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: September 29, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BEAVER STREET;
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WALTHAM, MASSACHUSETTS 02453
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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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 22,765,285
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$.10 PAR VALUE Outstanding November 9, 2001
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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, 2000 and September 29, 2001 3
Consolidated Statements of Operations
for the four week period ended June 23, 2001
and the thirteen and thirty-nine week periods ended
September 23, 2000 and September 29, 2001 4
Consolidated Statements of Cash Flows for the four week
period ended June 23, 2001 and the thirty-nine week
periods ended September 23, 2000 and September 29, 2001 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
---------------------------------------------------------------------------------------------
December 31, September 29,
2000 2001
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $10,095,817 $26,147,252
Marketable securities 51,743,917 31,327,186
Interest receivable 1,466,808 870,756
Accounts receivable 827,106 288,446
Unbilled costs and fees 796,072 422,154
Prepaid expenses and other current assets 900,547 1,039,985
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Total current assets 65,830,267 60,095,779
Equipment, furniture and leasehold improvements, at cost:
Laboratory and scientific equipment 18,823,063 20,559,610
Leasehold improvements 8,302,308 8,759,588
Equipment and furniture 1,134,320 1,267,854
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28,259,691 30,587,052
Less accumulated depreciation and amortization 15,225,148 18,010,641
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13,034,543 12,576,411
Restricted cash 200,000 200,000
Long-term marketable securities 10,970,153 14,850,174
Other assets 216,041 234,723
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Total assets $90,251,004 $87,957,087
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $1,296,511 $1,536,313
Accrued expenses 3,712,757 3,673,659
Deferred revenue 4,720,234 2,588,564
Current maturities of long-term obligations 4,499,696 3,917,290
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Total current liabilities 14,229,198 11,715,826
Long-term obligations, net of current maturities 3,334,354 2,587,860
Stockholders' equity 72,687,452 73,653,401
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Total liabilities and stockholders' equity $90,251,004 $87,957,087
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See Notes to Consolidated Condensed Financial Statements.
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------------------------------------------------
Four Week
Period Ended Thirteen Week Period Ended Thirty-Nine Week Period Ended
June 23, 2001 Sept. 23, 2000 Sept. 29, 2001 Sept. 23, 2000 Sept. 29, 2001
----------------------------------------------------------------------------------------------- ----------------------------------
Revenues:
Contract research, licenses, milestones and
subscription fees $ 7,226,276 $ 5,924,851 $ 7,378,035 $ 19,108,981 $ 26,858,162
Costs and Expenses:
Research and development 2,337,214 6,505,355 9,880,970 19,275,547 25,253,739
Selling, general and administrative 863,752 1,711,451 2,559,004 4,745,539 6,384,359
----------- ------------ ------------ ------------- -------------
Total costs and expenses 3,200,966 8,216,806 12,439,974 24,021,086 31,638,098
Income (Loss) from operations 4,025,310 (2,291,955) (5,061,939) (4,912,105) (4,779,936)
Interest income 303,975 1,180,363 1,055,631 2,100,165 3,186,149
Interest expense (80,568) (210,751) (174,269) (627,107) (555,734)
----------- ------------ ------------ ------------- -------------
Net interest income 223,407 969,612 881,362 1,473,058 2,630,415
----------- ------------ ------------ ------------- -------------
Net Income (loss) 4,248,717 ($1,322,343) ($4,180,577) ($3,439,047) ($2,149,521)
----------- ------------ ------------ ------------- -------------
Net Income (Loss) per Common Share:
Basic $0.19 ($0.06) ($0.18) ($0.16) ($0.10)
----------- ------------ ------------ ------------- -------------
Diluted $0.18 ($0.06) ($0.18) ($0.16) ($0.10)
----------- ------------ ------------ ------------- -------------
Weighted average common shares outstanding:
Basic 22,484,080 22,163,366 22,685,660 21,030,081 22,515,638
----------- ------------ ------------ ------------- -------------
Diluted 23,850,825 22,163,366 22,685,660 21,030,081 22,515,638
----------- ------------ ------------ ------------- -------------
See Notes to Consolidated Condensed Financial Statements.
