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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission file number: 0-10824
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GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
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Massachusetts 04-2297484
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
100 Beaver Street, Waltham, Massachusetts 02453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (781) 398-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 18, 2002 was approximately $70,316,000.
The number of shares outstanding of the registrant's common stock as of
June 18, 2002 was 22,837,573.
Documents Incorporated By Reference Portions of the registrant's proxy
statement for use at its Annual Meeting to be held on June 25, 2002 are
incorporated by reference into Part III.
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Introductory Note
In 1996 and 1997, the Company accounted for two stock options granted to the
Company's former chief executive officer on a fixed plan basis. During the
second quarter of 2002, the Company and its auditors determined that it was
more appropriate to have accounted for these options on a variable plan basis
in 1996 and 1997 in light of a cashless exercise provision contained in these
options. As a result of required non cash adjustments to reflect this change in
accounting treatment, the Company's net loss for the year ended December 31,
1996 was understated and the Company's net loss for the year ended December 31,
1997 was overstated. As reflected below, these changes have no cash impact to
the Company and have no impact on Total Shareholders' Equity.
A summary of the cumulative impact of the restatement on the Company's
financial statements as of December 31, 2001 and December 31, 2000 is as
follows:
As previously
reported As restated
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December 31, 2001
Accumulated deficit....... $(82,053,635) $(91,758,375)
Additional paid in capital 146,509,995 156,214,735
Total shareholders' equity 66,731,938 66,731,938
As previously
reported As restated
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December 31, 2000
Accumulated deficit....... $(71,963,333) $(81,668,073)
Additional paid in capital 143,018,548 152,723,288
Total shareholders' equity 72,687,452 72,687,452
This Annual Report on Form 10-K/A amends the financial information set forth
above contained in Items 6, 7, and 8 of the Company's Annual Report on Form
10-K previously filed for the fiscal year ended December 31, 2001.
This Annual Report on Form 10-K/A only reflects the effects of the
restatement and does not otherwise reflect events occurring after the filing of
the original Annual Report on Form 10-K or otherwise modify or update those
disclosures.
1
ITEM 6. Selected Consolidated Financial Data
Only those numbers with an asterisk (*) have changed.
For the Year Ended December 31,
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1997 1998 1999 2000 2001
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Revenues:
BioPharmaceutical............ $ 11,132,294 $ 18,135,038 $18,162,056 $11,851,091 $ 18,438,286
GenomeVision(TM) Services.... 3,300,881 3,913,376 6,665,529 13,594,143 17,302,239
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Total revenues............. 14,433,175 22,048,414 24,827,585 25,445,234 35,740,525
Net loss...................... (12,274,795)* (12,967,676) (3,940,075) (5,846,839) (10,090,302)
Net loss per common share..... (0.69)* (0.71) (0.21) (0.27) (0.45)
Weighted average common shares
outstanding................. 17,771,824 18,289,644 18,627,045 21,376,685 22,572,427
As of December 31,
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Cash and cash equivalents, restricted
cash, warrant and long and short-
term investments................... $44,492,461 $30,816,859 $26,778,026 $73,009,887 $67,341,249
Working capital...................... 31,298,804 19,749,608 19,447,189 51,601,069 44,156,478
Total assets......................... 61,230,003 48,920,973 45,443,236 90,251,004 82,739,598
Shareholders' equity................. 40,089,689 27,557,237 28,846,957 72,687,452 66,731,938
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introductory Note: The only number in MD&A that has changed due to the
restatement is accumulated deficit as of December 31, 2001, which went from
$82.1 million to $91.8 million.
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-Ayerst
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, GenomeVision/TM/
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 PathoGenome/TM/ 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.
2
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 and one joint venture, 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 December 31, 2001, we had substantively 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
December 31, 2001, we had substantively 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 has purchased a
subscription to our PathoGenome Database and has 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 September
2000, we entered into a joint venture with ArQule, Inc. to identify novel
anti-infective drug compounds.
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 December 31, 2001, 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.
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 $12.0 million had been received
through December 31, 2001. 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 $10.4 million had been received
through December 31, 2001. 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 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 will retain all other rights to
market and sell Ramoplanin. In addition, we are obligated to purchase bulk
material from Biosearch and fund the completion of clinical trials, purchase
bulk material, 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.
3
We have incurred significant operating losses since our inception. As of
December 31, 2001, we had an accumulated deficit of approximately $91.8
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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible
Assets and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. SFAS No. 142 addresses
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 SFAS
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 SFAS No. 142
are required to be applied starting with fiscal years beginning after
December 15, 2001. SFAS No. 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets and requires recognition of a liability for an
asset retirement obligation in the period in which it is occurred. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. The adotption of
SFAS No. 142 did not have a material impact on the Company's financial position
or results of operations. The adoption of SFAS No. 143 is not expected to have
a material impact on the Company's 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
Accounting Principles Board (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 the adoption of this Statement
to have a material impact on its financial position or results of operations.
Critical Accounting Policies
In December 2001, the SEC requested that reporting companies discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one that is important to the portrayal of a
company's financial condition and operating results and requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
4
We have identified the policies below as critical to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
this and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements of this Annual Report on Form 10-K. The Company's
preparation of this Annual Report on Form 10-K requires it to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of its financial
statements, and assurance that actual results will not differ from those
estimates.
Revenue Recognition
BioPharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies. GenomeVision
Services are revenues from government grants, fees received from custom gene
sequencing and analysis services and subscription fees from the PathoGenome
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 as earned 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 we have no other
performance obligations related to the milestone. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
Clinical Trial Estimates
Our clinical development trials related to Ramoplanin are primarily
performed by outside parties. It is not unusual at the end of each accounting
period to estimate both the total cost of the trials and the percent completed
as of that accounting date. We then need to adjust our estimates when final
invoices are received. To date, these adjustments have not been material to our
financial statements, and we believe that the estimates that we made as of
December 31, 2001 are reflective of the actual expenses incurred as of that
date. However, readers should be cautioned that the possibility exists that the
timing or cost of certain trials might be longer or shorter and cost more or
less than we have estimated and that the associated financial adjustments would
be reflected in future periods.
Results of Operations
Years Ended December 31, 2000 and 2001
Revenues
Total revenues increased 40% from $25,445,000 in 2000 to $35,741,000 in
2001. BioPharmaceutical revenue increased 56% from $11,851,000 in 2000 to
$18,438,000 in 2001 primarily due to increased milestone payments under our
product discovery alliances with Wyeth-Ayerst and Schering-Plough.
Revenue from GenomeVision Services increased 27% from $13,594,000 in 2000 to
$17,302,000 in 2001 due to increased revenue recognized under our commercial
sequencing business of approximately $935,000, as well as increased revenue
recognized under our government grants with the National Human Genome Research
Institute to participate in the Human Genome and Mouse (Rat) Genome sequencing
projects of approximately $3,175,000.
Costs and Expenses
Total costs and expenses increased 45% from $33,780,000 in 2000 to
$48,978,000 in 2001. Cost of services increased 39% from $11,715,000 in 2000 to
$16,153,000 in 2001 primarily due to increased costs and expenses associated
with the increase in GenomeVision Services revenue, as mentioned above. The
increase consisted primarily of higher labor and material costs.
5
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 58% from $15,191,000 in 2000 to $24,058,000 to 2001. This
planned increase was primarily due to the acquisition and clinical development
of Ramoplanin of approximately $5,549,000, as well as increased investment in
our internal drug discovery programs, specifically in the area of
anti-infectives and chronic human diseases of $4,138,000.
Selling, general and administrative expenses increased 28% from $6,875,000
in 2000 to $8,767,000 in 2001 reflecting an expansion in the areas of corporate
development, sales and marketing and clinical development administrative
expenses. 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 15% from $3,331,000 in 2000 to $3,839,000 in 2001
reflecting an increase in funds available for investment as a result of (i)
proceeds received from the sale of common stock through a public offering in
2000 and 2001, (ii) proceeds received from the exercise of stock options, and
(iii) proceeds received from our employee stock purchase plan.
Interest expense decreased 18% from $843,000 in 2000 to $692,000 in 2001.
The decrease was due to a decrease in our outstanding balances under long-term
obligations from approximately $7.8 million at December 31, 2000 to $5.6
million at December 31, 2001.
