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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 28, 1997 Commission File No. 0-21794
GENZYME TRANSGENICS CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-3186494
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
FIVE MOUNTAIN ROAD 01701
FRAMINGHAM, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(508) 872-8400
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
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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 twelve months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 1998: $122,872,600
Number of shares of the Registrant's Common Stock outstanding as of March
16, 1998: 17,406,912
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 27, 1998 are incorporated by reference into Part III
of this Form 10-K.
ITEM 1.
BUSINESS
General
Genzyme Transgenics Corporation ("GTC" or the "Company") has established a
leadership position in the application of transgenic technology to the
development and production of genetically engineered proteins for therapeutic,
diagnostic and other biomedical uses, both in collaboration with pharmaceutical
and biotechnology companies and independently. To date, GTC has produced more
than 27 such proteins. For its lead compound, Antithrombin III ("AT-III"), the
Company has completed a Phase I and Phase II human clinical trial, and has
initiated a Phase III clinical study. GTC is also a leading Contract Research
Organization ("CRO"), providing services such as preclinical efficacy and safety
testing, in vitro testing and formulation development to pharmaceutical,
biotechnology, medical device and other companies. In February 1998, GTC
reorganized its CRO business to form Primedica Corporation ("Primedica").
Revenues for the Company's testing and production services were $43.4 million in
1997, an increase of 13% from 1996. Revenues from research and development
totaled $19.5 million, an increase of 134% from 1996.
GTC produces recombinant proteins transgenically by inserting, into the genetic
material of an animal embryo, a gene that directs the production of a desired
protein in the milk of female offspring. The Company believes that transgenic
production offers significant economic and technological advantages relative to
traditional protein production systems, including reduced capital expenditures
and lower direct production cost per unit for complex proteins. For proteins
currently derived from pooled human plasma, transgenic production provides an
alternative source, free from the risks of transmission of human viruses and
other adventitious agents. In the case of certain complex proteins, transgenic
production may represent the only technologically and economically feasible
method of commercial production. To date, GTC has expressed 14 proteins at
levels of one gram per liter or higher, more than 10 times the level typically
achieved for comparable proteins in conventional cell culture systems.
GTC's most advanced product candidate is transgenic AT-III, an anticoagulant
normally present in human serum. Plasma-derived AT-III is an approved therapy
for inherited AT-III deficiency and for certain acquired deficiencies. Worldwide
sales of plasma-derived AT-III were approximately $200 million in 1994. The
Company believes transgenic AT-III may represent a more attractive product in
light of safety considerations, the limited volume of AT-III available from
plasma and the impracticality of producing sufficient quantities of recombinant
AT-III by cell culture methods. GTC has expressed transgenic AT-III in goats,
demonstrating stable expression across multiple generations and successive
lactations. Further, GTC has purified transgenic AT-III to clinical grade with
attractive yields. Preclinical safety and efficacy studies, Phase I and Phase II
human safety studies, have been successfully completed. GTC filed an
Investigational New Drug application (an "IND") with the U.S. Food and Drug
Administration ("FDA") to initiate a Phase III clinical trial for this product,
which began in the first quarter of 1998.
Other significant plasma proteins under development by GTC include Alpha-1
Proteinase Inhibitor ("API") and Human Serum Albumin ("HSA"), which is now being
developed in conjunction with Fresenius AG. Additionally, GTC is working with
other corporate partners such as Bristol-Meyers Squibb and BASF on a number of
monoclonal antibodies and other recombinant proteins. The Company is also
developing transgenic production processes for other proteins, including
prolactin, insulin and the msp-1 protein for use in a malaria vaccine, and is in
commercial discussions with prospective partners for other products.
The Company's Primedica CRO operations are focused on enabling its clients to
meet regulatory testing and other product development needs quickly and
effectively by offering a fully integrated line of services. Primedica's
laboratories focus on providing high value, scientifically differentiated
services to clients, including preclinical efficacy testing, experimental
surgery, photobiology and reproductive toxicology testing as well as formulation
development. Primedica uses its technological capabilities to introduce new
services that improve the ability of its customers to develop their products
successfully. The Company's comprehensive programs link its preclinical and
manufacturing support services in order to reduce the time and expense of
bringing new therapeutics or other products to market.
As an outgrowth of production services performed for the National Cancer
Institute (the "NCI"), the Company has developed technology for the production
of idiotypic vaccines, in which a cancer patient's own tumor cells are used to
enhance the immune system's ability to prevent the regrowth of tumors. Idiotypic
vaccines produced by GTC have shown
promising results, including the absence of disease for over six years in four
of nine lymphoma patients treated. Results from this program have been reported
in the October 1992 issue of The New England Journal of Medicine and the May
1995 issue of The Lancet. During 1997, 4 of 5 multiple myeloma patients and 7 of
8 lymphoma patients were shown to mount T-cell immune responses specific to
their tumors in response to vaccination with the idiotype vaccine. These results
were reported at the IVth International Workshop on Multiple Myeloma in Boston
in June 1997 and at the American Society of Hematology Meeting in San Diego in
December 1997. GTC and the NCI signed a Collaborative Research and Development
Agreement ("CRADA") in 1996. The Company has expanded its clinical trials in
myeloma in 1997 under an agreement with the University of Arkansas for Medical
Sciences.
Transgenic Production
Overview and Strategy
A growing number of recombinant proteins are being developed by pharmaceutical,
biotechnology and other companies for therapeutic, diagnostic and nutriceutical
applications. Many of these proteins have proven difficult or expensive to
produce in the quantities required using conventional methods, such as bacteria,
yeast or mammalian cell sources. Moreover, bacteria or yeast systems cannot
produce many complex proteins. While mammalian cells can produce certain complex
proteins, they are generally more difficult and expensive to grow and often
produce lower volumes of protein. Proteins produced by the Company
transgenically have been expressed at concentrations significantly greater than
those typically achieved using conventional methods.
Transgenic technology uses in vitro microinjection or other techniques to
introduce a genetically engineered segment of exogenous DNA (an "expression
vector") into the genetic material of a fertilized egg or early stage animal
embryo. Two types of genetic instructions are incorporated into the expression
vector: the coding sequence and the promoter sequence. Coding sequences instruct
the cells of the animal to express a specified protein. Promoter sequences
direct the expression of proteins at appropriate times and by specific tissues
or cell types. The modified embryo is then transferred to a recipient female.
Transgenes are successfully integrated into the genetic makeup of only a small
percentage of the embryos that are microinjected; therefore multiple
microinjection candidates are required. If successful, the resulting animal,
when mature and lactating, will express the desired protein. Once established in
the first generation of transgenic animals, the transgene is transmitted like
other genetic traits to future generations through traditional breeding with
either non-transgenic or other transgenic animals.
The Company believes transgenic production offers significant economic and
technological advantages over traditional methods of protein production,
including reduction in the total amount of required capital expenditures, lower
direct production cost per unit and reduced risk of transmission of human
viruses and other adventitious agents. For certain complex proteins, transgenic
production may represent the only technologically and economically feasible
method of commercial production. To date, the Company has produced such proteins
principally using goats, which offer an attractive combination of large milk
volumes, relatively short generational time periods and ease of handling and
milking.
GTC also believes that for certain proteins required in extremely large amounts,
the cloning of large dairy animals such as cows expressing the desired transgene
in their milk will speed transgenic biopharmaceutical development. In September
1997, GTC signed an exclusive, worldwide licensing agreement with Advanced Cell
Technologies, Inc. ("ACT") of Worcester, MA allowing GTC to utilize ACT
technology for the development of biopharmaceuticals and nutraceuticals in the
milk of cloned, transgenic dairy cows. In January 1998, two transgenic calves
expressing a marker gene were born using this technology. ACT has developed
proprietary technology, which, when coupled with GTC's transgenic technology,
will provide patentable approaches to efficiently create cloned transgenic cows.
GTC's strategy is to commercially produce proteins by use of transgenic
technology both by (i) entering into contracts with biotechnology and
pharmaceutical companies to utilize the Company's transgenic services in
exchange for revenue, royalties and, possibly, marketing rights to the resulting
product and (ii) independently identifying proteins in the public domain,
proteins covered by lapsing patents and proprietary proteins available for
license which represent attractive candidates for transgenic production and
funding development of such proteins itself or seeking corporate partner
funding.
GTC has entered into funding contracts for the development of AT-III, other
plasma proteins, certain monoclonal antibodies and other products.
Achievements to Date:
Over the past few years, GTC has shown the feasibility of transgenic protein
production by the achievement of the following specific milestones:
o To date, GTC has produced 27 different transgenic proteins in animals,
14 at concentrations of one gram per liter or greater and one protein
in excess of 35 grams per liter, levels often many times higher than
those achievable in other production systems.
o The Company has produced a significant number of transgenic goats. GTC
maintains a herd of over 500 goats at its facility in Massachusetts as
well as an additional 150 goats at Tufts University School of
Veterinary Medicine ("Tufts"). Over 40 of these goats are transgenic,
each expressing one of five different proteins.
o Stability of expression has been demonstrated across lactations, and,
for two proteins, across two generations expressing the same
transgene.
o Together with Genzyme Corporation ("Genzyme"), GTC has been able to
achieve clinical grade purity for a transgenically produced protein at
high recovery levels. This transgenic protein has been extensively
characterized and its pharmacodynamic properties in animal models have
been shown to be comparable to those of the same protein from other
sources.
o GTC completed a Phase I human safety clinical trial, filed an IND with
the FDA, and completed a Phase II clinical trial in patients
undergoing coronary artery bypass grafting ("CABG"). GTC began a Phase
III clinical trial in patients on cardiopulmonary bypass during
surgery in March 1998.
Transgenic Products Under Development
Antithrombin III. AT-III is an anticoagulant normally present in human serum.
Decreased levels of AT-III are found in individuals who have either a hereditary
or an acquired deficiency of AT-III. The hereditary deficiency has an incidence
rate of 1 in 2,000 to 1 in 20,000. Individuals with hereditary AT-III deficiency
have an increased tendency towards blood clots (thromboses) and are treated with
AT-III protein replacement therapy during periods when they are at high risk for
clots, such as during surgery. Acquired AT-III deficiency occurs in many disease
states as a result of several possible causes, including a decrease in the
amount of AT-III produced, an increase in the rate of AT-III consumption or an
abnormal loss of AT-III from the circulation. Examples of such conditions
include acute liver failure, disseminated intravascular coagulation, sepsis and
septic shock, burns, multiple organ failure, bone marrow and other organ
transplantation and hemodialysis.
Plasma-derived AT-III is approved for use in Europe and Japan for treatment of
both acquired and hereditary AT-III deficiency. In the United States,
plasma-derived AT-III is currently approved for use only for hereditary AT-III
deficiency. The worldwide market for plasma-derived AT-III was approximately
$200 million in 1994.
GTC believes transgenic AT-III may represent a more attractive product in light
of the risks of viral transmission from pooled plasma products in general, the
limited volume of AT-III currently available from plasma and the impracticality
of producing sufficient quantities of recombinant AT-III in cell culture
systems. The Company also believes that a lower cost, higher volume alternative
to plasma-derived AT-III will further expand the use of AT-III in clinical
settings.
GTC has produced multiple transgenic goats carrying the AT-III gene and has
selected a founder goat from which a production herd is being generated. This
genetic line expresses AT-III at levels of approximately two grams per liter.
The processes for production and purification have been implemented and result
in a product that is purified to clinical grade at attractive yields.
Preclinical safety and efficacy studies for AT-III have been successfully
completed. The Company filed an IND with the FDA for the use of transgenic
AT-III as a potential treatment for AT-III deficiency that occurs during certain
vascular surgeries, including cardiopulmonary artery bypass grafting, and a
Phase II clinical study for this indication was completed. The study confirmed
the safety of AT-III at all doses administered and supported its ability to
enhance anticoagulation in CABG patients. A Phase III clinical trial was begun
in March 1998 to test the efficacy of AT-III in restoring heparin sensitivity
among patients on cardiopulmonary bypass. A concurrent trial is comparing the
physiological activity of transgenic AT-III with that of plasma-derived AT-III.