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Four Week
Period Ended Thirty-nine Week Periods Ended
June 23, September 23, September 29,
2001 2000 2001
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Cash Flows from Operating Activities:
Net Income (loss) $4,248,717 ($3,439,047) ($2,149,521)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 372,775 3,319,675 3,601,072
Loss on disposal of fixed assets 868 71,975 27,083
Stock-based compensation expense 41,307 736,695 418,079
Changes in assets and liabilities:
Interest receivable (85,894) (168,022) 596,052
Accounts receivable (102,585) 728,658 538,660
Unbilled costs and fees 188,028 1,413,792 373,918
Prepaid expenses and other current assets 127,810 71,719 (139,438)
Accounts payable (416,932) 325,398 239,802
Accrued expenses 151,164 510,562 (39,098)
Deferred revenue (1,090,465) (1,974,660) (2,131,670)
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Total adjustments (813,924) 5,035,792 3,484,460
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Net cash provided by operating activities 3,434,793 1,596,745 1,334,939
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Cash Flows from Investing Activities:
Purchases of marketable securities (6,044,095) (39,934,348) (33,446,290)
Maturities of marketable securities 2,886,000 24,578,316 49,983,000
Purchases of equipment, furniture and leasehold improvements (139,494) 732,050 (408,582)
(Increase) decrease in other assets 2,875 37,542 (18,682)
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Net cash (used in) provided by investing activities (3,294,714) (14,586,440) 16,109,446
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Cash Flows from Financing Activities:
Proceeds from sale of common stock 0 44,722,729 1,509,084
Proceeds from exercise of stock options 43,084 3,281,755 871,228
Proceeds from employee stock purchase plan 0 215,556 317,079
Payments on long-term obligations (328,844) (3,366,543) (4,090,341)
-------------- -------------- ------------
Net cash (used in) provided by financing activities (285,760) 44,853,497 (1,392,950)
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Net Increase (Decrease) in Cash and Cash Equivalents (145,681) 31,863,802 16,051,435
Cash and Cash Equivalents, at beginning of period 20,201,979 5,015,574 10,095,817
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Cash and Cash Equivalents, at end of period $20,056,298 $36,879,376 $26,147,252
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Supplemental Disclosure of Cash Flow Information:
Interest paid during period $80,568 $627,107 $555,734
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Income taxes paid during period $12,500 $9,262 $50,000
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Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital lease obligations $0 $3,394,937 $2,761,441
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See Notes to Consolidated Condensed Financial Statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of 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 entries) necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in the 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 November 22, 2000.
On July 24, 2001 the Board of Directors of Genome Therapeutics Corp.
approved a change of the Company's fiscal year end from August 31 to December
31, as of the fiscal year ended December 31, 2000. A transition report on Form
10-Q covering the transition period from September 1, 2000 through December 31,
2000, was filed with the Securities and Exchange Commission on September 7,
2001; this filing included financial statements restated to provide financial
information for the four months ended December 31, 2000 and 1999.
The Company has included financial information for the four week period
ended June 23, 2001 in this Form 10-Q filing since this information was not
included in past quarterly filings with the Securities and Exchange
Commission due to the change in the Company's fiscal year end, as mentioned
above.
2. REVENUE RECOGNITION
Revenues consist of contract research, non-refundable license fees,
milestone payments and subscription fees from the PathoGenomeTM Database.
These revenues are derived from alliances with pharmaceutical companies,
government grants and contracts, and fees received from custom gene sequencing
and analysis. The Company follows the provisions of Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition. In accordance with SAB No. 101, revenues
from contract research derived from alliances with pharmaceutical companies,
from government grants and contracts, and from custom gene sequencing and
analysis are recognized over the respective contract periods as the services
are provided. Non-refundable license fees are recognized ratably over the life
of the alliance. Subscription fees from the PathoGenome Database are
recognized ratably over the life of the subscription. Milestone payments, that
are deemed to be substantive from research and development alliances, are
recognized when they are achieved. Unbilled costs and fees represent revenue
recognized prior to billing. Deferred revenue represents amounts billed and
received prior to revenue recognition.
3. NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (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 by the weighted average common shares outstanding during the
period. Diluted earnings per share was determined by dividing net income by the
weighted average common and common equivalent shares outstanding during the
period using the treasury stock method. Antidilutive securities which consist
of stock options, restricted stock and directors' deferred stock that were not
included in diluted net loss per common share were 3,328,233 and 2,422,116 at
September 29, 2001 and September 23, 2000, respectively.