Years Ended December 31, 1999 and 2000
Revenues
Total revenues increased slightly by 2% from $24,828,000 in 1999 to
$25,445,000 in 2000. BioPharmaceutical revenue decreased 35% from $18,162,000
in 1999 to $11,851,000 in 2000 primarily due to decreased contract research
revenue and milestone payments under our product discovery alliances.
Revenue from GenomeVision Services increased 104% from $6,665,000 in 1999 to
$13,594,000 in 2000 primarily due to increased revenue recognized under our
commercial sequencing business of approximately $691,000, as well as increased
revenue recognized under our government grants with the National Human Genome
Research Institute to participate in the Human Genome and Mouse (Rat) Genome
sequencing projects of approximately $6,779,000.
Costs and Expenses
Total costs and expenses increased 15% from $29,389,000 in 1999 to
$33,780,000 in 2000. Cost of services increased 157% from $4,560,000 in 1999 to
$11,715,000 in 2000 primarily due to increased costs and expenses associated
with the increase in GenomeVision Services revenue, as mentioned above. The
increase consisted primarily of higher labor and material costs.
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 decreased 25% from $20,376,000 in 1999 to $15,191,000 to 2000. This
reduction in research and development expenses was primarily attributable to a
decline in our internal drug discovery programs and research funded under our
product discovery alliances during 2000.
Selling, general and administrative expenses increased 54% from $4,453,000
in 1999 to $6,875,000 in 2000 primarily due to increases in payroll and related
expenses, non-cash charges related to the issuance of stock options and
restricted stock awards, as well as increased shareholder communication
expenses caused by an expanded shareholder base.
6
Interest Income and Expense
Interest income increased 124% from $1,488,000 in 1999 to $3,331,000 in 2000
reflecting primarily an increase in funds available for investment as a result
of (i) proceeds received from the sale of common stock through a public
offering in 2000, (ii) proceeds received from the exercise of stock options,
and (iii) proceeds received from our employee stock purchase plan.
Interest expense decreased 3% from $867,000 in 1999 to $843,000 in 2000. The
decrease was due to a decrease in our outstanding balances under long-term
obligations from approximately $8.9 million at December 31, 1999 to $7.8
million at December 31, 2000.
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
equity securities.
As of December 31, 2001, we had cash, cash equivalents, restricted cash and
short-term and long-term investments of approximately $67,341,000. In 2001, we
sold 127,500 shares of common stock in a series of transactions through the
Nasdaq National Market, resulting in proceeds received of approximately
$1,706,000, net of issuance costs. In 2001, we also issued 352,950 shares of
common stock related to the exercise of stock options and our employee stock
purchase plan, resulting in proceeds received of approximately $1,204,000. In
2000, we sold 1,500,000 shares of common stock in a series of transactions
through the Nasdaq National Market, resulting in proceeds received of
approximately $44,723,000, net of issuance costs. In 2000, we issued 1,288,943
shares of common stock related to the exercise of stock options and our
employee stock purchase plan, resulting in proceeds received of approximately
$3,528,000.
In 1999, we also sold 678,610 shares of common stock to bioMerieux, a
product discovery partner, resulting in proceeds received of approximately
$3,732,000, net of issuance costs. In 1999, we also issued 472,459 shares of
common stock related to the exercise of stock options, resulting in proceeds
received of approximately $1,235,000.
We received payments of approximately $18,087,000, $17,399,000 and
$22,866,000 in 2001, 2000 and 1999, respectively, from our product discovery
partners consisting of up-front license fees, contract research funding,
subscription fee, milestone payments and expense reimbursement.
We had various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. We had an aggregate of
approximately $5,632,000 outstanding under our borrowing arrangements at
December 31, 2001. This amount is repayable over the next 34 months, of which
$3,572,000 is repayable over 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. We had no
additional borrowing capacity under these capital lease agreements at December
31, 2001. In February 2002, we entered into an additional line of credit for
$3,500,000, of which $500,000 will be used to refinance a portion of the
existing line of credit and the remaining $3,000,0000 to be used to finance
office and laboratory equipment.
Our operating activities used cash of approximately $3,091,000 in 2001
primarily due to an increase in our net loss and prepaid expenses and other
assets, as well as a decrease in deferred revenue. These uses of cash were
partially offset by a decrease in interest receivable, accounts receivable and
unbilled costs and fees, as well as an increase in accounts payables and
accrued liabilities. Our operating activities provided cash of approximately
$3,011,000 in 2000 and used cash of approximately $1,616,000 in 1999.
7
Our investing activities provided cash of approximately $20,017,000 in 2001
through the conversion of marketable securities to cash and cash equivalents,
partially offset by purchases of marketable securities, equipment and additions
to leasehold. Our investing activities used cash of approximately $45,568,000
and $2,467,000 in 2000 and 1999, respectively, to purchase marketable
securities, equipment and additions to leasehold, partially offset the
conversion of marketable securities to cash and cash equivalents.
Capital expenditures totaled $3,706,000 during 2001 consisting of leasehold
improvements and purchases of laboratory, computer, and office equipment. We
utilized existing capital lease and equipment financing arrangements to finance
the majority of these capital expenditures. We currently estimate that we will
acquire approximately $5,000,000 in capital equipment in 2002 consisting of
primarily computers, laboratory equipment, and additions to leasehold
improvement, which we intend to finance the majority of theses purchases under
new financing arrangements.
Financing activities used cash of approximately $2,217,000 and $205,000 in
2001 and 1999, respectively, primarily for payments of long-term obligations,
partially offset by proceeds received from the sale of equity securities,
exercise of stock options, and employee stock purchase plan. Financing
activities provided cash of approximately $43,636,000 in 2000 primarily from
proceeds received from the sale of equity securities, exercise of stock
options, and employee stock purchase plan, net of payments of long-term
obligations.
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.
On March 6, 2002, we sold convertible debentures to two institutional
investors in a private placement transaction, raising $15 million in gross
proceeds. The debentures 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 debentures 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 less obligations for
borrowed money bearing interest) of less than $35 million, then the holders of
the debentures can require that all or any part of the outstanding principal
balance of the notes plus all accrued but unpaid interest be repaid. Interest
on the debentures accrues at 6% annually. The investors also received warrants
to purchase up to 487,500 shares of common stock at an exercise price of $8.00
per share, subject to certain adjustments. The warrants only become exercisable
to the extent the debentures are converted or if certain other redemptions or
repayments of the debentures occur.
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 incur $15-20 million in Phase III clinical
development expenditures through the end of 2002.
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.
8
In 2000, we entered into two separate interest-rate-swap agreements with a
bank aggregating approximately $1,900,000. Under these agreements, we pay a
fixed rate of 8.78% and receives a variable rate tied to the one month LIBOR
rate. As of December 31, 2001, the variable rate was 3.83%. These swap
agreements meet the required criteria, as defined in SFAS No. 133 to use
special hedge accounting, and we have recorded an unrealized loss of $30,830 at
December 31, 2001, through other comprehensive income, for the change in the
fair value of the swap agreements. At February 28, 2002, this debt had been
paid off in its entirety and the interest-rate-swap agreements expired.
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-K 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. All forward-looking statements, other than statements of
historical fact, included in this report regarding our financial 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 our ability and the ability of our alliance
partners to (i) successfully develop products based on the Company's genomics
information, (ii) obtain the necessary governmental approvals, (iii)
effectively commercialize any products developed before our competitors and
(iv) obtain and enforce intellectual property rights, as well as the risk
factors set forth in this Annual Report on Form 10-K and those set forth in
other filings that we may make with the Securities and Exchange commission from
time to time.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by Item 8 are set forth
at the pages indicated in Item 14(a) below.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See
"Index to Consolidated Financial Statements and Financial Statement Schedules"
appearing on page F-1.