GTC is developing recombinant human AT-III under a license from Behringwerke AG,
subject to a royalty obligation. In March 1996, the Company entered into a
Convertible Debt and Development Funding Agreement (the "Agreement") with
Genzyme under which Genzyme agreed to provide a revolving line of credit
("Genzyme Credit Line") in the amount of $10 million and agreed to fund
development costs of the AT-III program. During 1996, Genzyme converted
$1,673,000 of debt to equity under this agreement, leaving the availability
under the Genzyme Credit Line at $8.3 million.
In March 1997, the Company amended the Agreement with Genzyme to provide for
continued funding by Genzyme of the development costs of the AT-III program
through June 30, 1997. In June 1997, the Company agreed to extend the AT-III
Agreement until December 31, 1997. Under the agreements in effect in 1997,
Genzyme provided $7 million in development funding. In July 1997, the Company
and Genzyme announced an agreement to establish a joint venture (the "ATIII
LLC") for the development, marketing and distribution of AT-III, subject to the
execution of a definitive agreement. A definitive collaboration agreement for
ATIII LLC ("Genzyme Joint Venture") was executed on January 1, 1998. Under the
terms of the agreement, Genzyme will provide 70% of the next $33 million of
development costs and the Company will fund the remaining 30%. Development costs
in excess of $33 million will be funded equally by the partners. In addition to
the funding, both partners will contribute manufacturing, marketing and other
resources to the joint venture at cost and will share profits from product sales
equally. The agreement covers all territories other than Asia and may include
milestone payments from Genzyme to the Company after the product has been
approved by the FDA.
Alpha-1 Proteinase Inhibitor ("API"). API is a serine protease inhibitor which
is normally present in human plasma. In certain pulmonary diseases, including
congenital alpha1-antitrypsin ("AAT") deficiency and cystic fibrosis, patients
develop chronic emphysema. Although the precise mechanism is uncertain,
researchers believe that the development of emphysema results from a chronic
imbalance between elastase and API, which is deficient in patients with
hereditary AAT deficiency. Plasma-derived API is approved in the United States
for parenteral use in the treatment of patients with congenital AAT deficiency.
Treatment of AAT deficiency focuses on chronic augmentation therapy with API to
restore the elastase/elastase inhibitor balance. Dosing requirements are high,
averaging four grams per week for a 150-pound patient.
An imbalance between elastase and elastase inhibitors also occurs in cystic
fibrosis, which is the most common fatal genetic disease among Caucasians,
occurring in one in every 2,500 infants born in the United States. Based on
preliminary data, the Company believes that aerosol administration of API to
cystic fibrosis patients may be effective in reducing the level of neutrophil
elastase in the lung, thereby reducing elastase-induced pulmonary tissue
degradation and fibrosis.
GTC believes that transgenic API may represent a more attractive product than
plasma-derived API in light of potential risks of viral transmission from donor
plasma products, and that it will be more economical to produce and more widely
available than the plasma-derived products. The ability to produce large
quantities of transgenic API may enable the Company to pursue other indications
for this product, such as atopic dermatitis, in which an imbalance of proteases
is also implicated.
GTC has expressed API at levels equivalent to 35 grams per liter in a mouse
model. Several transgenic founder goats have been generated, including at least
one line which expresses API in excess of 20 grams per liter. To date, GTC has
funded the development of API internally.
Human Serum Albumin ("HSA"). HSA is the protein principally responsible for
maintaining oncotic pressure, plasma volume and the balance of fluids in blood.
It is critical to the transport of amino acids, fatty acids, enzymes and
hormones in the blood stream. The therapeutic use of HSA is indicated in
situations of blood loss and decreased blood albumin levels which can occur
during shock, serious burns, pre- and post-operative conditions and gastric and
intestinal malfunctions. HSA is currently produced by human plasma
fractionation, with 1994 worldwide sales in excess of $1.3 billion.
For HSA and all human blood sourced products, the theoretical risk of virus
transmission, including HIV and hepatitis, remains a concern despite efforts to
improve screening and purification techniques.
Prices for HSA are expected to rise due to a number of factors, including
increasing costs of testing and purifying protein fractions sourced from human
plasma, the replacement of high margin plasma fractions with safer recombinant
versions,
and decreasing blood donations in the face of increasing demand. Transgenic
production of HSA would eliminate the risk of human viral transmission and help
ensure the delivery of safe therapeutics at competitive prices.
GTC has expressed transgenic HSA in mice at levels equivalent to or greater than
35 grams per liter. Because the Company has demonstrated that the mouse system
is highly predictive to that of dairy animals, the Company believes it will be
able to produce transgenic HSA in cows at commercial scale. An individual dairy
cow will produce approximately 8,000 liters of milk per year, or an estimated 80
kilograms of albumin per year. This level of productivity will provide GTC with
the ability to produce HSA at costs competitive with albumin sourced from human
blood. The Company believes that HSA is not the subject of any composition of
matter patent, and has entered into an agreement with Fresenius AG of Bad
Homburg, Germany, to further develop and commercialize transgenic HSA. During
1997, GTC made substantial progress toward meeting key milestones for the
commercialization of HSA. By the end of 1997, GTC has demonstrated, at the
technical laboratory scale and through its sophisticated analysis, that the
production of HSA at the scale, purity and cost requirements is feasible. In
February 1998, GTC's partner, Fresenius, agreed that this milestone had been
achieved. By this achievement GTC now believes it has demonstrated that it has
the ability to produce recombinant proteins at the lowest-to-date cost ever
achieved in the biotechnology industry.
The founding of transgenic cows for HSA also progressed well. GTC and its
collaborators were on target for the year in activities toward the founding of
transgenic cows. Both traditional microinjection and cloning techniques are
being utilized, and the first cows are expected to be born by Spring 1998. The
other elements of the project, such as planning for production facilities, are
on track or ahead of planned schedules. GTC has entered into an agreement with
Advanced Cell Technologies of Worcester, MA to develop cloned, transgenic cows
for the production of HSA.
Monoclonal Antibodies. Monoclonal antibodies are immune system proteins that can
find and attach to specific biological targets in the body. Recent advances in
developing humanized and human antibodies, single chain antibodies and
conjugated antibodies have added to the potential value of these therapeutic
agents. More than 50 monoclonal antibodies are now in clinical trials sponsored
by pharmaceutical and biotechnology companies with many more in development as
therapeutics for cancer, cardiovascular disease, immune system disorders and for
use against a wide variety of infectious agents, such as viruses and bacterial
infections. GTC is now collaborating with pharmaceutical and biotechnology
companies for the transgenic production of a number of therapeutic monoclonal
antibodies.
Bristol-Myers Squibb ("BMS"), a leading pharmaceutical company specializing in
cancer treatment, has entered into an agreement with GTC for transgenic
production in goats of its BR-96 monoclonal antibody, a potential therapy for
breast and lung cancer. In February 1997, GTC announced that it had successfully
demonstrated an expression level of 14 grams per liter in the milk of transgenic
goats, and that the antigen binding levels were equivalent to material produced
using conventional cell culture technology. During 1997, BMS decided to
terminate its antibody targeting program, of which BR-96 was a part. GTC did
receive its milestone payment of achievement of expression levels prior to this
termination. BMS is currently spinning off this technology to a group of former
BMS employees, and GTC expects that any further BR-96 development would be done
in conjunction with this new entity.
Discussions are underway to determine next steps.
GTC executed a second agreement with BMS for the development of transgenic goats
expressing a humanized monoclonal antibody in their milk. This antibody,
CTLA4Ig, is currently in clinical trials for the treatment of psoriasis, and may
have applications in other disorders including rheumatoid arthritis and organ
transplant rejection.
GTC currently has nine other funded development programs underway. One, an
anti-colon cancer antibody, produced on behalf of a Japanese pharmaceutical
company, has been expressed in the milk of goats at four grams per liter. Other
programs are being conducted in collaboration with B. Braun Melsungen,
Progenics, BASF AG, Zeneca, HMR, Monsanto/Searle, Novopharm and NeoRx. The
Company is in active discussions with a number of other pharmaceutical and
biotechnology companies for the transgenic development of therapeutic
antibodies.
Progenics. In 1997, GTC and Progenics Pharmaceuticals, Inc. signed a
collaborative agreement for the development of a transgenic manufacturing
process for PRO 542, Progenics' fusion protein for the treatment of HIV. The
initial samples of product have been produced by Progenics in cell culture and
have entered Phase I human clinical trials. This exclusive arrangement between
GTC and Progenics is targeted to the large scale, low cost manufacture of this
product which is hoped to be beneficial for HIV/AIDS patients.
Insulin. Current worldwide sales of insulin products are more than $3 billion
annually. Recombinant DNA insulin now accounts for approximately 50% of the
market.
GTC has expressed insulin precursors at the equivalent of more than eight grams
per liter in the milk of mice, which provides for the potential to manufacture
insulin on a highly cost effective basis. GTC has taken initial steps to develop
appropriate insulin processing and purification procedures, and the Company
believes that there are several approaches to the manufacture of a transgenic
insulin that may offer cost benefits compared to current products. Insulin is
not the subject of any known patents that could foreclose the Company's
development program.
Prolactin. In collaboration with Genzyme, GTC has developed multiple transgenic
mouse lines which express prolactin at levels in excess of the equivalent of one
gram per liter. Prolactin is a human hormone which has numerous biological
activities, including stimulation of the immune system. Genzyme has licensed
patents covering recombinant prolactin and the parties are jointly exploring the
development of transgenic prolactin for multiple clinical indications, and for
the infant and specialty nutritional product markets. GTC announced in November
1997 that it had achieved expression levels of 3 milligrams per milliliter of
human prolactin in the milk of transgenic mice, a level 30-50 times greater than
that achieved in conventional cell culture production systems.
Malaria Vaccine. GTC's transgenic expression system has the potential to express
the correct, immunogenic protein for use as a malaria vaccine both economically
and on a large scale. Malaria is a disease that has an annual incidence of more
than 300 million people worldwide and results in several million deaths
annually. GTC is working with the U.S. National Institutes of Health (the "NIH")
and the Federal Malaria Vaccine Coordinating Committee to transgenically express
a malaria vaccine and to examine the options for commercializing the vaccine.
The Company has signed a letter of intent to enter into a CRADA with the NIH and
has achieved high level expression on a malaria-based peptide, MSP-1, in the
milk of transgenic mice.
TransGenerics. GTC has a program to identify and develop transgenic production
systems for the first generation of approved recombinant drugs as they come off
patent. These drugs, many of which have established significant markets, may
become vulnerable to competition from second-generation transgeneric versions
which are more cost effective. GTC is in discussions with both generic and
proprietary pharmaceutical and biotechnology companies with strategic and
product-specific interests in the TransGenerics program.
GTC completed its first commercial agreement for an undisclosed
second-generation transgeneric with B. Braun of Melsungen, Germany. GTC will
develop the product, a currently-approved biological, through product launch. B.
Braun will make up to $11 million in development and milestone payments to GTC
in exchange for bringing the product to Phase II human clinical trials. Both
companies will share pivotal clinical trial costs, and GTC will retain
co-marketing rights in the US.
Other Products. GTC is actively developing, at various technical stages, a
number of proprietary products on its own or in conjunction with partners. These
products include decorin, for the treatment of scar formation in a wide variety
of surgical indications and other conditions such as renal disease, and
gluatamic acid decarboxylase (GAD) for the putative treatment of Type 1 juvenile
diabetes. GTC is also involved in several collaborations on products where
identity is confidential.
Primedica Corporation (CRO Services)
Overview
Contract research organizations provide testing and development services to
pharmaceutical, biotechnology, medical device and other companies, as well as to
certain government agencies. The industry is divided generally into companies
which conduct human clinical trials and those providing non-clinical services,
including preclinical testing, clinical trial support and other development
services. The worldwide revenues for non-clinical CRO services were in excess of
$1 billion in 1997.
The growth of the CRO market has been influenced by several factors. First, cost
control pressures on large pharmaceutical firms are leading them to focus on
core competencies, often resulting in a reduction in the size and capacity of
in-house, non-clinical testing departments. Second, emerging biotechnology and
medical device companies often have and can afford little infrastructure
dedicated to such functions. Third, new scientific developments continue
to lead to new fields of safety testing. Fourth, regulatory changes have
mandated additional testing requirements. Fifth, the need for services, such as
efficacy models and formulation development, increases as pharmaceutical
companies venture further from their traditional bases in search of breakthrough
products.