6
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At December 31, 2000 and September 29, 2001, the
Company's cash equivalents and marketable securities 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 three months or less. Marketable
securities are investment securities with original maturities of greater than
three months. Cash equivalents are carried at cost, which approximates market
value, and consist of money market funds, repurchase agreements and debt
securities. Marketable securities are recorded at amortized cost, which
approximates market value. The Company has not recorded any realized gains or
losses on its marketable securities. Marketable securities consist of commercial
paper and U.S. government debt securities. The average maturity of the
Company's marketable securities is approximately 9 months at September 29, 2001.
At December 31, 2000 and September 29, 2001, the Company's cash, cash
equivalents and marketable securities consisted of the following:
December 31, September 29,
2000 2001
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Cash and Cash Equivalents:
Cash.............................................. $ 9,245,817 $24,147,252
Debt securities................................... 850,000 2,000,000
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Total cash and cash equivalents........... $10,095,817 $26,147,252
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Marketable Securities:
Short-term securities............................. $51,743,917 $31,327,186
Long-term securities.............................. 10,970,153 14,850,174
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Total marketable securities............... $62,714,070 $46,177,360
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The Company has $200,000 in restricted cash in connection with certain
long-term obligations at December 31, 2000 and September 29, 2001 (see Note 9).
5. 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 significant 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,
cash equivalents and marketable securities balances with several nonaffiliated
institutions.
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:
Percentage of
Number of Total Revenues
Significant -----------------------
Customers A B C
---------------- --- --- ---
Thirteen week period ended:
September 23, 2000........................... 2 33% 35% 6%
September 29, 2001........................... 2 53% 31% 5%
Thirty-nine week period ended:
September 23, 2000........................... 2 34% 35% 6%
September 29, 2001........................... 3 37% 26% 23%
7
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
Number of Total Accounts Receivable
Significant -------------------------------------
As of: Customers A B C D
--------------- -------- ------- ------ -------
September 23, 2000..................... 2 37% 55% 0% 0%
September 29, 2001..................... 3 34% 6% 15% 19%
6. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7. COMPREHENSIVE LOSS
The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 requires disclosure of all components of comprehensive income on an annual
and interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's total comprehensive net
income (loss) for the four week period ended June 23, 2001 and for the thirteen
and thirty-nine week periods ended September 23, 2000 and September 29, 2001
were the same as reported net income (loss) for those periods.
8. SEGMENT REPORTING
The Company applies 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 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 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 one operating segment. As a
result, the financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segment. All of the Company's revenues are generated in the United States and
all of its assets are located in the United States.
9. LONG-TERM OBLIGATIONS
On February 23, 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. On December 18, 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
an operating or capital lease. Borrowings under operating leases are payable in
24 monthly installments and capital leases are payable in 36 monthly
installments. As of
8
September 29, 2001, the Company has entered into $256,000 in operating leases
and $6,456,000 in capital leases. The interest rates under the capital leases
range from 7.50% to 10.37%. In addition, the Company had entered into other
capital lease arrangements under which it financed approximately $15,060,000 of
laboratory, computer and office equipment, as well as facility renovations.
These leases are payable in 36 to 48 monthly installments from date of
initiation. Interest rates range from 7.63% to 10.28%. Under several agreements,
we are required to maintain certain financial ratios pertaining to minimum cash
balances, tangible net worth and debt service coverage. As of September 29,
2001, the Company was in compliance with all of these covenants. The Company had
no additional borrowing capacity under these capital lease agreements at
September 29, 2001.
10. ALLIANCES
(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 to further develop and annotate the
Company's H. pylori genomic sequence database, identify therapeutic and vaccine
targets and develop appropriate biological assays. In August 1999, the Company
successfully concluded its portion of the research alliance and transitioned the
program to AstraZeneca for pre-clinical testing.
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 received $13.5 million in license fees, expense
allowances, milestone payments and research funding under the Astra agreement
through September 29, 2001.
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.
For the disclosed thirty-nine week periods ended September 29, 2001 and
September 23, 2000, the Company recorded revenue of $0 and $6,000, respectively,
under this agreement.
(B) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance and license
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 also granted Schering-Plough a
nonexclusive license to use the Company's bioinformatics systems for Schering-
Plough's internal use in connection with the genomic databases licensed to
Schering-Plough under the agreement and other genomic databases Schering-Plough
develops or acquires. The Company also 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.