(3) Exhibits
Exhibit
No. Description
------- -----------
3 Restated Articles of Organization and By-laws/(1)/
3.1 Amendment dated January 5, 1982 to Restated Articles of Organization/(2)/
3.2 Amendment dated January 24, 1983 to Restated Articles of Organization/(3)/
3.3 Amendment dated January 17, 1984 to Restated Articles of Organization/(4)/
3.4 Amendment dated October 20, 1987 to the By-laws/(8)/
3.5 Amendment dated December 9, 1987 to Restated Articles of Organization/(9)/
3.6 Amendment dated October 16, 1989 to the By-law/(11)/
9
Exhibit
No. Description
------- -----------
3.7 Amendment dated January 24, 1994 to Articles Restated Articles of Organization/(14)/
3.8 Amendment dated August 31, 1994 to Restated Articles of Organizatio /(14)/
3.9 Amendment dated March 15, 2001 to Restated Articles of Organization/(33)/
3.10 By-Laws of Genome Therapeutics Corp (as amended through July 24, 2001)/(34)/
4.2 Form of Note dated March 5, 2002 received by Smithfield Fiduciary LLC and the Tail Wind Fund,
Ltd./(35)/
4.3 Form of Warrant received by Smithfield Fiduciary LLC and The Tail Wind Fund, Ltd./(35)/
10.4 Incentive Stock Option Plan and Form of Stock Option Certificate/(1)/
10.6 Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings Plan/(6)/
10.7 Amendment dated November 4, 1986 to the Genome Therapeutics Corp. (f/k/a Collaborative Research)
Incentive Savings Plan dated March 1, 1985/(7)/
10.14 1991 Stock Option Plan and Form of Stock Option Certificate/(12)/
10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts/(13)/
10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts/(13)/
10.19 Employment Agreement with Robert J. Hennessey/(13)/
10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA/(14)/
10.24 1993 Stock Option Plan and Form of Stock Option Certificate/(14)/
10.28 Agreement between the Company and AstraZeneca PLC (f/k/a Astra Hassle AB) dated August 31,
1995/(16)/*
10.29 Collaboration and License Agreement between the Company, Schering Corporation and Schering-
Plough Ltd., dated as of December 6, 1995/(18)/*
10.30. Form of director Stock Option Agreement and schedule of director options granted/(17)/
10.37. Lease amendment dated November 15, 1996 to certain property in Waltham, MA/(19)/
10.38. Collaboration and License Agreement between the Company, Schering Corporation and Schering-
Plough Ltd., dated as of December 20, 1996/(20)/*
10.39. Credit agreement between the Company and Fleet National Bank dated February 28, 1997/(21)/
10.40. Credit agreement between the Company and U S Trust (f/k/a Sumitomo Bank, Limited) dated July 31,
1997/(22)/
10.41. Collaboration and License Agreement between the Company and Schering Corporation, dated
September 22, 1997/(23)/*
10.42. Collaboration and License Agreement between the Company and Schering-Plough Ltd. dated
September 22, 1997/(23)/*
10.43. Credit modification agreement between the Company and Fleet National Bank, dated March 9, 1998/(24)/
10.44. 1997 Directors' Deferred Stock Plan/(25)/
10.45. 1997 Stock Option Plan/(25)/
10.46. Amended Employment Agreement with Robert J. Hennessey/(26)/
10.47. Collaboration and License Agreement between the Company and American Home Products, Inc., acting
through its Wyeth-Ayerst Division, dated December 20, 1999/(27)/
10.49. Collaboration and License Agreement between Genome Therapeutics Corporation and bioMerieux
Incorporated dated as of September 30, 1999/(29)/
10.50. Registration Rights Agreement between the Company and bioMerieux Alliance sa dated September 30,
1999/(30)/
10.51. Compound Discovery Collaboration Agreement, dated October 17, 2000 between the Company and
ArQule, Inc./(31)/*
10.52. 2001 Incentive Plan/(32)/
10.53. Stock Option Agreements with Steven M. Rauscher/(32)/
10.55. Employment Letter with Steven M. Rauscher/(34)/
10.56. Employment Letter with Stephen Cohen/(34)/
10.57. Employment Letter with Richard Labaudinere PhD/(34)/
10
Exhibit
No. Description
------- -----------
10.58. Purchase Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund, Ltd.
and the Company/(35)/
10.59. Registration Rights Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind
Fund, Ltd. and the Company/(35)/
10.60. Employment Letter with Robert J. Hennessey/(36)/
10.61. License and Supply Agreement between the Company and Biosearch Italia, S.P.A., dated October 8,
2001/(36)/*
23.1 Consent of Arthur Andersen LLP Independent Public Accounts/(37)/
99.1 Risk Factors/(36)/
99.2 Letter to Commission Pursuant to Temporary Note 3T/(37)/
--------
/* / Confidential treatment requested with respect to a portion of this
Exhibit.
/(1)/ Filed as exhibits to the Company's Registration Statement on Form S-1
(No. 2-75230) and incorporated herein by reference.
/(2)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 27, 1982 and incorporated herein by reference.
/(3)/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 26, 1983 and incorporated herein by reference.
/(4)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 25, 1984 and incorporated herein by reference.
/(6)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
/(7)/ Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1986 and incorporated herein by reference.
/(8)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended August 31, 1987 and incorporated herein by reference.
/(9)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 28, 1987 and incorporated herein by reference.
/(11)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1989 and incorporated herein by reference.
/(12)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1992 and incorporated herein by reference.
/(13)/ Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 and incorporated herein by reference.
/(14)/ Filed as exhibits of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994 and incorporated herein by reference.
/(16)/ Filed as an exhibit to the Company's Annual Report on Form 10-K/A3 for
the year ended August 31, 1995 and incorporated herein by reference.
/(17)/ Filed as an exhibit to the Company Registration Statement on Forms S-8
(File No. 33-61191) and incorporated herein by reference.
/(18)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 25, 1995 and incorporated herein by reference.
/(19)/ Filed as an exhibit to the Company's 10-K for fiscal year ended August
31, 1996 and incorporated herein by reference.
/(20)/ Filed as an exhibit to the Company's 10-Q/A for the quarter ended March
1, 1997 and incorporated herein by reference.
/(21)/ Filed as an exhibit to the Company's 10-Q for the quarter ended May 31,
1997 and incorporated herein by reference.
/(22)/ Filed as an exhibit to the Company's 10-K for fiscal year ended August
31, 1997 and incorporated herein by reference.
11
/(23)/ Filed as exhibits to the Company's 10-Q for the quarter ended February
28, 1998 and incorporated herein by reference.
/(24)/ Filed as an exhibit to the Company's 10-Q for the quarter ended May 30,
1998 and incorporated herein by reference.
/(25)/ Filed as exhibits to the Company's Registration Statement on Forms S-8
(333-49069) and incorporated herein by reference.
/(26)/ Filed as an exhibit to the Company's 10-K for the fiscal year ended
August 31, 1998 and incorporated herein by reference.
/(27)/ Filed as an exhibit to the Company's 8-K filed on March 8, 2000 and
incorporated herein by reference.
/(29)/ Filed as an exhibit to the Company's 10-Q for the quarter ended November
27, 1999 and incorporated herein by reference.
/(30)/ Filed as an exhibit to the Company's Registration Statement on Forms S-3
(333-32614) and incorporated herein by reference.
/(31)/ Filed as an exhibit to the Company's 10-K for the quarter ended November
25, 2000 and incorporated herein by reference.
/(32)/ Filed as an exhibit to the Company's Registration Statement on Form S-8
(333-58274) and incorporated herein by reference.
/(33)/ Filed as an exhibit to the Company's 10-Q for the quarter ended February
24, 2001 and incorporated herein by reference.
/(34)/ Filed as an exhibit to the Company's 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference.
/(35)/ Filed as an exhibit to the Company's 8-K filed on March 6, 2002 and
incorporated herein by reference.
/(36)/ Filed as an exhibit to the Company's 10-K for the fiscal year ended
December 31, 2001 and incorporated herein by reference.
/(37)/ Filed herewith.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on June
24, 2002.
GENOME THERAPEUTICS CORP.