GTC believes that it has built one of the premier non-clinical CROs in the
industry. The Company believes that it has a broader set of value-added services
than any of its competitors and is differentiated by its ability to offer
comprehensive development programs. The Company has the ability to perform
virtually all of the safety, efficacy and quality control testing, as well as to
provide the regulatory affairs expertise necessary to bring a client's early
research-stage product to the start of Phase I clinical trials.
Operations and Technical Capabilities
GTC acquired its CRO capabilities through the acquisitions of TSI Corporation
("TSI") in October 1994 and BioDevelopment Laboratories, Inc. ("BDL") in June
1995. GTC conducts its CRO services through five laboratories: Mason
Laboratories (Worcester, Massachusetts); Argus Research Laboratories (Horsham,
Pennsylvania); Redfield Laboratories (Redfield, Arkansas); Washington
Laboratories (Rockville, Maryland) and BDL (Cambridge, Massachusetts). In
February 1998, GTC reorganized its CRO businesses under its wholly owned
subsidiary, Primedica Corporation ("Primedica"), to provide a unified identity
and a dedicated structure for further growth of its CRO business. GTC expects to
use Primedica as a vehicle to pursue acquisitions and facilitate other
transactions driving growth and profitability. This business currently employs
over 400 people.
Primedica's laboratories focus on providing high value, scientifically
differentiated services to its clients. Fields in which Primedica provides
contract services include:
o Preclinical Efficacy Testing measures the effectiveness of a drug
candidate prior to human clinical trials. Primedica believes that its
Mason Laboratories facility has the only comprehensive preclinical
efficacy services in the CRO marketplace utilizing a wide variety of
disease models and expertise intended to assist clients in designing
optimal clinical trials.
o ExperimentalSurgery to support toxicology programs enables Primedica
scientists to test novel routes of administration for biotechnology
products which cannot be delivered through standard routes. Primedica
believes that its Mason Laboratories facility has the leading surgical
capabilities in the preclinical CRO marketplace and has the ability to
perform studies which are unavailable from other CROs.
o PhotobiologyTesting measures a drug candidate's potential interactions
with sunlight. Primedica believes that the FDA will require an
increasing number of products to be tested for these effects.
Primedica has the only CRO facilities capable of performing a full
range of phototoxicology and photocarcinogenesis testing.
o Developmental and Reproductive Toxicology Testing measures a drug
candidate's potential impact on a fetus. Primedica believes that its
Argus Research Laboratories facility has performed more teratology
studies than any other laboratory in the industry and is widely
recognized as the leader in the field.
Primedica has also made significant investments in bioanalytical chemistry
services to support clinical trials, drug formulation development and lot
release testing for biopharmaceuticals. The Company believes that its experience
in related areas, its client base and its sales force enables it to compete
effectively in these fields. Clients have recently contracted with Primedica for
testing services for major programs in each of these areas, and Primedica is
pursuing opportunities which may, if successfully concluded, lead to growth in
each field. Primedica believes that its ability to provide high value,
scientifically differentiated services, combined with its traditional strengths
in toxicology, pharmacokinetics, cell line testing and production and regulatory
affairs, offers clients one of the broadest sets of preclinical services
available in the CRO industry.
Primedica believes the key to sustaining superior performance in this field will
be in providing services in a close, collaborative relationship in which
customers are able to receive scientific services from Primedica at levels equal
to or greater than that which they could receive from an in-house department.
Toward this end, GTC has also made significant investment in people, technology
and programs since its acquisition of TSI, increasing the numbers of doctoral
level employees by 42% since the acquisition. GTC believes that its testing
services strategy has been validated by the growth in its business since the
acquisition of TSI in October 1994. Revenues for the Company's testing and
production services in 1997 were $43.4 million representing a 13% increase
compared to 1996.
Idiotypic Cancer Vaccines
GTC's Washington Laboratories (now part of Primedica) has been producing
experimental cancer vaccines for the NCI under contract since 1993. These
vaccines have shown preliminary efficacy in early clinical trials. In 1996, the
Company signed a letter of intent to enter into a CRADA with the NCI to expand
these clinical trials and to gain development rights to the program.
Idiotypic cancer vaccines are autologous therapeutics, requiring that
immunoglobulin harvested from individual patients be expanded in separate cell
cultures. Vaccines are produced at the NCI and Primedica and are given to
patients upon the completion of chemotherapy. The vaccine activates the
patient's immune system to destroy cancer cells which remain after traditional
chemotherapy regimens.
The principal clinical focus of the work today is on B-cell lymphoma, with
secondary efforts on multiple myeloma and other related malignancies. There
are over 40,000 newly diagnosed cases of B-cell lymphoma in the United States
each year. Most patients initially respond favorably to chemotherapy, but the
cancer has a 70% to 90% mortality rate, with patients typically relapsing
within two to three and one half years.
Idiotypic vaccines produced by Primedica have shown promising results, including
the absence of disease for over six years in four of nine lymphoma patients. The
first myeloma patient treated experienced a remission of three and one half
years. GTC signed a CRADA with the NCI in May 1997 to expand clinical trials for
lymphoma and myeloma. The production costs for these vaccines will be shared by
the NCI and GTC. In June 1997, GTC's NCI collaborator, Dr. Larry Kwak, reported
that 4 of 5 multiple myeloma patients who had received the idiotypic vaccine
have mounted a cellular immune response against their own tumors. He further
reported at the American Society of Hematology meeting in December 1997, that 7
of 8 lymphoma patients had responded similarly to the vaccine. In 1997, GTC
entered into a collaboration with the University of Arkansas to expand myeloma
Phase I/II clinical trials at that institution, and expects to be manufacturing
6 vaccines per month by March 1998 for these trials, as well as two vaccines
monthly for the lymphoma clinical trial.
Relationship With Genzyme
Equity Position. Genzyme is the largest single stockholder of the Company,
currently holding 7,428,365 shares of Common Stock, representing approximately
43% of the outstanding GTC Common Stock. Genzyme also holds a Common Stock
Purchase Warrant (the "Genzyme Warrant") exercisable for 145,000 shares of
Common Stock at a price of approximately $2.84 per share, the market price of
the Common Stock at the time the warrant was issued.
Four million of Genzyme's shares in GTC were acquired in 1993 at the time of the
Company's organization in exchange for the transfer of certain assets to the
Company. In February 1995, 500,000 shares were sold to Genzyme at $8.00 per
share, upon exercise by GTC of a put agreement entered into at the time of the
Company's initial public offering. Genzyme received 1,333,333 shares in 1995 and
219,565 shares in 1996 in exchange for conversion of debt at the then current
market prices. In July 1995, 475,467 shares were issued to Genzyme in exchange
for shares of Genzyme common stock delivered as a portion of the consideration
for the acquisition of BDL. The remaining 900,000 shares were purchased by
Genzyme as part of the August 1996 Public Offering. The Genzyme Warrant, which
expires on July 3, 2005, was issued to Genzyme in consideration of Genzyme's
guaranty of the Company's indebtedness to a commercial bank discussed below. All
of the shares held by Genzyme are entitled to certain registration rights.
Arrangements Regarding Technology and Product Development. GTC and Genzyme have
entered into a number of agreements regarding technology and product development
discussed below:
Technology Transfer Agreement. Under the Technology Transfer Agreement
dated May 1, 1993, Genzyme transferred substantially all of its transgenic
assets and liabilities to GTC, including its ownership interest in SMI
Genzyme Ltd., a joint venture between Genzyme and Sumitomo Metal Industries
Ltd. (the "Joint Venture"), assigned its relevant contracts, and licensed
to the Company technology owned or controlled by it and relating to the
production of recombinant proteins in the milk of transgenic animals (the
"Field") and the purification of proteins produced in that matter. The
license is worldwide and royalty free as to Genzyme, although GTC is
obligated to Genzyme's licensors for any royalties due them. As long as
Genzyme owns less than 50% of GTC,
Genzyme may use the transferred technology, or any other technology it
subsequently acquires relating to the Field, without any royalty obligation
to the Company, provided Genzyme may not offer transgenic production
services to third parties.
R&D Agreement. Pursuant to the R&D Agreement, Genzyme and GTC agreed, until
May 1, 1998, to provide research and development services to the other
relating, in the case of GTC, to transgenic production of recombinant
proteins and, in the case of Genzyme, to the purification of such proteins.
Each company receives payments from the other equal to the performing
party's fully allocated cost of such services, which can be no less than
80% of the annual budgets established by the parties under the R&D
Agreement, plus, in most cases, a fee equal to 10% of such costs.
AT-III Development Funding. In March 1996, the Company entered into a
Convertible Debt and Development Funding Agreement (the "Agreement") with
Genzyme under which Genzyme agreed to provide a revolving line of credit
("Genzyme Credit Line") in the amount of $10 million and agreed to fund
development costs of the AT-III program. During 1996, Genzyme converted
$1,673,000 of debt to equity under this agreement, leaving the availability
under the Genzyme Credit Line at $8.3 million.
In March 1997, the Company amended the Agreement with Genzyme to provide
for continued funding by Genzyme of the development costs of the AT-III
program through June 30, 1997. In June 1997, the Company agreed to extend
the Agreement until December 31, 1997. Under the agreements in effect in
1997, Genzyme provided $7 million in development funding. In July 1997, the
Company and Genzyme announced an agreement to establish a joint venture for
the development, marketing and distribution of AT-III, subject to the
execution of a definitive agreement. A definitive collaboration agreement
for ATIII LLC was executed on January 1, 1998. Under the terms of the
agreement, Genzyme will provide 70% of the next $33 million of development
costs and the Company will fund the remaining 30%. Development costs in
excess of $33 million will be funded equally by the partners. In addition
to the funding, both partners will contribute manufacturing, marketing and
other resources to the joint venture at cost and will share profits from
product sales equally. The agreement covers all territories other than Asia
and may include milestone payments from Genzyme to the Company after the
product has been approved by the United States Food and Drug
Administration.
Other Arrangements. GTC and Genzyme have also entered into the following other
arrangements:
Services Agreement. Under a services agreement between GTC and Genzyme (the
"Services Agreement"), GTC pays Genzyme a fixed monthly fee for basic
laboratory and administrative support services provided by Genzyme. The
monthly fee is adjusted annually, based on the services to be provided and
changes in Genzyme's cost of providing the services. The Services Agreement
is self-renewing annually and may be terminated upon 90 days notice by
either party to the other party.
Lease. GTC leases a portion of Genzyme's facilities in Framingham,
Massachusetts (the "Lease"). GTC paid Genzyme $178,000 under the Lease in
1997.
Credit Line Guaranty, Term Loan Guaranty and Lien. The Company obtained a
credit line in July 1995 and a term loan in December 1995 with a commercial
bank, each secured by Genzyme's guaranty of the Company's obligations
thereunder (up to $9.8 million at December 28, 1997). The Company has
agreed to reimburse Genzyme for any liability Genzyme may incur under such
guaranty and has granted Genzyme a first lien on all of the Company's
assets to secure such obligation.
Genzyme Credit Line. In March 1996, the Company entered into the Genzyme
Credit Line Agreement with Genzyme under which Genzyme agreed to provide a
revolving line of credit in the amount of $10 million. During 1996,
$1,673,000 of debt was converted into 219,565 shares of common stock,
leaving $8,327,000 available on the revolving line of credit.
In September 1997, the Company and Genzyme amended the terms of the $8.3
million Genzyme Credit Line. The expiration date of the revolving credit
line was extended to March 31, 2000, with an option, at that date, for the
Company to convert the outstanding balance to a three-year term loan. The
interest rate remains at 7% through April 1, 1998, increasing annually
through the end of the term loan; starting at the lower of 8% or prime in
the first year increasing to the lower of 10% or prime lending rate +2% in
the final year of the term loan. Financial
covenants require positive quarterly earnings before interest, taxes,
depreciation, amortization and unfunded research and development expense
starting April 1, 1998. As of December 28, 1997, there was $6,000,000
outstanding on the Genzyme Credit Line.