9
Under this agreement, Schering-Plough paid an initial license fee and will
fund the research program through December 31, 2001. Under this agreement,
Schering-Plough agreed to pay the Company a minimum of $21.9 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 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 by the Company 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 from the Company. A total of $21.3
million had been received through September 29, 2001.
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $426,000 and $441,000, respectively, under
this agreement, which consisted of contract research revenue.
For the thirty-nine week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $1,275,000 and $1,420,000, respectively,
under this agreement, which consisted of contract research revenue.
In December 1996, the Company entered into its second strategic alliance
and license 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.
Under this agreement, Schering-Plough paid an initial license fee and an
expense allowance to the Company. Schering-Plough agreed to fund the research
program through at least December 2001. In addition, upon completion of certain
scientific developments, Schering-Plough will 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 $75.9 million,
excluding royalties. Of the total potential payments, approximately $31.4
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 $33.3 million has been received through
September 29, 2001.
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $1,499,000 and $1,145,000, respectively,
under this agreement, which consisted of contract research revenue.
For the thirty-nine week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $3,607,000 and $3,492,000, respectively,
under this agreement, which consisted of contract research revenue and milestone
payments.
On September 1997, the Company entered into a third strategic alliance and
license agreement with Schering-Plough to use genomics to discover and develop
new pharmaceutical products to treat fungal infections.
Under the agreement, the Company will employ 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.
10
Schering-Plough will receive exclusive access to the genomic information
developed in the alliance related to two fungal pathogens, Candida albicans and
Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right 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 December 2001. If all milestones are met and the
research program continues for its full term, total payments to the Company will
approximate $32.7 million, excluding royalties. Of the total potential payments,
$9.7 million represents contract research payments and $23.0 million represents
milestone payments based on achievement of research and product development
milestones. A total of $12.2 million has been received through September 29,
2001. Additionally, the Company entered into a subscription agreement with
Schering-Plough to provide Schering-Plough with nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome, and associated
information relating to microbial organisms (see Note 11).
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $356,000 and $482,000, respectively, under
this agreement, which consisted of contract research revenue.
For the thirty-nine week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $1,169,000 and $1,530,000, respectively,
under this agreement, which consisted of contract research revenue.
(C) 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
participating as part of an international consortium in a full-scale effort to
sequence the human genome. The Company is entitled to receive research and
development funding from the National Human Genome Research Institute (NHGRI) of
up to $17.4 million over a forty-four month period, of which $14.1 million is
appropriated through February 2002.
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 over three years with respect to this agreement, of which $9.3 million
is appropriated through November 2001. In August 2000, the Company was 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.
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $3,551,000 and $1,804,000, respectively,
under these agreements. For the thirty-nine week periods ended September 29,
2001 and September 23, 2000, the Company recorded revenue of $9,191,000 and
$6,087,000, respectively, under these agreements.
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.
(D) BIOMERIEUX ALLIANCE
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 11),
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 ratably over the four-year term of the agreement.
11
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $297,000 for each period under this
agreement, which consisted of contract research revenue and amortization of an
up-front license fee. For the thirty-nine week periods ended September 29, 2001
and September 23, 2000, the Company recorded revenue of $900,000 for each period
under this agreement, which consisted of contract research revenue and
amortization of an up-front license fee. A total of $3.2 million has been
received through September 29, 2001.
(E) WYETH-AYERST LABORATORIES
In December 1999, the Company entered into a strategic alliance with Wyeth-
Ayerst Laboratories 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-Ayerst'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-Ayerst 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.
The Company recorded revenue of $375,000 for both thirteen-week periods
ended September 29, 2001 and September 23, 2000, under this agreement, which
consisted of contract research revenue and amortization of an up-front license
fee.
For the thirty-nine week period ended September 29, 2001, the Company
recorded revenue of $6,125,000 under this agreement, which consisted of contract
research revenue, amortization of an up-front license fee and a $5.0 million
milestone payment. For the thirty-nine week period ended September 23, 2000,
the Company recorded revenue of $1,125,000 under this agreement, which consisted
of contract research revenue and amortization of an up-front license fee. A
total of $7.8 million has been received through September 29, 2001.
11. DATABASE SUBSCRIPTIONS
The Company has entered into a number of PathoGenomeTM 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.