/S/ STEPHEN COHEN
--------------------------------------
Stephen Cohen
Senior Vice President and Chief
Financial Officer
13
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................................. F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001.............................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001 F-6
Notes to Consolidated Financial Statements................................................ F-7
Note: The only amounts which changed in these restated financial statements are
accumulated deficit and additional paid in capital. See Note 1(m) for a
discussion of the changes.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consoldiated balance sheets of Genome
Therapeutics Corp. and subsidiary (the Company) as of December 31, 2000 and
2001, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Company's managementment. Our responsibility is to
express an opinion on these consoldiated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genome
Therapeutics Corp. and subsidiary as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 28, 2002 (except with
respect to the matter discussed
in Note 1(m) as to which the
date is June 18, 2002)
F-2
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 2001
-------------- --------------
ASSETS (as restated) (as restated)
Current Assets:
Cash and cash equivalents................................................ $ 10,095,817 $ 24,805,385
Short-term investments (held-to-maturity)................................ 51,743,917 29,961,540
Interest receivable...................................................... 1,466,808 1,074,726
Accounts receivable...................................................... 827,106 513,885
Unbilled costs and fees.................................................. 796,072 164,465
Prepaid expenses and other current assets................................ 900,547 1,583,320
-------------- --------------
Total current assets................................................... 65,830,267 58,103,321
Property and Equipment, at cost:
Laboratory and scientific equipment...................................... 18,823,063 20,918,535
Leasehold improvements................................................... 8,302,308 8,798,842
Equipment and furniture.................................................. 1,134,320 1,267,854
-------------- --------------
28,259,691 30,985,231
Less--Accumulated depreciation........................................... 15,225,148 19,091,703
-------------- --------------
13,034,543 11,893,528
Restricted Cash (Note 2).................................................. 200,000 200,000
Long-term Investments (held-to-maturity).................................. 10,970,153 11,839,045
Warrant (available-for-sale).............................................. -- 535,279
Other Assets.............................................................. 216,041 168,425
-------------- --------------
$ 90,251,004 $ 82,739,598
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations.............................. $ 4,499,696 $ 3,571,578
Accounts payable......................................................... 1,296,511 2,092,593
Accrued expenses......................................................... 3,712,757 4,832,713
Deferred revenue......................................................... 4,720,234 3,449,959
-------------- --------------
Total current liabilities.............................................. 14,229,198 13,946,843
Long-term Obligations, net of current maturities.......................... 3,334,354 2,060,817
Commitments (Note 4)
Shareholders' Equity:
Common stock, $0.10 par value --
Authorized--50,000,000 shares...........................................
Issued and outstanding--22,288,658 and 22,772,170 shares at December 31,
2000 and 2001, respectively............................................ 2,228,866 2,277,217
Additional paid-in capital............................................... 152,723,288 156,214,735
Accumulated deficit...................................................... (81,668,073) (91,758,375)
Deferred compensation and note receivable from officer (Note 6(e))....... (596,629) (506,088)
Accumulated other comprehensive income................................... -- 504,449
-------------- --------------
Total shareholders' equity............................................. 72,687,452 66,731,938
============== ==============
$ 90,251,004 $ 82,739,598
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------
1999 2000 2001
----------- ----------- ------------
Revenues:
BioPharmaceutical......................... $18,162,056 $11,851,091 $ 18,438,286
GenomeVision(TM) services................. 6,665,529 13,594,143 17,302,239
----------- ----------- ------------
Total revenues.......................... 24,827,585 25,445,234 35,740,525
Costs and Expenses:
Cost of services.......................... 4,559,588 11,714,955 16,152,707
Research and development.................. 20,376,271 15,190,531 24,057,760
Selling, general and administrative....... 4,453,252 6,874,579 8,767,229
----------- ----------- ------------
Total costs and expenses................ 29,389,111 33,780,065 48,977,696
----------- ----------- ------------
Loss from operations.................. (4,561,526) (8,334,831) (13,237,171)
Interest Income (Expense):
Interest income........................... 1,488,250 3,330,625 3,839,260
Interest expense.......................... (866,799) (842,633) (692,391)
Net interest income..................... 621,451 2,487,992 3,146,869
----------- ----------- ------------
Net loss.............................. $(3,940,075) $(5,846,839) $(10,090,302)
Net Loss per Common Share:
Basic and diluted......................... $ (0.21) $ (0.27) $ (0.45)
Weighted Average Common Shares Outstanding:
Basic and diluted......................... 18,627,045 21,376,685 22,572,427
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock
--------------------- Additional
$0.10 Paid-In
Shares Par Value Capital
---------- ---------- ------------
Balance, December 31, 1998 (as restated)............................. 18,348,646 $1,834,865 $ 97,733,824
---------- ---------- ------------
Sale of common stock, net of issuance costs of $17,885............. 678,610 67,861 3,664,254
Exercise of stock options.......................................... 472,459 47,245 1,187,509
Deferred compensation from grant of stock options.................. -- -- 1,366,574
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- -- --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- -- (119,494)
Compensation expense related to grant of stock options............. -- -- 3,464
---------- ---------- ------------
Net loss.......................................................... -- -- --
Balance, December 31, 1999 (as restated)............................. 19,499,715... 1,949,971... 103,836,131...
---------- ---------- ------------
Sale of common stock, net of issuance costs of $718,066............ 1,500,000 150,000 44,572,729
Exercise of stock options.......................................... 1,280,612 128,062 3,184,327
Issuance of stock under employee stock purchase plan............... 8,331 833 214,723
Deferred compensation from grant of stock options.................. -- -- 1,377,161
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- -- --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- -- (461,783)
---------- ---------- ------------
Net loss.......................................................... -- -- --
Balance, December 31, 2000 (as restated)............................. 22,288,658... 2,228,866... 152,723,288...
---------- ---------- ------------
Sale of common stock, net of issuance costs of $44,622............. 127,500 12,750 1,693,017
Exercise of stock options.......................................... 251,354 25,135 736,584
Issuance of stock under employee stock.............................
purchase plan.................................................... 74,596 7,460 434,410
Issuance of restricted common stock and loan to officer (Note 6e).. 24,000 2,400 (2,400)
Deferred compensation from grant of stock options.................. -- -- 647,942
Issuance of stock under directors deferred stock plan.............. 6,062 606 (606)
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- -- --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- -- (17,500)
Unrealized gain on long-term investment (available for sale).......
Unrealized loss on derivative instruments..........................
---------- ---------- ------------
Net loss.......................................................... -- -- --
Balance, December 31, 2001 (as restated)............................. 22,772,170... $2,277,217... $156,214,735...
---------- ---------- ------------
Deferred
Compen-
sation & Accumulated
Note Other
Receivable Compre
Accumulated From hensive
Deficit Officer Income
------------ ----------- -----------
Balance, December 31, 1998 (as restated)............................. $(71,881,159) $ (130,293) --
------------ ----------- --------
Sale of common stock, net of issuance costs of $17,885............. -- -- --
Exercise of stock options.......................................... -- -- --
Deferred compensation from grant of stock options.................. -- $(1,366,574) --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- 259,462 --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- 119,494 --
Compensation expense related to grant of stock options............. -- -- --
------------ ----------- --------
Net loss.......................................................... (3,940,075) -- --
Balance, December 31, 1999 (as restated)............................. (75,821,234)... (1,117,911) --
------------ ----------- --------
Sale of common stock, net of issuance costs of $718,066............ -- -- --
Exercise of stock options.......................................... -- -- --
Issuance of stock under employee stock purchase plan............... -- -- --
Deferred compensation from grant of stock options.................. -- (1,377,161) --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- 1,436,660 --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- 461,783 --
------------ ----------- --------
Net loss.......................................................... (5,846,839) --. --.
