded under our product discovery alliances of
approximately $787,000.
Selling, general and administrative expenses increased 11% from $3,825,000
for the twenty-six week period ended June 23, 2001 to $4,246,000 for the
twenty-six week period ended June 29, 2002 reflecting an expansion in the areas
of corporate development and sales and marketing. The increase consisted of an
increase in payroll and related expenses.
Interest Income and Expense
Interest income decreased 52% from $2,131,000 for the twenty-six week
period ended June 23, 2001 to $1,026,000 for the twenty-six week period ended
June 29, 2002 reflecting fluctuations in interest rates, as well as lower levels
of funds available for investment.
Interest expense increased 121% from $381,000 for the twenty-six week
period ended June 23, 2001 to $844,000 for the twenty-six week period ended June
29, 2002. The increase was due to an increase in our outstanding balances under
long-term obligations from approximately $7.8 million at June 23, 2001 to $21.2
million at June 29, 2002. The increase in our long-term obligations resulted
primarily from the sale of convertible notes payable in March 2002 in a private
placement transaction, which resulted in gross proceeds of $15 million. Interest
expense also includes approximately $204,000 related to the amortization of
warrants issued in connection with the convertible notes payable.
Liquidity and Capital Resources
Our primary sources of cash have been payments received from product
discovery alliances, subscription fees, government grants, borrowings under
equipment lending facilities and capital leases and proceeds from sale of debt
and equity securities.
As of June 29, 2002, we had cash, cash equivalents, restricted cash and
short-term and long-term investments of approximately $67,370,000. On March 5,
2002, we sold convertible notes payable to two institutional investors in a
private placement transaction, raising $15 million in gross proceeds. The
convertible notes payable may be converted into shares of our common stock at
the option of the holder, at a price of $8.00 per share, subject to certain
adjustments. The maturity date of the convertible notes payable is December 31,
2004, provided, that if any time on or after December 31, 2003 we maintain a net
cash balance (i.e., cash and cash equivalents and investments less obligations
for borrowed money bearing interest) of less than $35 million, then the holders
of the convertible notes payable can require that all or any part of the
outstanding principal balance of the notes payable plus all accrued but unpaid
interest be repaid. Interest on the notes payable accrues at 6% annually and the
interest is payable, in cash or in stock, semi-annually on June 30 or December
31 of each year. On June 30, 2002, the first interest payment on the convertible
notes payable was due and was paid by issuing 120,986 shares of the Company's
common stock to the holders of the notes payable. The investors also received a
warrant to purchase up to an aggregate of 487,500 shares of common stock at an
exercise price of $8.00 per share, subject to certain adjustments. The warrant
is exercisable at the time the convertible notes payable are converted or if
certain other redemptions or repayments of the convertible notes payable occur
and will terminate upon the earlier of four years from date of such conversion
and December 31, 2008. The warrant was valued, using the Black-Scholes option
pricing model, at $1,736,000. The amount was recorded as a discount to long-term
debt and will be amortized to interest expense over the term of the convertible
notes payable. Additionally, the Company issued a warrant to purchase up to
100,000 shares of common stock at an exercise price of $15.00 per share to its
placement agent in this transaction.
17
The warrant is exercisable over a three year term commencing upon issuance. This
warrant was valued, using Black-Scholes option pricing model at $244,000. This
amount is included in deferred issuance costs and will be amortized to interest
expense over the term of the convertible notes payable.
As of June 29, 2002, we had various arrangements under which we financed
certain office and laboratory equipment and leasehold improvements. We had an
aggregate of approximately $6,225,000 outstanding under these borrowing
arrangements at June 29, 2002. This amount is repayable over the next 31 months,
of which $3,182,000 is repayable over the next 12 months. Under these
arrangements, we are required to maintain certain financial ratios, including
minimum levels of unrestricted cash. We had no additional borrowing capacity
under these capital lease agreements at June 29, 2002.
Our operating activities used cash of approximately $12,729,000 for the
twenty-six week period ended June 29, 2002 primarily due to an increase in our
net loss, accounts receivable, and unbilled costs and fees, as well as a
decrease in deferred revenue. The increase in unbilled costs and fees reflect
higher unbilled costs and fees under our government sequencing business and our
product discovery alliances with Schering-Plough. These uses of cash were
partially offset by a decrease in interest receivable, prepaid expenses and
other current assets, as well as an increase in accounts payable and accrued
liabilities. The increase in accrued liabilities reflects primarily accrued
expenses associated with the clinical development of Ramoplanin. Our operating
activities provided cash of approximately $4,465,000 for the twenty-six week
period ended June 23, 2001.
Our investing activities used cash of approximately $318,000 for the
twenty-six week period ended June 29, 2002 through the purchases of marketable
securities and equipment and additions to leasehold improvements and an increase
in other assets. The increase in other assets in 2002 reflects the inclusion of
deferred issuance costs associated with the convertible notes payable, which
will be amortized to interest expense over the term of the convertible notes
payable. These uses of cash were partially offset by the conversion of
marketable securities to cash and cash equivalents. Our investing activities
provided cash of approximately $4,917,000 for the twenty-six week period ended
June 23, 2001 through the conversion of marketable securities to cash and cash
equivalents, partially offset by purchases of marketable securities and
equipment and additions to leasehold improvements. deferred issuance costs and
will be amortized to interest expense over the term of the convertible notes
payable.