For the thirteen-week periods ended September 29, 2001 and September 23,
2000, the Company recorded revenue of $412,000 and $950,000, respectively, under
these agreements. For the thirty-nine week periods ended September 29, 2001 and
September 23, 2000, the Company recorded revenue of $2,071,000 and $3,012,000,
respectively, under these agreements.
12. PRODUCT DEVELOPMENT
On October 8, 2001, subsequent to quarter-end, the Company had acquired an
exclusive license in the United States and Canada for a novel antibiotic,
Ramoplanin, from Biosearch Italia S.p.A
12
(Biosearch Italia). The Company will assume 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 the agreement, the Company has 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 to purchasing bulk
material from Biosearch Italia, the Company will fund the completion of clinical
trials and pay a royalty on product sales. The combined total of bulk sales
costs and royalties is expected to be 26% of the Company's net product sales.
13. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combination, and SFAS No. 142, Goodwill and Other Intangible
Assets. Statement No. 141 requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method of accounting.
Statement No. 142 discusses how intangible assets that are acquired should be
accounted for in financial statements upon their acquisition and also how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. Beginning on January 1,
2002, with the adoption of Statement No. 142, goodwill and certain purchased
intangibles existing on June 30, 2001, will no longer be subject to
amortization over their estimated useful life. Rather the goodwill and certain
purchased intangibles will be subject to an assessment for impairment based on
fair value. The provisions of Statement No. 142 are required to be applied
starting with the fiscal years beginning after December 15, 2001. The Company
does not expect adoption of these statements to have a material impact on its
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Under this statement it is required that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal transactions.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early adoption permitted. The Company does not expect
adoption of this statement to have a material impact on its financial position
or results of operations.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("we", "our", or "us") is a leader in the
commercialization of genomics-based drug discovery. We have over ten years of
experience in genomics research and have been one of the original recipients of
funding from the United States government under its genome programs. Our
commercial strategy is to use our genomics and related proprietary technologies
to identify and validate novel drug targets for commercialization. Our two areas
of scientific focus are the discovery and characterization of novel targets for
human diseases and infectious diseases. We also commercialize our sequencing
capabilities through our GenomeVisionTM Services business, which we established
in July 1999 to provide high quality, industrial scale sequencing to
pharmaceutical and biotechnology companies on a fee for service basis. In May
1997, we introduced a non-exclusive genetic database, the PathoGenomeTM
Database, which provides subscribers with genetic information to identify gene
targets. We believe that our genomic discoveries and information from our
database will lead to the development of novel therapeutics, vaccines, and
diagnostic products. To complement these established genomics programs, we
expanded our drug discovery pipeline in October 2001 with the acquisition of
Ramoplanin, a novel anti-infective in Phase III clinical trials for the
prevention of bloodstream infections caused by vancomycin-resistant enterococci
(VRE).
We receive payments from our strategic partners based on license fees,
contract research and milestone payments during the term of the alliance. In
addition, subscribers to our PathoGenome Database pay access fees for the
information they obtain. Once a product resulting from a research alliance or a
subscriber's use of the PathoGenome Database is commercialized, we are entitled
to receive royalty payments based upon product revenues. 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 the strategic
partners to conduct preclinical tests and clinical trials, obtain regulatory
clearances, manufacture, sell, and distribute the product. Accordingly, we do
not expect to receive royalties from these alliances for many years, if at all.
Additionally, we sell, as a contract service business, high quality genomic
sequencing information to third parties, including pharmaceutical companies,
biotechnology companies, governmental agencies, and academic institutions.
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 seven
strategic research 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 sponsored 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. We entered into an alliance with
Schering-Plough in December 1995. Under this alliance, Schering-Plough can use
our Staph. aureus genomic database to identify new gene targets for the
development of novel antibiotics. 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. 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-Ayerst 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 September 29, 2001, we had a total of seven
subscribers. Under our agreements, the subscribers receive non-exclusive access
to information relating to microbial organisms in our PathoGenome
14
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.