Balance, December 31, 2000 (as restated)............................. (81,668,073)... (596,629) --
------------ ----------- --------
Sale of common stock, net of issuance costs of $44,622............. -- -- --
Exercise of stock options.......................................... -- -- --
Issuance of stock under employee stock.............................
purchase plan.................................................... -- -- --
Issuance of restricted common stock and loan to officer (Note 6e).. -- (163,000) --
Deferred compensation from grant of stock options.................. -- (647,942) --
Issuance of stock under directors deferred stock plan.............. -- -- --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. -- 883,983 --
Reversal of deferred compensation related to cancellation of stock
options........................................................... -- 17,500 --
Unrealized gain on long-term investment (available for sale)....... 535,279
Unrealized loss on derivative instruments.......................... (30,830)
------------ ----------- --------
Net loss.......................................................... (10,090,302) -- --
Balance, December 31, 2001 (as restated)............................. $(91,758,375)... $ (506,088) $504,449)
------------ ----------- --------
Total
Share- Compre-
holders' hensive
Equity Income
------------ ------------
Balance, December 31, 1998 (as restated)............................. $ 27,557,237
------------ ------------
Sale of common stock, net of issuance costs of $17,885............. 3,732,115
Exercise of stock options.......................................... 1,234,754
Deferred compensation from grant of stock options.................. --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. 259,462
Reversal of deferred compensation related to cancellation of stock
options........................................................... --
Compensation expense related to grant of stock options............. 3,464
------------ ------------
Net loss.......................................................... (3,940,075) (3,940,075)
Balance, December 31, 1999 (as restated)............................. 28,846,957 (3,940,075)
------------ ------------
Sale of common stock, net of issuance costs of $718,066............ 44,722,729
Exercise of stock options.......................................... 3,312,389
Issuance of stock under employee stock purchase plan............... 215,556
Deferred compensation from grant of stock options.................. --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. 1,436,660
Reversal of deferred compensation related to cancellation of stock
options........................................................... --
------------ ------------
Net loss.......................................................... (5,846,839) (5,846,839)
Balance, December 31, 2000 (as restated)............................. 72,687,452 (5,846,839)
------------ ------------
Sale of common stock, net of issuance costs of $44,622............. 1,705,767
Exercise of stock options.......................................... 761,719
Issuance of stock under employee stock.............................
purchase plan.................................................... 441,870
Issuance of restricted common stock and loan to officer (Note 6e).. (163,000)
Deferred compensation from grant of stock options.................. --
Issuance of stock under directors deferred stock plan.............. --
Amortization of deferred compensation and other stock-based
compensation expense.............................................. 883,983
Reversal of deferred compensation related to cancellation of stock
options........................................................... --
Unrealized gain on long-term investment (available for sale)....... 535,279 535,279
Unrealized loss on derivative instruments.......................... (30,830) (30,830)
------------ ------------
Net loss.......................................................... (10,090,302) $(10,090,302)
Balance, December 31, 2001 (as restated)............................. $ 66,731,938 $ (9,585,853)
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1999 2000 2001
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss.................................................. $ (3,940,075) $ (5,846,839) $(10,090,302)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities-
Depreciation and amortization............................. 3,973,001 4,471,722 4,807,379
Loss on disposal of equipment and leasehold improvements.. 362,534 665,207 39,355
Amortization of deferred compensation..................... 262,926 1,436,660 883,983
Changes in assets and liabilities-
Interest receivable..................................... (274,095) (612,005) 392,082
Accounts receivable..................................... (806,527) (10,787) 313,221
Unbilled costs and fees................................. (317,216) 1,220,195 631,607
Prepaid expenses and other current assets............... (34,174) (323,730) (682,773)
Accounts payable........................................ 210,409 305,954 796,082
Accrued expenses........................................ (46,230) 1,049,809 1,089,126
Deferred revenue........................................ (1,006,212) 654,545 (1,270,275)
Net cash (used in) provided by operating activities... (1,615,659) 3,010,731 (3,090,515)
Cash Flows from Investing Activities:
Purchases of investments.................................. (23,129,394) (69,013,466) (47,526,465)
Proceeds from sale of investments......................... 22,880,646 23,860,411 68,439,950
Purchases of property and equipment....................... (2,514,394) (460,835) (944,278)
Decrease in other assets.................................. 296,372 46,167 47,616
Net cash (used in) provided by investing activities... (2,466,770) (45,567,723) 20,016,823
Cash Flows from Financing Activities:
Proceeds from sale of common stock........................ 3,732,115 44,722,729 1,705,767
Proceeds from exercise of stock options................... 1,234,754 3,312,389 761,719
Proceeds from issuance of stock under the employee stock
purchase plan........................................... -- 215,556 441,870
Note receivable from officer.............................. (120,000) 120,000 (163,000)
Payments on long-term obligations......................... (5,052,021) (4,734,876) (4,963,096)
Net cash (used in) provided by financing activities... (205,152) 43,635,798 (2,216,740)
Net (Decrease) Increase in Cash and Cash Equivalents....... (4,287,581) 1,078,806 14,709,568
Cash and Cash Equivalents, beginning of year............... 13,304,592 9,017,011 10,095,817
Cash and Cash Equivalents, end of year..................... $ 9,017,011 $ 10,095,817 $ 24,805,385
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year............................. $ 866,800 $ 842,633 $ 692,391
Income taxes paid during the year......................... $ 31,800 $ 8,231 $ 60,000
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Equipment acquired under capital leases................... $ 1,126,597 $ 3,691,840 $ 2,761,441
Unrealized gain on warrant................................ -- -- $ 535,279
Unrealized loss on derivative instruments................. -- -- (30,830)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. and subsidiary (the Company) is a
biopharmaceutical company focused on the discovery and development of
pharmaceutical and diagnostic products. The Company has eight established
product development programs. The Company's lead product candidate, Ramoplanin,
is in Phase III clinical trials for the prevention of bloodstream infections
caused by vancomycin-resistant enterococci (VRE). The Company has six alliances
with pharmaceutical companies including Schering-Plough, AstraZeneca,
Wyeth-Ayerst and bioMerieux, and a joint venture with ArQule. In addition to
these eight projects, the Company has a portfolio of earlier stage internal
drug discovery programs. The Company also maintains an active service business,
GenomeVision(TM) Services, providing drug discovery services to pharmaceutical
and biotechnology companies and to the National Human Genome Research Institute.
The accompanying consolidated financial statements reflect the application
of certain accounting policies, as described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated 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. GenomeVision
Services are revenues 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 as earned 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. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
(c) Property and Equipment
Property and equipment, including leasehold improvements, are depreciated
over their estimated useful lives using the straight-line method. The estimated
useful life for leasehold improvements is the lesser of the term of the lease
or the estimated useful life of the assets. The majority of the Company's
equipment and leasehold improvements are financed through bank lines of credit.
Estimated Useful Life
---------------------
Laboratory Equipment......... 5 Years
Computer Equipment & Licenses 3 Years
Office Equipment............. 5 Years
Furniture & Fixtures......... 5 Years
(d) Net Loss Per Share
Basic and diluted earnings per share were determined by dividing net loss by
the weighted average shares outstanding during the period. Diluted loss per
share is the same as basic loss per share for all periods presented,
F-7
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as the effect of the potential common stock is antidilutive. Antidilutive
securities which consist of stock options, directors' deferred stock and
unvested restricted stock that are not included in diluted net loss per share
were 3,762,856, 3,320,113 and 3,773,990 shares at December 31, 1999, 2000 and
2001, respectively.
(e) 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. At December 31, 2001, the Company had entered into two
interest- rate-swap agreements with a bank. The Company has no other
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.
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 -------------
Year ended December 31, Customers A B C
----------------------- ----------- -- -- --
1999.......... 1 71% 9% --
2000.......... 2 35% 36% --
2001.......... 3 31% 36% 18%
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
--------------------------------------
At December 31, B D E F G H I
--------------- -- -- -- -- -- -- --
1999...... -- 11% 31% -- -- 35% 18%
2000...... 87% -- -- -- -- -- --
2001...... -- -- -- 37% 29% -- --
(f) Use of Estimates
The preparation of consolidated 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(g) Financial Instruments
The estimated fair value of the Company's financial instruments, which
includes cash and cash equivalents, short-term and long-term investments,
accounts receivable, accounts payable and long-term debt, approximates the
carrying values of these instruments.
(h) Derivative Instruments and Hedging Activities
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, in 2001. SFAS No. 133 establishes standards for
accounting and reporting derivative instruments,
F-8
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
including certain derivative instruments embedded in other contracts, and for
hedging activities. To manage the Company's exposure to movements in interest
rates on its variable rate debt, the Company entered into two
interest-rate-swap agreements. See Note 5 for further discussion.
(i) Reclassifications
The Company has reclassified certain prior-year information to conform with
the current year's presentation.
(j) Comprehensive Income (Loss)
The Company has adopted 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. At December 31, 2001, the
Company recorded approximately $535,000 to comprehensive income related to the
value of a warrant and ($35,000) to comprehensive loss related to two
interest-rate-swap agreements. See Notes 2 and 5 for further discussion.