Other Strategic Collaborations
Tufts University School of Veterinary Medicine. Pursuant to a cooperation and
licensing agreement, Tufts has agreed to work exclusively with GTC until
September 1998 in developing commercial applications of transgenic protein
production in milk. Tufts has also granted GTC a perpetual, non-exclusive
license to use certain proprietary microinjection technology and animal
husbandry techniques. Sales of products derived from transgenic goats produced
by Tufts, or from their offspring, are subject to royalties payable to Tufts.
The Company maintains a herd of approximately 150 goats at Tufts' facility in
Grafton, Massachusetts.
The Joint Venture. GTC holds an interest in the Joint Venture which, in March
1994, increased to 22% after an additional $1.2 million cash investment by the
Company. In October 1995, GTC contributed approximately $807,000 to maintain its
22% interest. The Joint Venture and GTC are parties to a research and
development agreement under which the Joint Venture funded GTC's research into
transgenic production of AT-III through October 1995 and certain research on
other proteins (the "Funded Proteins") through October 1996. GTC has granted to
the Joint Venture an exclusive license in Asia to use GTC's transgenic
technology to market and sell transgenic animals and to sell Funded Proteins
until the later of 2008 or the expiration of any applicable Japanese patent,
subject to various reciprocal royalty obligations. In February 1997, the Company
reached agreement with the Joint Venture under which GTC received milestone
payments of $4.4 million (see Note 12 to the consolidated financial statements
appearing in this report).
Patents and Proprietary Rights
GTC has filed a number of patent applications which cover relevant portions of
its transgenic technology, several of which are covered by cross-licensing
agreements. GTC holds an exclusive license from Genzyme to rights under a number
of patent applications on file in the United States and corresponding foreign
patent applications relating to certain aspects of its technology. GTC has a
broad patent issued by the European Patent Office which grants the full range of
claims presented in GTC's application covering the basic method of protein
production in milk, as well as any promoter used to do so. Other GTC
applications as to specific proteins, classes of proteins, techniques to enhance
expression and purification technologies remain pending.
GTC has exclusive and nonexclusive licenses to technologies owned by other
parties, including DNX, Inc. as to microinjection, Stanford University as to
gene transfer, and Behringwerke AG as to AT-III, as well as promoter
cross-licenses in place with PPL Therapeutics PLC and Pharming B.V. Certain of
the licenses require GTC to pay royalties on sales of products which may be
derived from or produced using the licensed technology. The licenses generally
extend for the life of any applicable patent. In April 1997, GTC entered into a
Settlement Agreement that ended the arbitration proceeding with Pharming B.V.
with respect to one such cross-license agreement. See "Item 3--Legal
Proceedings."
The Company also relies upon trade secrets, know how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company.
Competition
Transgenics
Many companies, including biotechnology and pharmaceutical companies, are
actively engaged in seeking efficient methods of producing proteins for
therapeutic or diagnostic applications. Two other companies known to GTC are
extensively engaged in the application of transgenic technology for the
production of proteins: Pharming B.V. and PPL Therapeutics PLC. Pharming B.V.,
based in the Netherlands, is primarily engaged in the development of recombinant
proteins in the milk of transgenic cows, which are most suitable for extremely
high volume protein production. See "Item 3--Legal Proceedings." PPL
Therapeutics PLC, which is based in Scotland, utilizes primarily sheep for
transgenic protein production.
Primedica
The worldwide markets for testing services, manufacturing support services and
related development services are highly fragmented, involving several hundred
companies, as well as universities and governmental bodies. Competition in these
markets is based primarily on technological capabilities and reputation for
quality of products and services offered and perceived financial stability. In
certain market segments, price is also a significant competitive factor.
Government Regulation
Transgenics
The manufacturing and marketing of GTC's potential products, and certain areas
of research related to them, are subject to regulation by governmental
authorities in the United States, including the FDA, the U.S. Department of
Agriculture (the "USDA") and the Environmental Protection Agency (the "EPA").
Comparable authorities are involved in other countries.
To GTC's knowledge, no protein produced in the milk of a transgenic animal has
been submitted for final regulatory approval. However, the FDA issued its Points
to Consider in August 1995. Earlier in 1995, comparable guidelines were issued
by European regulatory authorities. GTC believes that its programs
satisfactorily address the issues raised by these documents and generally views
them as a very positive milestone in the acceptance of the transgenic form of
production. Based on discussions with the FDA and others, GTC expects that the
basic U.S. regulatory framework for the transgenic production of recombinant
proteins in animals will be similar to that described in the Points to Consider.
The anticipated approval process will be a two-part process, governing, first,
the approval of an individual pharmaceutical product as safe and effective and,
second, the approval of the manufacturing process as complying with applicable
FDA current Good Manufacturing Processes ("GMPs"). There can be no assurance,
however, that there will not be any delays in product development or FDA
approval due to issues arising from the breeding of transgenic animals and the
use of proteins derived from such animals.
With respect to therapeutic products, generally the standard FDA approval
process includes preclinical laboratory and animal testing, submission of an IND
to the FDA, appropriate human clinical trails to establish safety and
effectiveness and submission of a New Drug Application prior to market
introduction. The Company generally expects the same process to apply to
transgenically produced products and has already submitted a U.S. IND for AT-III
and has initiated clinical trials in the U.S. GTC expects the approval process
for various proteins to be undertaken either by the Company, by a collaborator
for which the Company is producing proteins, or jointly, depending upon the
nature of the relationship involved.
Approval for the production facilities to be used in producing a therapeutic
product will be subject to both the requirements for Biologics License
Applications and the Points to Consider.
Primedica
GTC and its customers are subject to a variety of regulatory requirements
intended to ensure the quality and integrity of their products and services. The
industry standard for conducting non-clinical testing is embodied in regulations
called Good Laboratory Practices ("GLPs"). GLPs have been adopted by the EPA and
the FDA and a number of foreign regulatory bodies. To help ensure compliance,
the Company maintains a strict quality assurance program at each site to audit
test data and conduct regular inspections of testing procedures and facilities.
GTC also complies with FDA-established current GMPs at its Washington
Laboratories and at BDL.
GTC also maintains certain licenses and permits issued by federal, state and
local authorities relating to the operation of its current laboratory and
testing facilities, including those required for hazardous waste disposal, the
purchase, use and disposal of radioactive isotopes and the use of animals in
testing and research. These licenses and permits include licenses from the U.S.
Nuclear Regulatory Commission for the purchase, use and disposal of small
amounts of short-lived radioactive isotopes for research purposes. GTC also has
registered with the Massachusetts Department of Environmental Protection and the
EPA as a Very Small Quantity Hazardous Waste Generator in connection with its
disposal of certain organic hazardous wastes used in connection with its
molecular biology and biomedical research. These wastes are disposed of through
a licensed hazardous waste transporter. The use and disposal of chemicals is
regulated under the Toxic Substances Control Act and other state and federal
legislation.
Each of GTC's laboratories is licensed by the USDA and state and local
authorities to house and use laboratory animals for biomedical research
purposes. The ability to continue using animals in testing and research is
dependent on continued compliance with the requirements of such licenses. GTC's
Argus, Mason and Washington Laboratories are also registered with the U.S.
Public Health Service to conduct biomedical research on laboratory animals
funded by the NIH and other federal agencies. GTC's Argus, Mason and Redfield
laboratories are also licensed by federal and state drug enforcement agencies to
procure and use controlled substances in research programs involving laboratory
animals.
The Company's operations are also subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and waste, including, but not limited to, animal waste and waste
water.
RESEARCH AND DEVELOPMENT COSTS
During its fiscal years ended December 28, 1997, December 29, 1996, and December
31, 1995, GTC spent $17,840,000, $8,684,000, and $6,394,000, respectively, on
research and development (both sponsored and proprietary). These costs include
labor, materials and supplies, and overhead, including the cost of operating the
transgenics production facility as well as certain subcontracted research
projects.
EMPLOYEES
As of December 28, 1997, GTC employed 582 people. Of these, 368 were engaged in
operations, 54 were engaged in research and development, and 160 were engaged in
marketing and general administration. Of GTC's employees, approximately 43 have
Ph.D. degrees, 1 has a M.D. degree and 14 have D.V.M. degrees. None of GTC's
employees are covered by collective bargaining agreements. GTC believes its
employee relations are satisfactory.
ITEM 1A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
James A. Geraghty.............. 43 Chairman of the Board, President and Chief Executive
Officer
John B. Green.................. 44 Vice President, Chief Financial Officer and Treasurer
Harry M. Meade................. 51 Vice President, Transgenics Research
Peter H. Glick................. 34 President, Primedica Corporation
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors.
Mr. Geraghty has been the President, Chief Executive Officer and a director of
GTC since its incorporation in February 1993 and Chairman of the Board since
January 1998. Mr. Geraghty announced in November 1997 that upon the engagement
of his successor as Chief Executive Officer of the Company, he would resign from
such position. A search is currently underway for such position. Mr. Geraghty
joined Genzyme in September 1992, where he was a Vice President for Corporate
Development and the General Manager of the transgenics business unit until the
incorporation of the Company.
Mr. Green has been the Vice President and Chief Financial Officer of GTC since
December 1994 and Treasurer since August 1997. He has also served as Vice
President and Treasurer of TSI since March 1993 and as its Chief Financial
Officer since December 1994. Prior to that, he was Vice President and Assistant
Treasurer of TSI from December 1989.
Dr. Meade has been Vice President, Transgenics Research for GTC since August
1994 and has served as Research Director of GTC since May 1993. Prior to joining
GTC, Dr. Meade was a Scientific Fellow at Genzyme, where he was responsible for
directing the transgenic molecular biology program. From 1981 to March 1990,
when he joined Genzyme, Dr. Meade was a Senior Scientist at Biogen, Inc., a
biotechnology company, where he worked on the technology relating to the
production of proteins in milk and was an inventor on the first issued patent
covering this process.
Mr. Glick has been President, Primedica Corporation, a wholly-owned subsidiary
of GTC, since February 1998 and has served as Vice President, Marketing and
Corporate Development of GTC since June 1995. Prior to that he was Vice
President, Corporate Development of GTC from October 1994, and of TSI from June
1993. From January 1994 to January 1996, he also served as President of
Primedica's Washington Laboratories subsidiary. From November 1991 to May 1993,
he was Director, Corporate Development of TSI. Prior to joining TSI, he was a
strategy consultant at Bain & Company.
ITEM 2. PROPERTIES
GTC's headquarters and research facilities are located in approximately 9,100
square feet of laboratory and office space leased from Genzyme in Framingham,
Massachusetts. This lease extends through May 1998, at which time the lease
automatically renews on a year-to-year basis unless terminated by either party
on 90 days' notice. See "Item 1 - Business--Relationship with Genzyme."
GTC owns a 168-acre commercial production facility in central Massachusetts.
This facility contains 63,180
square feet of production, laboratory and administrative space. The facility
also currently houses more than 500 goats. GTC believes its and Genzyme's
current facilities are adequate for significant further development of
commercial transgenic products. GTC also currently utilizes animal housing, care
and treatment facilities operated by Tufts in Massachusetts.
GTC also owns or leases sites for each of its testing laboratories. The
Company's Mason Laboratories occupy two facilities in Worcester, Massachusetts,
the largest of which is an approximately 107,600 square foot preclinical testing
facility, leased through March 2005. In addition, GTC owns an adjacent building
that consists of 46,800 square feet, of which 28,100 square feet of space has
been renovated for preclinical testing. The remaining 18,700 square feet, of
which 16,000 square feet is unrenovated shell space, is available for future
expansion.
In addition, GTC owns and occupies a 68,000 square-foot preclinical testing
facility in Redfield, Arkansas; leases a 55,000 square-foot facility in Horsham,
Pennsylvania consisting of a 38,000 square foot preclinical testing facility and
16,000 square feet of unrenovated expansion space, under a lease which expires
in June 2002; operates its formulation business in a 10,500 square-foot
laboratory facility in Cambridge, Massachusetts under a lease that expires in
October 2002; and occupies a 27,000 square-foot laboratory and office facility
in Rockville, Maryland, under a lease expiring in December 2000 and leases 5,000
square feet of office space located in Milford, Massachusetts under a lease
expiring in October 1998.