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, the government
named us as one of the nationally funded DNA sequencing centers of the
international Human Genome Project. We are participating in an international
consortium in a full-scale effort to sequence the human genome. We will receive
funding from the National Human Genome Research Institute (NHGRI) under the
Human Genome Project of up to $17.4 million over a forty-four month period, of
which $14.1 million is appropriated through February 2002. In October 1999,
NHGRI appointed us as one of the initial centers in the Mouse Genome Sequencing
Network. The NHGRI agreed to provide us with funding under this program of up to
$13.4 million over a three-year period, of which $9.3 million is appropriated
through November 2001. In August 2000, we were named as one of two primary
centers for the Rat Sequencing Program by NHGRI. As part of the agreement, we
switched our focus from the mouse genome to the rat genome and agreed to use all
remaining funding under the mouse genome award and a portion of the remaining
funding under the human genome award to participate in the rat genome
initiative. These programs are subject to annual appropriations by the
government based upon the availability of government funds and the achievement
by us of certain milestones.
On October 8, 2001, subsequent to quarter-end, we acquired an exclusive
license in the United States and Canada for a novel antibiotic, Ramoplanin, from
Biosearch Italia S.p.A (Biosearch Italia). We will assume 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 Italia will provide
the bulk material for manufacture of the product and will retain all other
rights to market and sell Ramoplanin. In addition to purchasing bulk material
from Biosearch Italia, we will fund the completion of clinical trials, make
payments upon achievements of specified milestones and pay a royalty to
Biosearch Italia on product sales.
We have incurred significant operating losses since our inception. As of
September 29, 2001, we had an accumulated deficit of approximately $74 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
contracts and 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, rapid technological change, history of operating losses, need for
future capital, competition, patent and proprietary rights, dependence on key
personnel, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, healthcare reform and related matters, availability of, and competition
for, unique family resources, and volatility of our stock.
RESULTS OF OPERATIONS
THIRTEEN-WEEK PERIODS ENDED SEPTEMBER 23, 2000 AND SEPTEMBER 29, 2001
REVENUES
Contract research, licenses, milestones and subscription fees increased 25%
from $5,925,000 for the thirteen-week period ended September 23, 2000 to
$7,378,000 for the thirteen-week period ended September 29, 2001. The increase
in contract research, licenses, milestones and subscription fees was primarily
attributable to an increase in revenue recognized under our GenomeVision
Services
15
business, which provides sequencing services for the National Human Genome
Research Institute as a participant in the International Human Genome Project
and the Rat Genome Sequencing projects, as well as our biotechnology and
pharmaceutical customers.
COSTS AND EXPENSES
Total costs and expenses increased 51% from $8,217,000 for the thirteen-
week period ended September 23, 2000 to $12,440,000 for the thirteen-week period
ended September 29, 2001. Research and development expense, which includes
internal research and development and research funded pursuant to arrangements
with our strategic alliances, commercial sequencing customers and the U.S.
government, increased 52% from $6,505,000 in the thirteen-week period ended
September 23, 2000 to $9,881,000 for the thirteen-week period ended September
29, 2001. The increase was primarily due to an increase in costs and expenses
associated with an expansion of our internal research programs, specifically in
the area of infectious diseases and human gene discovery, as well as an increase
in revenues derived from our GenomeVision Services business, as mentioned above.
The increase consisted of an increase in payroll and related expenses,
laboratory supplies and overhead expenses related to our operations.
Selling, general and administrative expenses increased 50% from $1,711,000
for the thirteen-week period ended September 23, 2000 to $2,559,000 for the
thirteen-week period ended September 29, 2001 reflecting primarily an expansion
in the areas of corporate development, sales and marketing and clinical
development. The increase consisted of an increase in payroll and related
expenses, as well as recruiting and consulting expenses.
INTEREST INCOME AND EXPENSE
Interest income decreased 11% from $1,180,000 for the thirteen-week period
ended September 23, 2000 to $1,056,000 for the same period ended September 29,
2001, reflecting primarily a lower interest earned on investments.
Interest expense decreased 18% from $211,000 for thirteen-week period ended
September 23, 2000 to $174,000 for the same period ended September 29, 2001, due
primarily to a decrease in outstanding balances under our long-term obligations.
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 23, 2000 AND SEPTEMBER 29, 2001
REVENUES
Contract research, licenses, milestones and subscription fees increased 41%
from $19,109,000 for the thirty-nine week period ended September 23, 2000 to
$26,858,000 for the thirty-nine week period ended September 29, 2001. The
increase was primarily attributable to a $5 million milestone payment received
in June 2001 from our strategic partner, Wyeth-Ayerst, associated with the
identification of a high bone mass gene under our osteoporosis program. The
increase in contract research, licenses, milestones and subscription fees was
also due to an increase in revenue recognized under our GenomeVision Services
business, which provides sequencing services for the National Human Genome
Research Institute as a participant in the International Human Genome Project
and the Rat Genome Sequencing projects, as well as our biotechnology and
pharmaceutical customers.