(k) Segment Reporting
The Company adopted 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 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
---------------- ----------------- -----------
1999
Revenues............................. $ 6,665,529 $18,162,056 $24,827,585
Gross profit......................... 2,105,941 7,083,332 9,189,273
Company-funded research & development -- 9,297,547 9,297,547
2000
Revenues............................. $13,594,143 $11,851,091 $25,445,234
Gross profit......................... 1,879,188 3,715,045 5,594,233
Company-funded research & development -- 7,054,485 7,054,485
2001
Revenues............................. $17,302,239 $18,438,286 $35,740,525
Gross profit......................... 1,149,532 11,122,807 12,272,339
Company-funded research & development -- 16,742,281 16,742,281
The Company does not allocate assets by its operating segments.
F-9
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(l) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combination, SFAS No. 142, Goodwill and Other Intangible
Assets and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. SFAS No. 142 addresses
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 SFAS 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 SFAS No. 142 are required to
be applied starting with fiscal years beginning after December 15, 2001. SFAS
No. 143 establishes accounting standards for the recognition and measurement of
legal obligations associated with the retirement of tangible long-lived assets
and requires recognition of a liability for an asset retirement obligation in
the period in which it is occurred. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 142 did not have a
material impact on the Company's financial position or results of operations.
The adoption of SFAS No. 143 is not expected to have a material impact on the
Company's 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 SFAS 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 Accounting
Principles Board (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 the adoption of this Statement
to have a material impact on its financial position or results of operations.
(m) Restatement
During the second quarter of 2002, the Company and its auditors determined
that an error had inadvertently been made in the accounting during 1996 and
1997 for two stock options granted to the Company's former Chief Executive
Officer. Due to this error the accounting treatment did not properly reflect
that these options contained a cashless exercise provision. As a result of
required non-cash adjustments, the Company's net loss for the year ended
December 31, 1996 was understated and the Company's net loss for the year ended
December 31, 1997 was overstated. As reflected below, these corrections have no
cash impact to the Company and have no impact on Total Shareholders' Equity.
F-10
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the cumulative impact of the restatement on the Company's
financial statements as of December 31, 2001 and December 31, 2000 is as
follows:
As previously
reported As restated
------------- ------------
December 31, 2001
Accumulated deficit....... $(82,053,635) $(91,758,375)
Additional paid in capital 146,509,995 156,214,735
Total shareholders' equity 66,731,938 66,731,938
As previously
reported As restated
------------- ------------
December 31, 2000
Accumulated deficit....... $(71,963,333) $(81,668,073)
Additional paid in capital 143,018,548 152,723,288
Total shareholders' equity 72,687,452 72,687,452
(2) 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, 2000 and 2001, the
Company's investments 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 7.5 months at December 31, 2001. At December 31, 2001, the
Company had an unrealized gain of approximately $442,000, which is the
difference between the amortized cost and the market value of the held to
maturity investments.
The Company's investment also include a warrant to purchase 45,000 shares of
common stock from Versicor, Inc. which was received in connection with its
collaboration agreement with Veriscor, Inc. dated March 10, 1997. The warrant
was immediately vested and is exercisable through March 10, 2002. The Company
is accounting for the warrant in accordance with SFAS No. 115 as an "available
for sale security" and as a result, the warrant is record at fair value. Upon
exercise, the shares received will be restricted and as a result the Company
will not be able to liquidate its position in the shares for at least one year.
At December 31, 2001, the Company had recorded an unrealized gain of $535,000
in other comprehensive income in its consolidated statements of shareholders'
equity related to the appreciation in value of the warrant.
F-11
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 2001, the Company's cash and cash equivalents and
investments consisted of the following:
2000 2001
----------- -----------
Cash and Cash Equivalents:
Cash.............................. $ 9,245,817 $21,801,201
Debt securities................... 850,000 3,004,184
----------- -----------
Total cash and cash equivalents. $10,095,817 $24,805,385
=========== ===========
Investments:
Short-term investments............ $51,743,917 $29,961,540
Long-term investments............. $10,970,153 $11,839,045
-- 535,279
----------- -----------
Warrant:
Total investments............... $62,714,070 $42,335,864
=========== ===========
The Company also has $200,000 in restricted cash at December 31, 2000 and
2001 in connection with certain capital lease obligations (see Note 5).
(3) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes, which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates
in effect for the year in which the differences are expected to reverse. SFAS
No. 109 requires deferred tax assets and liabilities to be adjusted when the
tax rates or other provisions of the income tax laws change.
At December 31, 2001, the Company had net operating loss and tax credit
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 and tax credit 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 the ownership
interest of significant shareholders over a three-year period in excess of 50%.
The net operating loss and tax credit carryforwards expire approximately as
follows:
Net Operating Research Tax Investment
Loss Credit Tax Credit
Expiration Date Carryforwards Carryforwards Carryforwards
--------------- ------------- ------------- -------------
2002........ $ 2,254,000 $ -- $ --
2003........ 697,000 -- --
2004........ 2,702,000 -- --
2005........ 1,456,000 80,000 --
2006-2021... 86,658,000 6,525,000 37,000
----------- ---------- -------
$93,767,000 $6,605,000 $37,000
=========== ========== =======
F-12
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's net deferred tax asset at the respective
dates are as follows:
December 31,
--------------------------
2000 2001
------------ ------------
Net operating loss carryforwards $ 36,538,000 $ 37,265,000
Research and development credits 5,816,000 6,605,000
Investment tax credits.......... 37,000 37,000
Other, net...................... 4,018,000 4,233,000
------------ ------------
46,409,000 48,140,000
Valuation allowance............. (46,409,000) (48,140,000)
------------ ------------
$ -- $ --
============ ============
The valuation allowance has been provided due to the uncertainty surrounding
the realization of the deferred tax assets.
(4) COMMITMENTS
(a) Lease Commitments
At December 31, 2001, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006.
Approximate minimum lease payments and facilities charges under the operating
leases at December 31, 2001 are as follows:
Year ending December 31,
------------------------
2002.......... $1,028,000
2003.......... 946,000
2004.......... 1,100,000
2005.......... 1,107,000
2006.......... 1,073,000
----------
$5,254,000
==========
Rental expense under these operating leases was approximately $1,009,000,
$927,000 and $1,007,000 for the years ended December 31, 1999, 2000 and 2001,
respectively.
(b) Employment Agreements
The Company has employment agreements with its executive officers, which
provide for bonuses, as defined, and severance benefits upon termination of
employment, as defined.
(5) LONG-TERM OBLIGATIONS
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 operating leases are payable
in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of December 31, 2001, the Company had entered into $256,000 in
operating leases and $6,456,000 in 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 December 31, 2001. There are no
covenants related to this agreement.
F-13
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Over the last five years, the Company had entered into other lines of credit
or capital lease arrangements under which it financed approximately $15,060,000
of laboratory, computer and office equipment, as well as facility renovations.
The borrowings under these arrangements are payable in 36 to 48 monthly
installments from the date of initiation. Interest rates range from 7.63% to
10.28%. The Company is required to maintain certain restricted cash balances,
as defined. In addition, the Company is required to maintain certain financial
ratios pertaining to minimum cash balances, tangible net worth and debt service
coverage. As of December 31, 2001, the Company was in compliance with all
covenants. The Company had no additional borrowing capacity under these other
lines of credit or capital lease agreements at December 31, 2001.
In February 2002, the Company entered into an additional line of credit for
$3,500,000, of which $500,000 will be 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 (2.08% at February 28, 2002)
plus 1 1/2 %. The Company is required to maintain certain financial ratios
pertaining to minimum cash balances. As of December 31, 2001, the Company was
in compliance with all covenants.
During 2000, the Company entered into two interest-rate-swap agreements to
manage its exposure to movements in the interest rates on its variable rate
debt. The swap agreements are cash flow hedges and are used to manage exposure
to interest rate movement by effectively converting the variable rate to a
fixed rate. Such instruments are matched with the underlying borrowings. SFAS
No. 133 eliminates special hedge accounting if a swap agreement does not meet
certain criteria, thus requiring the Company to reflect all changes in the fair
value of the swap agreement in earnings in the period of change.