The operations of the Company's now inactive subsidiary, Health and Sciences
Research Incorporated ("HSRI") were located in a 20,700 square foot facility in
Englewood, New Jersey under a lease expiring in August 1998. The Company has
sublet approximately 6,000 square feet of this space.
ITEM 3. LEGAL PROCEEDINGS
On April 23, 1997, the Company and Pharming, B.V., a Netherlands corporation,
("Pharming"), entered into a Settlement Agreement, thereby ending arbitration
proceedings which were initiated by Pharming on December 21, 1995. The
arbitration was filed under a license agreement between the companies dated
September 21, 1994 (the "License Agreement"), under which the Company and
Pharming cross-licenses various intellectual property rights under certain
patents relating to the transgenic production of proteins. Pharming claimed
breach of the License Agreement by the Company on various grounds, and the
Company denied Pharming's allegations and filed a counterclaim alleging that
Pharming's request for arbitration was filed for improper purposes.
Under the Settlement Agreement, a stipulation dismissing all claims was
submitted to the tribunal and the Company paid Pharming $200,000, which payment
was made in May 1997. Also, in connection with the settlement, the companies
amended the License Agreement to clarify the terms under which (i) the Company
and its affiliates may work in transgenic cattle under the existing license to
Pharming's promoter patent and (ii) Pharming and its affiliates may work in
transgenic goats under the existing license to the Company's promoter patent.
The amended License Agreement further specifies that the Company and Pharming
each have a right of first refusal to perform the work in goats and cattle,
respectively, which the other party would seek to contract to a third party.
Finally, the amended License Agreement clarifies that the agreement's conditions
and restrictions apply only to the cross-licensed patents, and that no rights
other than the cross-licensed patents are conferred on the parties. All other
material terms of the original License Agreement remain in force.
On June 17, 1994, a lawsuit was filed in the Court of Chancery of the State of
Delaware for New Castle County, Civil Action No 13569, on behalf of the
stockholders of TSI naming the Company, TSI and each of the directors of TSI as
defendants. The complaint alleged, among other things, that (i) the terms of the
merger between TSI and a subsidiary of GTC pursuant to the Agreement and Plan of
Merger dated June 14, 1994 among TSI, GTC and such subsidiary of GTC (the
"Merger Agreement") are unfair to the TSI stockholders, (ii) TSI's directors
breached their fiduciary duties to the TSI stockholders in authorizing TSI to
enter into the Merger Agreement and failing to conduct an auction for TSI, and
(iii) GTC aided and abetted the TSI directors in the breach of their fiduciary
duty. The lawsuit sought an unspecified amount of damages and a court order to
unwind the Merger. In September 1994, GTC filed a motion to dismiss all claims
asserted against it in the litigation. On April 14, 1996, the case was dismissed
by stipulation of the parties and under an approving order of the court.
Except as described above, GTC is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1997, no matter was submitted to a vote
of the security holders of the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of GTC commenced trading on July 9, 1993 in the Nasdaq National
Market System under the symbol GZTC. Quarterly high and low sales prices for the
stock as reported by the Nasdaq National Market System are shown below.
HIGH LOW
---- ---
1995:
1st Quarter 3 1/8 1 1/2
2nd Quarter 3 5/8 1 7/8
3rd Quarter 6 1/8 2 7/16
4th Quarter 5 7/8 4
1996:
1st Quarter 7 1/8 4 3/8
2nd Quarter 10 5/8 5
3rd Quarter 8 1/8 3 3/4
4th Quarter 7 1/4 5 1/8
1997:
1st Quarter 10 1/4 6
2nd Quarter 9 1/4 6 3/8
3rd Quarter 12 3/16 8
4th Quarter 14 8 1/4
On March 16, 1998, there were approximately 734 shareholders of GTC of record.
The Company has never paid a cash dividend on its Common Stock and currently
expects that future earnings will be retained for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 28, 1997 and December
29, 1996 and for each of the three fiscal years in the period ended December 28,
1997 are derived from the Company's consolidated financial statements included
elsewhere in this Report, which have been audited by Coopers & Lybrand L.L.P.,
independent public accountants. The selected financial data set forth below as
of December 31, 1995, 1994 and 1993, and for the years ended December 31, 1994
and 1993 are derived from audited consolidated financial statements not included
in this Report. This data should be read in conjunction with the Company's
consolidated financial statements and related notes thereto under Item 8 of this
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 7 of this Report.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands except per share data)
For the Fiscal Years Ended
-----------------------------------------------------------------------
December 28, December 29, December 31, December 31, December 31,
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues:
Services $ 43,417 $ 38,496 $ 26,399 $ 4,465 $ -
Sponsored research and development 19,521 8,338 6,022 4,097 3,222
Products - - - 909 -
---------- ----------- ---------- ---------- ----------
62,938 46,834 32,421 9,471 3,222
Costs and expenses:
Services 36,989 33,356 24,250 5,157 -
Research and development 17,840 8,684 6,394 4,671 3,143
Products - - - 841 -
Selling, general and administrative 15,650 11,691 8,919 3,596 1,088
Equity in loss of Joint Venture 811 356 713 582 -
Impairment of investment in
Joint Venture - - - 58 318
---------- ----------- ---------- ---------- ----------
71,290 54,087 40,276 14,905 4,549
---------- ----------- ---------- ---------- ----------
Loss from continuing operations (8,352) (7,253) (7,855) (5,434) (1,327)
Other income and (expenses):
Interest income 136 85 32 238 156
Interest expense (1,129) (1,138) (1,007) (263) -
Other income 50 587 780 - -
---------- ----------- ---------- ---------- ----------
Loss from continuing operations before
income taxes (9,295) (7,719) (8,050) (5,459) (1,171)
Provision (benefit) for income taxes 48 27 (2,346) 7 -
---------- ----------- ---------- ---------- ----------
Loss from continuing operations $ (9,343) $ (7,746) $ (5,704) $ (5,466) $ (1,171)
Discontinued operations
Income from discontinued clinical
operations
(less applicable taxes of $239
and $21) - - 412 182 -
Gain on disposal of clinical
operations
(less applicable income taxes
of $3,401) - - 1,159 - -
---------- ----------- ---------- ---------- ----------
Net loss $ (9,343) $ (7,746) $ (4,133) $ (5,284) $ (1,171)
========== ============ =========== =========== ==========
Results per weighted average number
of common shares (basic and diluted)
From continuing operations $ (0.54) $ (0.52) $ (0.48) $ (0.83) $ (0.44)
========== ============ =========== =========== ==========
Net loss $ (0.54) $ (0.52) $ (0.35) $ (0.80) $ (0.44)
========== ============ =========== =========== ==========
Weighted average number of
shares outstanding (basic and
diluted) 17,253,292 14,801,725 11,788,542 6,598,545 2,632,070
December 28, December 29, December 31, December 31, December 31,
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents $ 6,383 $ 8,894 $ 5,825 $ 816 $ 8,417
Short-term investments - - - 2,231 1,944
Working capital (deficit) (8,423) (116) (7,011) (7,858) 9,882
Total assets 70,980 66,704 58,042 47,993 10,527
Long-term liabilities 10,779 6,742 7,179 9,082 -
Stockholders' equity 27,378 35,204 27,288 19,424 10,014
There were no cash dividends paid for any period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year Ended December 28, 1997 as Compared to Year Ended December 29, 1996
Total revenues for 1997 were $62.9 million, compared with $46.8 million in 1996,
an increase of $16.1 million or 34%. Service revenues increased to $43.4 million
in 1997 from $38.5 million in 1996, an increase of $4.9 million or 13%.
Sponsored research and development revenues increased to $19.5 million in 1997
from $8.3 million in 1996, an increase of $11.2 million or 135%, due primarily
to an increase in activity and revenues related to the funding received from
Genzyme Corporation ("Genzyme") in the development of the lead compound,
transgenic Antithrombin III ("AT-III"), the achievement of $4.4 million in
milestones from the joint venture formed by the Company and Sumitomo Metals
Industries, LTD. (the "Joint Venture"), the achievement of a $1.5 million
milestone, from Bristol-Meyers Squibb related to the BR96 collaboration and
increased commercial activity.
Cost of services in 1997 was $37 million compared to $33.4 million in 1996, an
increase of $3.6 million or 11%, due, primarily, to the increased service
volumes. Sponsored research and development expenses increased to $12.6 million
in 1997 from $7.9 million in 1996, an increase of $4.7 million or 59%. The
increase is due to the operating costs of a manufacturing facility coming
on-line for the production of AT-III clinical trial material and increased
activity in commercial programs. Proprietary research and development increased
to $5.3 million in 1997 from $828,000 in 1996, an increase of 540%. The increase
is due to the cancer vaccine program being initiated in 1997 and increased
internal research.
Gross profit in 1997 amounted to $8.1 million versus $4.8 million in 1996. Gross
profit on services in 1997 was $6.4 million, a gross margin of 15%, versus $5.1
million, a gross margin of 13%, in 1996. The improvement in the services margins
was primarily due to increased services revenues.
Selling, general and administrative ("SG&A") expenses increased to $15.7 million
in 1997 from $11.7 million in 1996, an increase of $4 million or 34%. The
increase is due to an increase in the sales and marketing effort and to the
addition of administrative personnel required to support the growth in
transgenic research and development programs, $434,000 of transaction costs on
uncompleted merger and acquisition activities as well as $326,000 in one-time
personnel-related charges.
Interest income increased to $136,000 in 1997, from $85,000 in 1996, due to the
investment of funds from the Company's secondary public offering and receipt of
interest on funds that were held in escrow last year. Interest expense was
essentially unchanged year to year at $1.1 million. Of the 1997 total, $962,000
represents interest incurred by the testing service operations, $161,000
represents interest for the financing of the transgenic production facility and
$6,000 represents interest incurred under the Convertible Debt and Development
Funding Agreement with Genzyme (the "Genzyme Credit Line") (see Item 8 and Note
5 to the consolidated financial statements appearing in this report).
The Company recognized $50,000 of non-operating income in 1997 compared to
$587,000 in 1996, a decrease of $537,000 or 91%. Of the 1996 total, $538,000
represents the collection of the final payments of the promissory note received
in connection with the 1995 sale of the TSI Center for Diagnostic Products Inc.
("CDP").
The Company recognized $811,000 of Joint Venture losses in 1997 compared to
$356,000 in 1996. The increase was due to additional research by the Joint
Venture including increased research funding to the Company (see Note 12 to the
consolidated financial statements appearing in this report).
Year Ended December 29, 1996 as Compared to Year Ended December 31, 1995
Total revenues for 1996 were $46.8 million compared with $32.4 million in 1995,
an increase of $14.4 million or 44%. Service revenues for 1996 were $38.5
million compared with $26.4 million in 1995, an increase of $12.1 million or
46%. Sponsored research and development revenues increased to $8.3 million in
1996 compared with $6 million in 1995, an increase of $2.3 million or 38%, due
primarily to an increase in activity and revenues related to the development of
AT-III.
Cost of services for 1996 were $33.4 million compared with $24.3 million in
1995, an increase of $9.1 million or 37%, due to increased service volumes.
Sponsored research and development expenses increased to $7.9 million in 1996
compared with $5.7 million in 1995, an increase of $2.2 million or 39%. The
increase was due to increased activity relating to the development of AT-III,
which, in the second half of 1996, had an Investigational New Drug Filing
("IND") approved by the Food and Drug Administration ("FDA") and entered into
Phase I/II clinical trials. Proprietary research and development increased to
$828,000 in 1997 from $727,000 in 1996, an increase of 14%.
Gross profit amounted to $4.8 million in 1996 compared with $1.8 million in
1995. Gross profit on services in 1996 was $5.1 million, a gross margin of 13%,
versus $2.1 million, a gross margin of 8% in 1995. The majority of the
improvement in service margins was due to increased service revenues as a result
of continued marketing efforts with an emphasis on developing significant client
relationships and a shift to higher margin services.