COSTS AND EXPENSES
Total costs and expenses increased 32% from $24,021,000 for the thirty-nine
week period ended September 23, 2000 to $31,638,000 for the thirty-nine week
period ended September 29, 2001. Research and development expense, which
includes internal research and development and research funded pursuant to
arrangements with our strategic alliances, commercial sequencing customers and
the U.S. government, increased by 31% from $19,276,000 for the thirty-nine week
period ended September 23, 2000 to $25,254,000 for the thirty-nine week period
ended September 29, 2001. The increase was primarily attributable to an
expansion of our internal research programs, specifically in
16
the area of infectious diseases and human gene discovery, as well as an increase
in revenues derived from our GenomeVision Services business, as mentioned above.
The increase consisted of an increase in payroll and related expenses,
laboratory supplies and overhead expenses related to our operations.
Selling, general and administrative expenses increased 35% from $4,746,000
for the thirty-nine week period ended September 23, 2000 to $6,384,000 for the
thirty-nine week period ended September 29, 2001 reflecting primarily an
expansion in the areas of corporate development, sales and marketing and
clinical development. The increase consisted of an increase in payroll and
related expenses, as well as recruiting and consulting expenses.
INTEREST INCOME AND EXPENSE
Interest income increased 52% from $2,100,000 for the thirty-nine week
period ended September 23, 2000 to $3,186,000 for the same period ended
September 29, 2001, reflecting primarily an increase in funds available for
investment. The increase in funds available for investment was primarily due to
proceeds received last year from the sale of common stock.
Interest expense decreased 11% from $627,000 for the thirty-nine week
period ended September 23, 2000 to $556,000 for the same period ended September
29, 2001 due primarily to a decrease in outstanding balances under our long-term
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have been payments received from strategic
alliances, subscription fees, government grants and contracts, borrowings under
equipment lending facilities and capital leases and proceeds from the sale of
equity securities.
As of September 29, 2001, we had cash, cash equivalents, restricted cash,
and short-term and long-term marketable securities of approximately $72,525,000.
In July 2001, we sold 127,500 shares of common stock in a series of transactions
through the NASDAQ National Market, resulting in net proceeds of $1,672,000. In
fiscal 2000, we sold 1,500,000 shares of common stock in a series of
transactions through the NASDAQ National Market, resulting in net proceeds of
$44,723,000. During fiscal 2000, we issued 1,532,302 shares of common stock
related to the exercise of stock options, resulting in net proceeds of
approximately $4,155,000. In fiscal 2000, we also sold 678,610 shares of common
stock to bioMerieux, a strategic alliance partner, resulting in net proceeds of
approximately $3,732,000. For the thirty-nine week period ended September 29,
2001, we issued 342,893 shares of common stock related to the exercise of stock
options and the employee stock purchase plan, resulting in proceeds received of
$1,188,000.
We have various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. At September 29, 2001, we had
an aggregate of $6,505,000 outstanding under our borrowing arrangements, which
are repayable over the next 36 months, of which $3,917,000 is repayable within
the next 12 months. Under these arrangements, we are required to maintain
certain financial ratios, including minimum levels of tangible net worth, total
indebtedness to tangible net worth, minimum cash level, debt service coverage
and minimum restricted cash balances. As of September 29, 2001, the Company was
in compliance with all of these covenants. The Company had no additional
borrowing capacity under these capital lease agreements at September 29, 2001.
Our operating activities provided cash of $1,335,000 for the thirty-nine
week period ended September 29, 2001, primarily due to a decrease in interest
receivable, accounts receivable and unbilled costs & fees, an increase in
accounts payable, as well as noncash expenditures such as depreciation and
amortization, stock-based compensation expense, and loss on disposal of fixed
assets. Cash provided by operations for the thirty-nine week period ended
September 29, 2001 was partially offset by our net loss, and an increase in
prepaid expenses and other current assets, as well as a decrease in deferred
revenue. Our operating activities provided cash of $1,597,000 for the thirty-
nine week period ended September 23, 2000, primarily due to a decrease in
accounts receivable, unbilled costs & fees, an increase in accounts payable and
accrued expenses, as well as noncash expenditures
17
such as depreciation and amortization, stock-based compensation expense, and
loss on disposal of fixed assets. Cash provided by operations for the thirty-
nine week period ended September 23, 2000 was partially offset by our net loss,
and a decrease in deferred revenue.