Capital expenditures totaled approximately $2.2 million for the twenty-six
week period ended June 29, 2002, consisting of leasehold improvements and
purchases of laboratory, computer, and office equipment. We utilized an existing
line of credit to finance all of these capital expenditures. We currently
estimate that we will acquire an additional $2,800,000 in capital equipment in
2002 consisting primarily of computers, laboratory equipment, and additions to
leasehold improvements.
Our financing activities provided cash of approximately $15,864,000 for
the twenty-six week period ended June 29, 2002 primarily from proceeds received
from the sale of convertible notes payable totaling $15 million in gross
proceeds, as well as proceeds received from entering into an additional credit
line for $3,500,000, of which $500,000 was used to refinance a portion of an
existing line of credit. These financing activities were partially offset by
payments of long-term obligations of $2,908,000. Our financing activities
provided cash of approximately $579,000 for the twenty-six week period ended
June 23, 2001 primarily from proceeds received from an equipment financing
arrangement and the exercise of stock options, partially offset by payments of
long-term obligations and notes receivable from an officer.
At December 31, 2001, we had net operating loss and tax credits
(investment and research) carryforwards of approximately $93,767,000 and
$6,642,000, respectively, available to reduce federal taxable income and federal
income taxes, respectively, if any. Net operating loss carryforwards are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited, in the event of certain cumulative changes in ownership interests of
significant shareholders over a three-year period in excess of 50%.
Additionally, certain of these losses are expiring due to the limitations of the
carryforward period.
We believe that our existing capital resources are adequate for
approximately two years under our current rate of investment in research and
development. There is no assurance, however, that changes in our plans or events
affecting our operations will not result in accelerated or unexpected
expenditures.
18
We plan to continue to invest in our internal research and development
programs, including our lead candidate, Ramoplanin, currently in Phase III
clinical development.
We expect to seek additional funding in the future through public or
private financing. Additional financing may not be available when needed, or if
available, it may not be on terms acceptable to us. To the extent that we raise
additional capital by issuing equity or convertible debt securities, ownership
dilution to stockholders will result.
We generally place our marketable security investments in high quality
credit instruments, as specified in our investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, issuer, and type of
instrument. We do not expect any material loss from our marketable security
investments and therefore believe that our potential interest rate exposure is
limited.
Special Note Concerning Forward-Looking Statements
This Form 10-Q and documents we have filed with the Securities and Exchange
Commission contain forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements represent our management's judgment regarding future
events. Forward-looking statements typically are identified by use of terms such
as "may," "will," "should," "plan," "expect," "intend," "anticipate,"
"estimate," and similar words, although some forward-looking statements are
expressed differently. We do not plan to update these forward-looking
statements. You should be aware that our actual results could differ materially
from those contained in the forward looking statements due to a number of risks
affecting our business. These risk factors include risks related to our lead
product candidate, Ramoplanin, such as (i) our inability to obtain regulatory
approval to commercialize Ramoplanin due to negative, inconclusive or
insufficient clinical data and (ii) delays in the progress of our clinical trial
for Ramoplanin, and increased cost, due to the pace of enrollment of patients in
the trial or fluctuations in the infection rate of enrolled patients. We are
also subject to risks related to our inability or the inability of our alliance
partners to (i) successfully develop products based on our genomics information,
(ii) obtain the necessary regulatory approval for such products, (iii)
effectively commercialize any products developed before our competitors are able
to commercialize competing products or (iv) obtain and enforce intellectual
property rights. In addition, we are subject to the risk factors set forth in
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 and those set forth in other filings that we may make with the
Securities and Exchange Commission from time to time.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our market risks, and the ways we manage them, are summarized in
management's discussion and analysis of financial condition and results of
operations as of December 31, 2001, included in the Company's Form 10-K for the
year ended December 31, 2001. There have been no material changes in the first
six months of 2002 to such risks or our management of such risks.
19
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 25, 2002. At the
meeting, shareholders took the following actions:
1) Election of Directors.
------------------------- --------------------------- ------------------------
Name of Nominee Shares Voted For Withhold Authority
------------------------- --------------------------- ------------------------
Marc B. Garnick 18,064,181 357,290
------------------------- --------------------------- ------------------------
Robert J. Hennessey 18,381,154 40,317
------------------------- --------------------------- ------------------------
Philip J. Leder 18,378,011 43,460
------------------------- --------------------------- ------------------------
Lawrence Levy 18,047,263 374,208
------------------------- --------------------------- ------------------------
Steven M. Rauscher 18,382,366 39,105
------------------------- --------------------------- ------------------------
Norbert Riedel 18,387,681 33,790
------------------------- --------------------------- ------------------------
David K. Stone 18,061,261 360,210
------------------------- --------------------------- ------------------------
2) To approve an amendment to the 2000 Employee Stock Purchase Plan increasing
from 250,000 to 500,000 the number of shares of common stock, par value $ 0.10
per share, reserved for issuance under the plan.
For Against Abstain
--- ------- -------
17,909,102 497,220 15,149
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act.
99.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
Report on Form 8-K filed June 24, 2002 to report the Company's change in
certifying accountant. Report on Form 8-K/A filed July 2, 2002 to report
the Company's change in certifying accountant, as amended.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
GENOME THERAPEUTICS CORP.
/s/ Stephen Cohen
Stephen Cohen, SVP & CFO
(Principal Financial Officer)
August 13, 2002
21