SG&A expenses increased to $11.7 million in 1996 from $8.9 million in 1995, an
increase of $2.8 million or 31%. The increase was due primarily to increased
investment in sales and marketing and to the growth in the testing services
operations.
Interest income increased to $85,000 in 1996 from $32,000 in 1995, an increase
of $53,000 or 166%, primarily due to the investment of funds received from the
Company's 1996 public offering. Interest expense was $1.1 million in 1996
compared with $1 million in 1995, an increase of $131,000 or 13%. Of the 1996
total, $902,000 represents interest incurred by the testing service operations,
$167,000 represents interest for the financing of the transgenic production
facility and $61,000 represents interest incurred under the Genzyme Credit Line.
The Company recognized $356,000 of Joint Venture losses in 1996 compared to
$713,000 in 1995, a decrease of $357,000 or 50%. The decrease is due to reduced
funding received from the Joint Venture during 1996.
The Company recognized $587,000 of non-operating income in 1996 compared to
$780,000 in 1995, a decrease of $193,000 or 25%. Of the 1996 total, $538,000
represents the collection of the final payments of the promissory note received
in connection with the 1995 sale of CDP.
The Company had income from its discontinued clinical operations of $412,000 in
1995. The 1995 income represents the results of operations (net of tax) for the
first three quarters of 1995 for GDRU Limited ("GDRU") and Health and Sciences
Research Incorporated ("HSRI"). These operations were acquired by the Company as
part of the TSI Corporation ("TSI") acquisition in October 1994. GDRU was sold
effective as of September 1, 1995 and the HSRI operation was shutdown in August
1995.
The Company realized a $1,159,000 gain on the disposal of clinical operations in
1995 from the sale of GDRU.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income requires that all components of comprehensive income and
total comprehensive income be reported on one of the following: (1) the
statement of operations, or (2) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid-in capital)
and distribution to owners (dividends). This statement is effective for fiscal
years beginning after December 15, 1997. The implementation of SFAS 130 is not
expected to have a significant impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosure
About Segments of an Enterprise and Related Information requires public
companies to report certain information about their operating segments in their
annual financial statements and quarterly reports issued to stockholders. It
also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. This statement is effective for fiscal years beginning after
December 15, 1997. Implementation of SFAS 131 will have no effect on the
Company's financial position or results of operations. The Company is assessing
the financial statement disclosure impact of SFAS 131.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $6.4 million at December 28, 1997.
During 1997 the Company had
a $2.5 million net decrease in cash; $6.2 million was invested in equipment,
further expansion of the transgenic production facility and the expansion of
laboratory facilities, $3.6 million was used to pay down long-term debt and $4.4
million was used in operations. Sources of funds during 1997 included $5.3
million of proceeds from issuance of long-term debt, $1.1 million of proceeds
from the issuance of common stock, and $6 million in borrowings under the
Genzyme Credit Line.
In June 1997, the Company completed a $3 million expansion of its Mason
Laboratories facility. The Company obtained $5 million in long-term financing
for this project from a consortium consisting of state and local government
agencies in conjunction with a commercial bank. In June 1997, the Company
received approximately $3.8 million in funds under this facility, of which
approximately $800,000 was used to pay down existing debt. In connection with
the financing, the Company issued 20,000 warrants at the closing market value on
June 26, 1997 of $8.75. The remaining $1.2 million of financing is available
through December 31, 1998 to fund future renovations of this facility, if any
(see Note 5 to the consolidated financial statements appearing in this report).
In September 1997, the Company and Genzyme amended the terms of the $8.3 million
Genzyme Credit Line dated March 29, 1996. Under the terms of the amended Genzyme
Credit Line, the expiration date of the revolving credit line was extended to
March 31, 2000 with an option, at that date, for the Company to convert the
outstanding balance to a three-year term loan. As of December 28, 1997, $6
million was outstanding under the Genzyme Credit Line (see Note 5 to the
consolidated financial statements appearing in this report).
In September 1997, the Company entered into an agreement with Advanced Cell
Technology ("ACT") to utilize ACT's cloning technology to produce transgenic
proteins. In return for exclusive access to this technology and subject to
successful achievement of technical milestones, the Company agreed to place a
minimum of $2 million in contract services with ACT annually from 1998 through
2002.
In March 1998, the Company completed a $20 million private placement of Series A
Convertible Preferred Stock (the "Preferred Stock") to three institutional
investors. The Preferred Stock matures in three years and is convertible into
common stock at various conversion prices (see Note 13 to the consolidated
financial statements appearing in this report). As a result of this financing,
the amount of the Genzyme Credit Line was reduced to approximately $6.4 million.
The Company had a working capital deficit of $8.4 million at December 28, 1997
compared to a deficit of $116,000 at December 29, 1996. As of December 28, 1997,
the Company had approximately $2.3 million available under the Genzyme Credit
Line (subsequently reduced to approximately $400,000 as a result of the
Preferred Stock offering), $1.2 million available under the Mason facility
financing and commitments for an additional $3 million of capital lease
financing. The Company expects that the funds available from these sources as
well as the Preferred Stock offering completed in March 1998 will be sufficient
to fund operations and capital investment for the next year.
Management's current expectations regarding the sufficiency of the Company's
cash resources are forward-looking statements, and the Company's cash
requirements may vary materially from such expectations. Such forward-looking
statements are dependent on several factors, including the results of the
Company's testing services business, the ability of the Company to enter into
any transgenic research and development collaborations in the future and the
terms of such collaborations, the results of research and development and
preclinical and clinical testing, competitive and technological advances and
regulatory requirements. If the Company experiences increased losses, the
Company may have to seek additional financing through collaborative
arrangements or from public or private sales of its securities, including
equity securities. There can be no assurance that additional funding will be
available on terms acceptable to the Company, if at all. If additional
financing cannot be obtained on acceptable terms, to continue its operations
the Company could be forced to delay, scale back or eliminate certain of its
research and development programs or to enter into license agreements with
third parties for the commercialization of technologies or products that the
Company would otherwise undertake itself.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
implementing its plan to resolve the issue. The Year 2000 problem is a result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company presently believes that, with upgrades to existing financial software,
the Year 2000 problem will not pose significant operational
problems or additional cost for the Company's computer systems as so modified
and converted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Financial Statements
Response to this item is submitted as a separate section of this report
immediately following Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is set forth in part under the captions "ELECTION OF DIRECTORS"
and "SECTION 16 (a) BENEFICIAL REPORTING COMPLIANCE" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be held on May 27, 1998
(the "Proxy Statement") which are incorporated herein by reference, and the
remainder of such information is set forth under the caption "EXECUTIVE OFFICERS
OF THE REGISTRANT" in Part I, Item 1A hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth under the caption "SHARE OWNERSHIP" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "EXECUTIVE EMPLOYMENT AGREEMENTS"
and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Proxy
Statement is incorporated herein by reference. See also, Notes 2, 6 and 10 to
the Consolidated Financial Statements included herewith.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The Company's Financial Statements appear as a separate section of this
report immediately following Item 14.
All schedules have been omitted because the required information is not
applicable or not present in amounts sufficient to required submission of the
schedule, or because the information required is in the consolidated financial
statements or the notes thereto.
The Exhibits to this report are listed below under Part IV, Item 14(c) hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 28, 1997.
(c) Exhibits
The exhibits filed as part of this Form 10-K are listed on the Exhibit Index
immediately preceding such Exhibits, which Exhibit Index is incorporated herein
by reference.
FORM 10-K-ITEM 8, 14 (a) (1) and (2), and (d)
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Genzyme Transgenics
Corporation and subsidiaries are included in Item 8:
Report of Coopers & Lybrand L.L.P. - Independent Accountants
Consolidated Balance Sheets--December 28, 1997 and December 29, 1996
Consolidated Statements of Operations--For the fiscal years ended December
28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Stockholders Equity--For the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows--For the fiscal years ended December
28, 1997, December 29, 1996 and December 31, 1995
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Genzyme Transgenics Corporation:
We have audited the consolidated balance sheets of Genzyme Transgenics
Corporation as of December 28, 1997 and December 29, 1996 and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three fiscal years in the period ended December 28, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 consolidated financial position of Genzyme
Transgenics Corporation as of December 28, 1997 and December 29, 1996, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 28, 1997 in conformity with generally
accepted accounting principles.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
February 25, 1998, except as to
the information presented in Note 13,
for which the date is March 20, 1998
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
December 28, December 29,
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,383 $ 8,894
Accounts receivable, net of allowance of $390
and $422 at December 28, 1997 and
December 29, 1996, respectively 10,517 7,499
Unbilled contract revenue (including
$891 and $664 from Genzyme Corporation at
December 28, 1997 and December 29, 1996,
respectively) 6,069 6,740
Other current assets 1,431 1,509
------------- -------------
Total current assets 24,400 24,642
Net property, plant, and equipment 26,297 20,566
Costs in excess of net assets acquired, net 19,532 20,695
Investment in Joint Venture - 283
Other assets 751 518
============= =============
$ 70,980 $ 66,704
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,091 $ 2,992
Accounts payable - Genzyme Corporation 3,364 1,339
Revolving line of credit 6,000 6,000
Revolving line of credit - Genzyme 6,000 -
Corporation
Accrued expenses 7,900 5,911
Advance payments 5,568 6,649
Current portion of long-term debt and
capital leases 1,900 1,867
------------- -------------
Total current liabilities 32,823 24,758
Long-term debt and capital leases, net of current portion 9,862 5,708
Deferred lease obligation 613 508
Other liabilities 304 526
------------- -------------
Total liabilities 43,602 31,500
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none outstanding - -
Common stock, $.01 par value; 40,000,000
shares authorized; 17,403,406 and 17,130,901 shares
issued and outstanding at December 28, 1997
and December 29, 1996, respectively 174 171
Capital in excess of par value 54,478 52,974
Accumulated deficit (27,274) (17,931)
Accumulated translation adjustment - (10)
------------- -------------
Total stockholders' equity 27,378 35,204
============= =============
$ 70,980 $ 66,704
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share and per share amounts)
For the Fiscal Years Ended
----------------------------------
December 28, December 29, December 31,
1997 1996 1995
---------------- ------------- ---------------
Revenues:
Services $ 43,417 $ 38,496 $ 26,399
Sponsored research and development 19,521 8,338 6,022
---------------- ------------- ---------------
62,938 46,834 32,421
Costs and operating expenses:
Services 36,989 33,356 24,250
Research and development:
Sponsored 12,558 7,856 5,667
Proprietary 5,282 828 727
Selling, general and administrative 15,650 11,691 8,919
Equity in loss of Joint Venture 811 356 713
---------------- ------------- ---------------
71,290 54,087 40,276
---------------- ------------- ---------------
Loss from continuing operations (8,352) (7,253) (7,855)
Other income (expense):
Interest income 136 85 32
Interest expense (1,129) (1,138) (1,007)
Other income 50 587 780
---------------- ------------- ---------------
Loss from continuing operations before income taxes (9,295) (7,719) (8,050)
Provision (benefit) for income taxes 48 27 (2,346)
---------------- ------------- ---------------
Loss from continuing operations $ (9,343) $ (7,746) $ (5,704)
Discontinued operations
Income from discontinued clinical operations
(less applicable income taxes of $240) - - 412
Gain on disposal of clinical operations
(less applicable income taxes of $3,401) - - 1,159
---------------- ------------- ---------------
Net loss $ (9,343) $ (7,746) $ (4,133)
=============== ============= ===============
Net loss per common share (basic and diluted):
From continuing operations $ (0.54) $ (0.52) $ (0.48)
=============== ============= ===============
Net loss per share $ (0.54) $ (0.52) $ (0.35)
=============== ============= ===============
Weighted average number of common
shares outstanding (basic and diluted) 17,253,292 14,801,725 11,788,542
=============== ============= ===============
The accompanying notes are an integral part of the consolidated financial
statements.