The Company entered into two separate interest-rate-swap agreements with a
bank aggregating approximately $1,900,000. Under these agreements, the Company
pays a fixed rate of 8.78% and receives a variable rate tied to the one month
LIBOR rate. As of December 31, 2001, the variable rate was 3.83%. These swap
agreements meet the required criteria, as defined in SFAS No. 133 to use
special hedge accounting, and the Company has recorded an unrealized loss of
$30,830 at December 31, 2001, through other comprehensive income, for the
change in the fair value of the swap agreements. At February 28, 2002, this
debt had been paid off in its entirety and the interest-rate-swap agreements
expired.
Finance payments under long-term obligations at December 31, 2001 are as
follows:
Year ending December 31,
------------------------
2002............................................. $3,881,339
2003............................................. 1,727,572
2004............................................. 432,459
Total minimum lease payments.................. 6,041,370
Less--Amount representing interest............... 408,975
Present value of total minimum lease payments. 5,632,395
Less--Current portion............................ 3,571,578
----------
$2,060,817
==========
(6) SHAREHOLDERS' EQUITY
(a) Stock Options
The Company has granted stock options to key employees and consultants under
its 1991, 1993, 1995 and 1997 Stock Option Plans, as well as the 2001 Incentive
Plan. The Stock Option and Compensation Committee of
F-14
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Board of Directors determines the purchase price and vesting schedule
applicable to each option grant. In addition, under separate agreements not
covered by any plan, the Company has granted certain key employees and
directors of the Company, options to purchase common stock.
The Company granted nonqualified stock options for the purchase of 65,000
and 10,000 shares of common stock to consultants during fiscal years 1997 and
1999, respectively. The options were granted with an exercise price equal to
the fair market value price at the date of grant and vest ratably over the
contract period, as defined. In accordance with Emerging Issues Task Force
(EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,
the Company will measure the fair value of the options as they vest using the
Black-Scholes option pricing model. The Company has charged $29,750, $281,636
and $3,160 to operations for the years ended December 31, 1999, 2000 and 2001,
respectively, related to the grant of these options.
During 2000, the Company granted to certain employees the right to receive
154,616 shares of common stock. The employees received the common stock in two
equal installments on the anniversary of the grant date. The Company recorded
deferred compensation of $647,942 related to the grant of these rights to
receive the common stock, which will be amortized to expense over the period
the shares are earned. Since the inception of this program, employees who
resigned from the Company forfeited 62,915 shares of the restricted stock.
The Company records deferred compensation when stock options, restricted
stock and other stock-based awards are granted at an exercise price per share
that is less than the fair market value on the date of the grant. Deferred
compensation is recorded in an amount equal to the excess of the fair market
value per share over the exercise price times the number of options or shares
granted. Deferred compensation is being recognized as an expense over the
vesting period of the underlying options. During the years ended 1999, 2000 and
2001, the Company recorded $1,366,574, $1,377,161 and $647,942, respectively,
of deferred compensation. The Company recorded compensation expense of
approximately $262,926, $1,436,660 and $883,983 for the years ended December
31, 1999, 2000 and 2001, respectively. During 1999, 2000 and 2001, in
connection with the termination of several employees, the Company reversed
$119,494, $461,783 and $17,500, respectively, of unamortized deferred
compensation due to the cancellation of options.
There were 2,734,903 common shares available for future grant at December
31, 2001. The following is a summary of all stock option activity:
Number Exercise Weighted
of Shares Price Range Average Price
---------- ----------- -------------
Outstanding, December 31, 1998 3,622,570 $0.20-14.50 $ 3.63
Granted...................... 1,121,479 0.00- 9.25 3.60
Exercised.................... (472,459) 0.20- 8.31 2.61
Cancelled.................... (632,232) 0.00-14.50 5.35
Outstanding, December 31, 1999 3,639,358 0.00-14.50 3.45
Granted...................... 1,198,004 0.00-66.00 14.89
Exercised.................... (1,280,612) 0.00-14.72 2.59
Cancelled.................... (381,769) 0.00-66.00 4.44
Outstanding, December 31, 2000 3,174,981 0.00-66.00 7.99
Granted...................... 865,640 1.80-16.08 7.87
Exercised.................... (251,354) 0.00-14.72 3.03
Cancelled.................... (143,403) 0.00-39.38 11.74
Outstanding, December 31, 2001 3,645,864 $0.00-66.00 $ 8.15
Exercisable, December 31, 2001 1,951,126 $0.10-66.00 $ 5.73
Exercisable, December 31, 2000 1,607,085 $0.00-14.72 $ 4.10
Exercisable, December 31, 1999 2,091,258 $1.56-14.50 $ 2.87
F-15
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The range of exercise prices for options outstanding and options exercisable
at December 31, 2001 are as follows:
Options Outstanding Options Exercisable
-------------------------- --------------------------
Weighted Average
Remaining
Contractual Life
of Options
Range of Outstanding Weighted Average Weighted Average
Exercise Prices (In Years) Number Exercise Price Number Exercise Price
--------------- ---------------- --------- ---------------- --------- ----------------
$ 0.00-3.38... 2.98 994,202 $ 1.95 841,161 $ 1.81
3.52-4.88... 7.34 464,290 4.35 430,184 4.34
5.05-7.50... 8.82 400,754 6.73 71,027 7.03
7.56-9.50... 6.02 495,956 8.65 321,133 8.88
9.80-14.72.. 8.96 1,186,349 13.77 261,052 14.49
15.97-66.00.. 8.56 104,313 23.20 26,569 24.15
Total...... 6.69 3,645,864 $ 8.15 1,951,126 $ 5.73
(b) Sale of Common Stock
In September 1999, the Company sold 678,610 shares of its common stock to
bioMerieux as part of a strategic alliance agreement (see Note 8 (c)). The
Company received $3,732,115 in proceeds from the sale of common stock, net of
issuance costs of $17,885.
In June and July of 2000, the Company sold 1,500,000 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $31.01 per share resulting in proceeds of $44,722,729, net of
issuance costs of $718,066.
In June and July of 2001, the Company sold 127,500 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $13.73 per share resulting in proceeds of $1,705,767, net of
issuance costs of $44,622.
(c) Pro Forma Disclosure of Stock-based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the consolidated statement of operations or, alternatively,
disclosed in the notes to consolidated financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees and nonemployee directors under APB Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company has computed the
pro forma disclosures required under SFAS No. 123 for stock options granted in
1999, 2000 and 2001 using the Black-Scholes option-pricing model. The weighted
average assumptions used for 1999, 2000 and 2001 and certain weighted average
data are as follows:
1999 2000 2001
----------- ----------- -----------
Risk-free interest rate.............. 5.10%-6.38% 5.36%-6.71% 4.31%-5.24%
Expected dividend yield.............. -- -- --
Expected life........................ 5 years 5 years 5 years
Expected volatility.................. 72% 87% 87%
Weighted average fair market value at
grant date......................... $3.28 $11.45 $6.25
F-16
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma effect of these option grants for the years ended December 31,
1999, 2000 and 2001 is as follows:
As Reported Pro Forma
------------ ------------
1999
----
Net loss.......... $ (3,940,075) $ (4,498,680)
Net loss per share $ (0.21) $ (0.24)
2000
----
Net loss.......... $ (5,846,839) $ (7,175,564)
Net loss per share $ (0.27) $ (0.34)
2001
----
Net loss.......... $(10,090,302) $(16,700,952)
Net loss per share $ (0.45) $ (0.74)
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years, as the pro forma expense may vary
based on the number of options granted. The Black-Scholes option-pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
(d) 1997 Directors' Deferred Stock Plan
In January 1998, the Company's stockholders approved the 1997 Directors'
Deferred Stock Plan (the 1997 Directors' Plan) covering 150,000 shares of
common stock. The shares will be granted as services are performed by members
of the Company's Board of Directors. As of December 31, 2001, the Company
granted 39,012 shares of restricted common stock under the 1997 Directors'
Plan. These shares are issued at the end of the three-year period or earlier if
the individual ceases to serve as a member of the Company's Board of Directors.
As of December 31, 2001, 6,862 shares of restricted common stock were vested
under the 1997 Directors' Plan.