Our investing activities provided cash of $16,109,000 for the thirty-nine
week period ended September 29, 2001 from the conversion of marketable
securities to cash and cash equivalents, partially offset by the purchase of
marketable securities and property and equipment. Our investing activities used
cash of $14,586,000 for the thirty-nine week period ended September 23, 2000
from the purchase of marketable securities, partially offset by the conversion
of marketable securities to cash and cash equivalents and net proceeds received
under equipment finance arrangments.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $3,395,000 for the thirty-nine week period ended
September 29, 2001. Purchases consisted primarily of laboratory and computer
equipment. We currently estimate that we will acquire an additional $1,500,000
in capital property and equipment in fiscal 2001 consisting primarily of
computer, laboratory equipment, and additions to leasehold improvement. We
intend to finance the majority of capital purchases made during the fourth
quarter of fiscal 2001 under new equipment financing arrangements, yet to be
negotiated.
Our financing activities used cash of $1,393,000 for the thirty-nine week
period ended September 29, 2001, primarily for payments of long-term
obligations, partially offset by proceeds received from the sale of equity
securities, exercise of stock options, and the sale of common stock under the
employee stock purchase plan. Our financing activities provided cash of
approximately $44,853,000 for the thirty-nine week period ended September 23,
2000, primarily from the sale of equity securities, exercise of stock options,
sale of common stock under the employee stock purchase plan, net of payments of
long-term obligations.
At August 31, 2000, we had net operating loss and tax credit (investment
and research) carryforwards of $87,055,000 and $3,071,000, 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 carryforwards period.
We expect development expenditures associated with the acquisition of
Ramoplanin to be approximately $15-20 million through the end of 2002. We
believe that under our current rate of investment in both clinical development
and genomics research and development, our existing capital resources are
adequate for the foreseeable future. There is no assurance, however, that
changes in our plans or events affecting our operations will not result in
accelerated or unexpected expenditures.
We may 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 do not currently use derivative financial instruments. 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.
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 judgement 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. All forward-looking statements, other than statements of
historical fact, included in this report regarding our financial
18
position, business strategy and plans or objectives for future operations are
forward-looking statements. We cannot guarantee the accuracy of the forward-
looking statements, nor do we 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, including the ability of the Company and its alliance partners to
(i) successfully develop products based on the Company's genomic information,
(ii) obtain the necessary governmental approvals, (iii) effectively
commercialize any products developed before its competitors and (iv) obtain and
enforce intellectual property rights, as well as the risk factors set forth in
the Exhibit 99 to the Company's Annual Report on Form 10-K for the year ended
August 31, 2000 and those set forth in other filings that we may make with the
Securities and Exchange Commission from time to time.
19
Part II
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
---------
3.1 By-laws of Genome Therapeutics Corp. (amended through July 24,
2001)
10.2 Employment letter with Steven M. Rauscher, dated June 15, 2001
10.3 Employment letter with Stephen Cohen, dated June 15, 2001
10.5 Employment letter with Richard Labaudinere, PhD, dated June 15,
2001
b) Reports on Form 8-K
-------------------
Report on Form 8-K filed on July 2, 2001 to report the Company's
engagement letter with Tucker Anthony Sutro to retain Tucker Anthony
as our non-exclusive agent in connection with the sale of up to
1,950,000 registered shares of Genome Therapeutics Corp.
Report on Form 8-K filed on July 9, 2001 to report the Company's press
release announcing the financial results for the third quarter of its
fiscal 2001.
Report on Form 8-K filed on July 16, 2001 to report the Company's
press release announcing the extension of its collaboration with
Wyeth-Ayerst Laboratories.
Report on Form 8-K filed on August 9, 2001 to report that the
Company's Board of Directors had approved a change in the Company's
fiscal year from August 31 to December 31, as of fiscal year ended
December 31, 2000.
20
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)
Date: November 13, 2001
21