waiting for consolidated statements of stockholders' equity
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Series A Convertible Capital in Parent Unrealized Accumulated Total
Preferred Stock Common Stock Excess of Company Loss on Accumulated Translation Stockholders'
Shares Amount Shares Amount Par Value Investment Investments Deficit Adjustment Equity
Balance, December 31, 1994...... -- -- 9,890 $99 $25,476 -- $(94) $ (6,052) $(5) $19,424
Net loss (4,133) (4,133)
Common stock issuance under the
Genzyme Common Stock Put
Agreement..................... 500 5 3,995 4,000
Issuance of common stock in
connection with the Common
Stock Purchase
Agreement with Genzyme........ 1,334 13 3,987 4,000
Issuance of common stock in
connection with the purchase
of a subsidiary............... 866 10 2,469 2,479
Issuance of common stock for
payment of consulting and non-
competition agreement......... 341 3 973 976
Common stock issuance under
Employee Stock Purchase Plan.. 87 1 170 171
Common stock issuance in
connection with the TSI
Savings and Retirement Plan... 130 1 273 274
Proceeds from the exercise of
stock options................. 3 8 8
Realized loss on investments.... 94 94
Translation adjustment.......... (5) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995...... -- -- 13,151 132 37,351 -- -- (10,185) (10) 27,288
Net loss........................ (7,746) (7,746)
Sale of common stock to public,
net of expenses............... 3,450 34 12,666 12,700
Issuance of common stock in
connection with the
Convertible Debt and
Development Funding Agreement. 220 2 1,671 1,673
Common stock issuance under
Employee Stock Purchase Plan.. 165 1 511 512
Common stock issuance in
connection with the GTC
Savings and Retirement Plan... 58 1 265 266
Issuance of warrants in
settlement of liability....... 128 128
Proceeds from the exercise of
stock options................. 87 1 382 383
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 29, 1996...... -- -- 17,131 171 52,974 -- -- (17,931) (10) 35,204
Net loss........................ (9,343) (9,343)
Common stock issuance under
Employee Stock Purchase Plan.. 115 1 572 573
Common stock issuance in
connection with the GTC
Savings and Retirement Plan... 37 1 257 258
Issuance of warrants in
connection with a debt
financing..................... 130 130
Translation adjustment.......... 10 10
Proceeds from the exercise of
stock options................. 120 1 545 546
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1997...... -- -- 17,403 $174 $54,478 -- -- $(27,274) $ -- $27,378
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated
financial statements.
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE FISCAL YEARS ENDED
--------------------------------------
December 28, December 29, December 31,
1997 1996 1995
--------- --------- ---------
Cash flows for operating activities:
Net loss $ (9,343) $ (7,746) $ (4,133)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,149 3,821 3,712
Provision (recovery) of accounts receivable
allowances 124 (237) 3
Loss on sale of investments -- -- 108
Write-off of goodwill -- -- 972
Shares to be issued for 401-K employer match 464 368 266
Deferred tax provision -- -- 175
Gain on disposal of discontinued operations -- -- (2,350)
Gain from utilization of operating loss carry forward -- -- (1,159)
Loss on disposal of fixed assets 7 165 88
Equity in loss of Joint Venture 811 356 713
Issuance of warrants in settlement of liability -- 128 --
Changes in assets and liabilities, net of effects from purchase of
subsidiaries:
Accounts receivable and unbilled contract revenue (2,471) (4,072) (2,806)
Inventory and other current assets 78 (700) (29)
Decrease in net assets held for sale/disposition -- -- 781
Accounts payable 1,124 (38) 270
Accrued income taxes -- -- (407)
Other accrued expenses 1,783 (1,153) (2,228)
Advance payments (1,081) 1,959 (1,825)
-------- -------- --------
Net cash used by operating activities (4,355) (7,149) (7,849)
Cash flows for investing activities:
Purchase of property, plant and equipment (6,175) (3,549) (2,326)
Proceeds from sales and maturities of
short-term investments -- -- 2,217
Investment in Joint Venture (528) -- (807)
Cash paid for acquisitions -- -- (679)
Proceeds from sale of discontinued operations -- -- 6,443
Restricted cash -- 1,425 (1,425)
Other assets -- 632 495
-------- -------- --------
Net cash provided by (used in) investing activities (6,703) (1,492) 3,918
Cash flows from financing activities:
Net proceeds from the issuance of common stock -- 12,700 4,275
Net proceeds from employee stock purchase plan 573 512 171
Net proceeds from the exercise of stock options 546 383 8
Proceeds from long-term debt 5,302 -- 2,423
Repayment of long-term debt (3,597) (1,713) (3,515)
Net borrowings under revolving line of credit -- -- 4,670
Investment and advances by Genzyme Corporation 6,000 1,673 428
Deposits on capital leases -- -- (197)
Deferred financing costs (170) -- --
Other long-term liabilities (117) (420) (743)
-------- -------- --------
Net cash provided by financing activities 8,537 13,135 7,520
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,521) 4,494 3,589
Effect of exchange rates on cash 10 -- (5)
Cash and cash equivalents at beginning of the year 8,894 4,400 816
-------- -------- --------
Cash and cash equivalents at end of year $ 6,383 $ 8,894 $ 4,400
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended December 28, 1997, December 29, 1996 and December 31, 1995
(all tabular $ in thousands, except per share data)
NOTE 1. NATURE OF BUSINESS
Genzyme Transgenics Corporation (together with its subsidiaries, the "Company")
is engaged in the application of transgenic technology to the development and
production of recombinant proteins for therapeutic and diagnostic uses and,
through its wholly-owned subsidiaries, TSI Corporation ("TSI") and
BioDevelopment Laboratories, Inc. ("BDL"), is a leading provider of preclinical
and toxicology testing services to pharmaceutical, biotechnology, medical device
and chemical companies.
The accompanying financial statements have been presented on the assumption that
the Company is a going concern. The Company has incurred losses and negative
operating cash flow in each of the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995. The Company had a working capital
deficit of $8.4 million at December 28, 1997. As of December 28, 1997, the
Company had $2.3 million available under a credit line with Genzyme Corporation
("Genzyme"). In addition, in February 1998, the Company entered into a lease
agreement with a commercial leasing company for $3 million of additional lease
availability and in March 1998, the Company completed a $20 million private
placement of convertible preferred stock (see Notes 5 and 13). In conjunction
with this private placement, the credit line availability with Genzyme was
subsequently reduced by approximately $1.9 million.
The Company is subject to risks common to companies in the biotechnology
industry, including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with government regulations.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company was incorporated in February 1993. On October 1, 1994, the Company
acquired TSI and its respective subsidiaries, Argus Research Laboratories, Inc.
("Argus"), The TSI Center for Diagnostic Products, Inc. ("CDP"), Health and
Sciences Research Incorporated ("HSRI"), TSI Mason Laboratories, Inc. ("Mason"),
TSI Redfield Laboratories, Inc. ("Redfield"), TSI Washington Laboratories, Inc.
("Washington") and G.D.R.U. Limited ("GDRU"). In July 1995, the Company acquired
BDL.
In August 1995, the Company closed its HSRI laboratory. The results of
operations for HSRI are shown net of tax and included in discontinued clinical
operations for all periods presented. Effective September 1, 1995, the Company
completed the sale of GDRU. The 1995 results of operations for GDRU are shown
net of tax and included in discontinued clinical operations. HSRI and GDRU were
the only laboratories performing human clinical trials within the Company s
operations.
Genzyme is the Company's largest single stockholder. As a result of various
equity transactions, Genzyme owned 43% of the Company at both December 28, 1997
and December 29, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The Company has accounted for its 22% investment
in the joint venture between SMI Genzyme Ltd. and Sumitomo Metals Industries
Ltd. (" Joint Venture") using the equity method since 1994. All significant
intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions in these financial
statements include contract revenue recognition, net realizable value of costs
in excess of net assets acquired, account receivable reserves, tax valuation
reserves and the assumptions regarding the presentation of the Company as a
going concern. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents, consisting principally of money market funds and municipal
notes purchased with initial maturities of three months or less, are valued at
market.
Restricted Cash
Restricted cash represents cash from the sale of GDRU that was held in escrow
and became unrestricted during 1996.
Short-Term Investments
All short-term investments are classified as available for sale and are stated
at the lower of cost or market plus accrued interest with premiums and discounts
amortized over the life of the investment. Gains and losses on sales of
securities are calculated using the specific identification method.
At December 31, 1994, there was an unrealized loss on investment of $94,000 that
was included in equity. During 1995, the Company sold securities with a cost
basis of $2,231,000 and realized losses of $108,000 on those sales. At December
28, 1997 and December 29, 1996, there were no short-term investments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. At December 28, 1997 and December 29, 1996, approximately 87% and
78%, respectively of cash and cash equivalents were held by one financial
institution.
The Company provides most of its testing services to diverse pharmaceutical
companies worldwide. The Company also provides services to the U.S. government.
See Note 9 for additional revenue information. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company performs ongoing
credit evaluations of its customers' financial conditions and maintains reserves
for potential credit losses. Activity for fiscal 1996 included a provision of
$334,000, a recovery of $571,000 and write-offs of $144,000. Activity for fiscal
1997 included a provision of $256,000, a recovery of $132,000 and write-offs of
$156,000.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
life of the improvement or the remaining term of the lease, whichever is
shorter. The direct costs of the New Zealand goats ("Livestock") and related
costs to bring them to the United States are capitalized and amortized using the
straight-line method over three years.
The following is the summary of property, plant and equipment and related
accumulated amortization and depreciation as of December 28, 1997 and December
29, 1996.
Years December 28, December 29,
of Life 1997 1996
-------- ---------- ------------
Land -- $ 534 $ 530
Buildings 20 - 30 13,225 7,893
Livestock 3 1,291 740
Leasehold improvements lease life 3,751 2,854
Laboratory, manufacturing and
office equipment 3 - 10 5,829 5,177
Laboratory, manufacturing and
office equipment - capital lease 3 - 10 8,199 5,724
Construction in process -- 77 1,364
------- -------
$32,906 $24,282
Less accumulated amortization and
depreciation 6,609 3,716
------- -------
Net property, plant and
equipment $26,297 $20,566
======= =======
Depreciation and amortization expense was $2,919,000, $2,603,000 and $2,330,000
for the fiscal years ended December 28, 1997, December 29, 1996 and December 31,
1995, respectively. Accumulated amortization for equipment under capital lease
was $2,154,000 and $1,311,000 at December 28, 1997 and December 29, 1996,
respectively.
Non Cash Transactions
During fiscal 1995, the Company purchased BDL for 830,996 shares of stock valued
at $2,386,000 and issued approximately 35,077 shares of stock with a value of
$93,000 in return for settlement of a liability. In connection with the
acquisition, the Company exchanged approximately 341,160 shares of stock with a
value of $976,000 in return for a Consulting and a Non-Competition Agreement
with the principal stockholder of BDL (see Note 3). The Company also purchased
$1,312,000 of fixed assets and financed these additions with capital lease
obligations.
During fiscal 1996, the Company converted $1,673,000 of debt into 219,565 shares
of common stock under the Convertible Debt and Development Funding Agreement
with Genzyme. The Company also purchased $2,009,000 of fixed assets and financed
these additions with capital lease obligations.
During fiscal 1997, the Company purchased $2,482,000 of fixed assets and
financed these additions with capital lease obligations. The Company issued
warrants valued at $130,000 in connection with the financing for the expansion
of Mason Laboratories (see Note 5).
Long-Lived Assets
The Company reviews long-lived assets for impairment by comparing the cumulative
undiscounted cash flows from the assets with their carrying amount. Any
write-downs are to be treated as permanent reductions in the carrying amount of
the assets. Management's policy regarding long-lived assets is to evaluate the
recoverability of its assets when the facts and circumstances suggest that these
assets may be impaired. This analysis relies on a number of factors, including
operating results, business plans, budgets, economic projections and changes in
management's strategic direction or market emphasis. The test of such
recoverability is a comparison of the asset value to its expected cumulative net
operating cash flow over the remaining life of the asset.
Costs in Excess of Net Assets Acquired
The $19,397,000 of excess consideration paid and costs incurred over the net
value of assets acquired (goodwill) by GTC of TSI (see Note 3) is being
amortized using the straight-line method over a twenty-year period. The carrying
value of goodwill is included in management's evaluation of the recoverability
of its long-lived assets. In connection with the sale of GDRU in 1995, goodwill
was written down by $2 million, representing GDRU s percentage of the total
long-term assets acquired in the TSI acquisition, with the charge offsetting a
portion of the gain on disposal of clinical operations. In addition, final
purchase adjustments to goodwill in relation to the purchase of TSI were
recorded which amounted to a net decrease in
goodwill of $1,537,000. The resulting goodwill in connection with the purchase
of TSI was $15,860,000. Accumulated amortization at December 28, 1997 was
$2,710,000.