(e) Note Receivable from Officer
On March 28, 2001, the Company loaned $163,000 to an officer of the Company
to allow him to pay income tax liabilities associated with a restricted stock
grant of 24,000 shares. The loan bears interest at 4% and is payable in full on
December 31, 2004 and may be extended by either party to December 31, 2006. The
loan may also be extended beyond December 31, 2006 upon mutual consent. The
principal amount of the note is non-recourse as it is secured only by the
24,000 shares of restricted stock. The interest portion of the loan is
full-recourse as it is secured by the officer's assets. The Company issued
these shares to the officer for no consideration and as a result recorded
deferred compensation of approximately $347,000, which will be amortized over
the vesting period of the award, which is forty-eight months.
(f) Employee Stock Purchase Plan
On February 28, 2000, the Company adopted an Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings
toward the semi-annual purchase of the Company's common stock. The employees'
purchase price will be 85% of the fair market value of the common stock at the
time of grant of option or the time at which the option is deemed exercised,
whichever is less. No compensation expense will be recorded in connection with
the plan. As of December 31, 2001, the Company has issued 82,927 shares under
this plan.
F-17
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) INCENTIVE SAVINGS 401(K) PLAN
The Company maintains an incentive savings 401(k) plan (the Plan) for the
benefit of all employees. In February 2002, the Company changed its match to
50% of the first 6% of salary from 100% of the first 2% of salary and 50% of
the next 2% of salary, limited to the first $100,000 of annual salary. The
Company contributed $229,732, $201,759 and $251,157 to the Plan for the years
ended December 31, 1999, 2000 and 2001, respectively.
(8) 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 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 December 31, 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.
The Company recognized approximately $620,000, $6,000 and $0 in revenue
under the agreement during the years ended December 31, 1999, 2000 and 2001,
respectively.
(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 million in milestone payments.
F-18
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 2001, the Company
had substantively 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
December 31, 2001.
Under the December 1995 agreement, the Company recognized approximately
$2,344,000, $1,887,000 and $1,570,000 in revenue during the years ended
December 31, 1999, 2000 and 2001, respectively.
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.
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
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 $38.5
million has been received through December 31, 2001.
Under the December 1996 agreement, the Company recognized approximately
$9,280,000, $4,711,000 and $8,084,000 in revenue during the years ended
December 31, 1999, 2000 and 2001, respectively.
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 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.
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
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 and the
research program continues for its full term, total payments to the Company
will approximate $33.2 million, excluding royalties. Of the total potential
payments, approximately $10.2 million represents contract research
F-19
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payments and $23.0 million represents milestone payments based on achievement
of research and product development milestones. As of December 31, 2001, the
Company had substantively 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 December 31, 2001.
Under the September 1997 agreement, the Company recognized approximately
$5,261,000, $1,912,000 and $1,137,000 in revenue for the years ended December
31, 1999, 2000 and 2001, respectively.
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 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 9),
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 December 31, 2001.
The Company recognized approximately $232,000, $1,469,000 and $1,173,000 in
revenue during the years ended December 31, 1999, 2000 and 2001, respectively,
which consisted of alliance research revenue and amortization of the up-front
license fees.
(d) 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.
Approximately $8.1 million has been received through December 31, 2001.
The Company recognized approximately $1,640,000 and $6,485,000 in revenue
during the years ended December 31, 2000 and 2001, respectively, which
consisted of alliance research revenue milestone payments and amortization of
the up-front license fees.
(9) GENOMEVISION(TM) SERVICES
GenomeVision(TM) services are revenues from government grants, fees received
from custom gene sequencing and analysis and subscription fees from
PathoGenome(TM) Database.
F-20
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, 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.
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.
(10) 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 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 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 Company expended approximately $5,549,000 and made cash payments of
approximately $4,263,000 under this agreement during the year ended December
31, 2001, which consisted of the initial license fee and clinical development
expenses.
F-21
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the eight quarters in the period ended December 31, 2001. In
the opinion of management, this information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this Form 10-K, and
all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations.
Quarter Quarter Quarter Quarter
One Two Three Four Year
----------- ----------- ----------- ----------- ------------
2000
----
Revenues:
BioPharmaceutical................... $ 3,341,373 $ 2,872,424 $ 2,783,478 $ 2,853,816 $ 11,851,091
GenomeVision(TM) Services........... 3,668,813 3,301,520 3,141,373 3,482,437 13,594,143
Total revenues.................... 7,010,186 6,173,944 5,924,851 6,336,253 25,445,234
Costs and Expenses:
Cost of services.................... 2,937,332 2,671,538 2,750,809 3,355,276 11,714,955
Research and development............ 3,638,769 3,522,553 3,754,546 4,274,663 15,190,531
Selling, general and administrative. 1,835,662 1,198,426 1,711,451 2,129,040 6,874,579
Total costs and expenses.......... 8,411,763 7,392,517 8,216,806 9,758,979 33,780,065
Loss from operations.............. (1,401,577) (1,218,573) (2,291,955) (3,422,726) (8,334,831)
Interest Income (Expense):
Interest income..................... 463,209 456,593 1,180,363 1,230,460 3,330,625
Interest expense.................... (198,607) (217,749) (210,751) (215,526) (842,633)
Net interest income............... 264,602 238,844 969,612 1,014,934 2,487,992
Net loss.......................... $(1,136,975) $ (979,729) $(1,322,343) $(2,407,792) $ (5,846,839)
Net Loss per Common Share:
Basic and diluted................... $ (0.06) $ (0.05) $ (0.06) $ (0.11) $ (0.27)
Weighted Average Common Shares
Outstanding:
Basic and diluted................... 20,309,912 20,696,487 22,215,971 22,284,371 21,376,685
2001
----
Revenues:
BioPharmaceutical................... $ 3,557,570 $ 7,459,478 $ 2,917,389 $ 4,503,849 $ 18,438,286
Genome Vision(TM) Services.......... 4,532,678 3,930,400 4,460,646 4,378,514 17,302,239
Total revenues.................... 8,090,248 11,389,879 7,378,035 8,882,363 35,740,525
Costs and Expenses:
Cost of services.................... 3,680,816 3,430,803 4,633,058 4,408,030 16,152,707
Research and development............ 3,822,329 4,438,822 5,247,912 10,548,697 24,057,760
Selling, general and administrative. 1,634,922 2,190,432 2,559,004 2,382,871 8,767,229
Total costs and expenses.......... 9,138,067 10,060,057 12,439,974 17,339,598 48,977,696
Loss from operations.............. (1,047,819) 1,329,822 (5,061,939) (8,457,235) (13,237,171)
Interest Income (Expense):
Interest income..................... 1,143,795 986,723 1,055,631 653,111 3,839,260
Interest expense.................... (169,342) (212,123) (174,269) (136,657) (692,391)
Net interest income............... 974,453 774,600 881,362 516,454 3,146,869
Net loss.......................... $ (73,366) $ 2,104,422 $(4,180,577) $(7,940,781) $(10,090,302)
Net Loss per Common Share:
Basic and diluted................... $ (0.00) $ 0.09 $ (0.18) $ (0.35) $ (0.45)
Weighted Average Common Shares
Outstanding:
Basic and diluted................... 22,409,501 22,451,753 22,685,660 22,742,794 22,572,427
F-22
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
---------------------
2000 2001
---------- ----------
Payroll and related expenses $1,717,108 $1,990,394
Facilities.................. 466,678 463,279
Professional fees........... 242,273 108,375
License and other fees...... 435,434 183,724
Employee relocation......... 146,936 224,543
Clinical development........ -- 1,286,324
704,328 576,074
---------- ----------
$3,712,757 $4,832,713
========== ==========
(13) SUBSEQUENT EVENT (UNAUDITED)
On March 6, 2002, the Company sold convertible debentures to two
institutional investors in a private placement transaction, which resulted in
$15 million in gross proceeds. The debentures 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 debentures 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 less
obligations for borrowed money bearing interest) of less than $35 million, then
the holders of the notes can require that all or any part of the outstanding
principal balance of the notes plus all accrued but unpaid interest be repaid.
Interest on the debentures accrues at 6% annually. The investors also received
warrants to purchase up to 487,500 shares of common stock at an exercise price
of $8.00 per share, subject to certain adjustments. The warrants only become
exercisable to the extent the debentures are converted or if certain other
redemptions or repayments of the debentures occur. The warrant was valued using
the Black-Scholes Option Pricing Model and recorded as a discount to the debt
in accordance with EITF 00-27. The discount will be amortized as interest
expense over the term of the debt.
F-23