The $7,329,000 of excess consideration paid and costs incurred over the net fair
value of assets of BDL acquired by GTC (see Note 3) is being amortized using the
straight-line method over twenty years. Accumulated amortization at December 28,
1997 was $947,000.
At December 28, 1997, goodwill totaled $23,189,000 with $3,657,000 accumulated
amortization.
Accrued Expenses
Accrued expenses at December 28, 1997 and December 29, 1996 included the
following:
1997 1996
--------- ---------
Accrued payroll and benefits $2,877 $1,869
Accrued severance 523 219
Loss reserves on contracts 807 618
Other 3,693 3,205
------- -------
Total accrued expenses $7,900 $5,911
======= =======
As a result of the 1995 acquisition of BDL, the Company established severance
reserves of $542,000 for the elimination of 19 positions of which nine were
laboratory positions, three were accounting/finance positions and seven were
general and administrative positions. As of December 28, 1997, $478,000 has been
paid. During 1997, an additional $144,000 was recorded which is expected to be
paid in 1998, leaving a balance of $208,000.
As a result of the merger with TSI, the Company established severance reserves
for the elimination of 35 positions of which 20 were laboratory positions, eight
were accounting/finance positions and seven were general and administrative
positions. The total severance reserve established was $1,417,000 of which
$578,000 was classified as a long-term liability to be paid through 1999. As of
December 28, 1997, $1,044,000 has been paid. Of the remaining $373,000 balance,
$210,000 was classified as a long-term liability.
An additional $152,000 of severance was recorded in December 1997, which is
expected to be paid in 1998.
Investment in Joint Venture
In 1990, the Company entered into a Joint Venture with Sumitomo Metal Industries
as a minority owner (see Note 12). The investment has been accounted for under
the equity method since March 1994, with the Company recognizing its 22% share
of the Joint Venture losses in its Statement of Operations. In October 1995 and
March 1997, the Company made additional investments of $807,000 and $528,000,
respectively, in the Joint Venture, which maintained the Company's interest at
22%. In December 1997, the equity investment in the Joint Venture was reduced to
zero as a result of recognizing the Company's share of the Joint Venture's
losses. The Company has neither obligation nor intention to provide additional
funding to the Joint Venture, and has therefore discontinued recognizing its
share of the Joint Venture's losses.
Revenue Recognition and Contract Accounting
For both services and research and development revenues, the Company accounts
for cost reimbursement contracts and fixed price contracts using the percentage
of completion method. Unbilled contract revenue represents recoverable costs and
accrued profit which had not been billed at the balance sheet date. Advance
payments represent cash received from customers in advance of the work being
performed. Research and development revenues in fiscal 1997 consisted of
$4,413,000 from the Joint Venture (see Note 12), $7,011,000 from related parties
(see Note 10) and $8,097,000 from commercial clients.
Profits expected to be realized on contracts are based on the total contract
sales value and the Company's estimates of costs at completion. These estimates
are reviewed and revised periodically, throughout the lives of the contracts,
with adjustments to profits resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When management
believes the cost of completing a contract will exceed its sales value, the full
amount of the anticipated contract loss is immediately recognized.
Net Loss per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128, ("SFAS
128") Earnings Per Share in 1997. SFAS 128 simplifies the computation of
earnings per share ("EPS") previously required in Accounting Principles Board
("APB") Opinion No. 15, "Earnings Per Share," by replacing primary and fully
diluted EPS with basic and diluted EPS. Under SFAS 128, basic EPS is calculated
by dividing net earnings (loss) by the weighted-average common shares
outstanding during the period. Diluted EPS reflects the potential dilution to
basic EPS that could occur upon conversion or exercise of securities, options,
or other such items, to common shares using the treasury stock method based upon
the weighted-average fair value of the Company's common shares during the
period. SFAS 128 was required to be adopted by the Company in its year-end 1997
Annual Report. Common stock equivalents of the Company consist of warrants (see
Note 6), stock options (see Note 7), stock to be issued under the 401-K savings
plan (see Note 7) and convertible debt (see Note 5). The Company was in a net
loss position in 1997, 1996 and 1995, therefore 2.8 million, 1.8 million and 1.6
million common share equivalents, respectively, were not used to compute diluted
loss per share, as the effect was antidilutive.
In 1995, basic and diluted EPS from discontinued operations was $.13 per share.
In March 1998, the Company completed a private placement of 20,000 shares of
Series A Convertible Preferred Stock. In connection with the financing,
warrants to purchase 450,000 shares of the Company's common stock were issued
(see Note 13).
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using the expected enacted tax
rates for the year in which the differences are expected to reverse.
Reclassifications
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
NOTE 3. ACQUISITIONS/DISPOSITIONS
Effective October 1, 1994, the Company acquired all of the common stock of TSI,
a leading provider of preclinical, toxicology and human clinical testing
services to pharmaceutical, biotechnology, medical device and chemical
companies, for 4,367,601 shares of the Company's common stock with a market
value of approximately $14,741,000 at the date of the acquisition. In exchange
for these shares, the Company received total assets of $20,306,000, assumed
$22,563,000 of liabilities and incurred costs of $2,399,000 with a resulting
goodwill of $19,397,000. The Company has accounted for the acquisition using the
purchase method.
In July 1995, the Company acquired all of the outstanding common stock of BDL, a
leading provider of testing and development services to the biopharmaceutical,
medical device and chemical industries, in exchange for 830,996 of the Company s
common shares with an approximate market value of $2,378,000 at the date of the
acquisition. In exchange for these shares, the Company received total assets
with a fair value of $2,595,000, assumed $6,628,000 of liabilities and incurred
costs of $918,000. The transaction was accounted for under the purchase method
and the resulting goodwill of $7,329,000 is being amortized using the
straight-line method over twenty years. The Company also entered into a
Consulting and Non-Competition Agreement with the principal stockholder of BDL
in exchange for approximately 341,160 shares of the Company s common stock with
an approximate market value of $976,000. Approximately $488,000 of the value of
the Agreement was assigned to the consulting portion and was recorded as an
expense in 1995. The remaining value, representing the non-competition portion,
was recorded as a long-term asset included in Other Assets and is being
amortized over the ten year non-competition period. As a part of the
transaction, Genzyme exchanged 33,945 shares of its General Division common
stock with a market value of $1,360,000 for 475,467 of the Company s common
shares issued in the transaction.
In August 1995, the Company completed the closure of HSRI, a small clinical
trials monitoring unit based in San Diego, California. The related closure
expenses of approximately $166,000 were recorded in 1995.
Effective September 1, 1995, the Company completed the sale of its GDRU unit for
$9.5 million in cash. In exchange for the cash, the Company sold assets with a
net book value of $2,960,000. The Company recognized a gain on the sale of
$1,159,000 which includes a tax charge of $3,401,000 and a $2,000,000 writedown
of goodwill identifiable with GDRU. In conjunction with this transaction, the
Company received $1,425,000 of restricted cash which became unrestricted in
three
increments on January 31, April 30, and September 30, 1996. This transaction
completed the disposition of the former TSI units that were outside the
Company's core preclinical and nonclinical testing operations.
The following summary represents unaudited pro forma results of operations as if
the HSRI and GDRU dispositions and the BDL acquisition had occurred at the
beginning of 1995. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually resulted had the combination been in effect on the
date indicated and are not intended to be indicative of future results.
Unaudited
Pro forma
Year Ended
----------
1995
----
Revenues . . . . . . . . . . . . . . . . . . . . $ 29,709
Net loss . . . . . . . . . . . . . . . . . . . . $ (5,102)
Net loss per share (basic and diluted). . . . . $ (0.39)
NOTE 4. COMMITMENTS & CONTINGENCIES
The Company leases equipment and facilities under various operating and capital
leases (see Notes 5 and 13). The deferred lease obligation represents the
cumulative difference between actual facility lease payments and lease expense
recognized ratably over the lease period. Rent expense for the fiscal years
ended December 28, 1997, December 29, 1996 and December 31, 1995 was
approximately $2,566,000, $2,291,000 and $2,553,000, respectively.
At December 28, 1997, the Company's future minimum payments required under these
leases are as follows:
Operating Capital Total
1998 $ 2,579 $ 1,615 $ 4,194
1999 1,799 1,291 3,090
2000 1,718 1,214 2,932
2001 1,447 920 2,367
2002 1,303 308 1,611
Thereafter 2,244 - 2,244
----- ----- -----
Total $ 11,090 5,348 $ 16,438
======= =======
Less amount representing
interest 1,022
-----
Present value of minimum
lease payments $ 4,326
=======
On June 17, 1994, a law suit was filed in the State of Delaware, on behalf of
the stockholders of TSI, naming the Company, TSI and each of the directors of
TSI as defendants. The complaint alleged, among other things, that (i) the terms
of the merger between TSI and a subsidiary of GTC pursuant to the Agreement and
Plan of Merger dated June 14, 1994 among TSI, GTC and such subsidiary of GTC
(the "Merger Agreement") are unfair to the TSI stockholders, (ii) TSI s
directors breached their fiduciary duties to the TSI stockholders in authorizing
TSI to enter into the Merger Agreement and failing to conduct an auction for
TSI, and (iii) GTC aided and abetted the TSI directors in the breach of their
fiduciary duty. The lawsuit sought an unspecified amount of damages and a court
order to unwind the Merger. In September 1994, GTC filed a motion to dismiss all
claims asserted against it in the litigation. On April 14, 1996, the case was
dismissed by stipulation of the parties and under an approving order of the
court.
In September 1997, the Company entered into an agreement with Advanced Cell
Technologies, Inc. ("ACT") of Worcester, MA allowing GTC to utilize ACT
technology. This agreement requires that the Company shall make minimum annual
payments of not less than $2 million per year to ACT for the calendar years 1998
through 2002.
NOTE 5. BORROWINGS
At the date of the TSI acquisition, TSI had certain arrangements with a
commercial bank ("Credit Agreement"). Under the Credit Agreement, TSI could
borrow up to $3 million based on 75% of eligible accounts receivable. In
December 1994, the bank agreed to maintain the maximum borrowing under the
credit line at $3 million. The advances accrued interest at the base rate plus
.5% per annum, payable on the first of the following month. The Company
refinanced the Credit Agreement
in July 1995. Under the new facility, which totaled $7.5 million and expired on
March 31, 1997, the Company could borrow up to $6 million and $1.5 million for
an existing standby letter of credit in support of a major facility lease. At
the Company s option, interest on loans under the credit facility (other than
the standby letter of credit) accrued either at the Eurodollar rate plus 3/4% or
at the bank s base lending rate. In March 1997, the Company received an
extension of the Credit Agreement through March 31, 1999. The weighted average
interest rate on the line of credit was 5.68% for the fiscal year ended December
28, 1997 and 7.15% for the fiscal year ended December 29, 1996. As of December
28, 1997, $6,000,000 was outstanding under the line of credit and none was
available. The Company was in compliance with all covenants and no amounts were
due under the standby letter of credit as of December 28, 1997.
In connection with the refinancing of the Credit Agreement, Genzyme provided a
guaranty to the bank under which Genzyme will become primarily liable under the
Credit Agreement in the event of a default by the Company. In consideration of
Genzyme s agreement to provide such a guaranty, the Company granted a first lien
on all assets of the Company and issued warrants to purchase 145,000 shares of
the Company s common stock for a period of ten years at $2.84375 per share
(market price at the date of the Agreement). Under the terms of the Credit
Agreement, the Company has agreed not to pay any dividends until the loans have
been repaid.
In December 1995, the Company received a $2.3 million term loan from a
commercial bank which matures on December 15, 2000. At the Company s option,
interest on the loan will accrue either at the Eurodollar rate plus 1% or at the
bank s base lending rate. The loan is being repaid in quarterly installments
which commenced March 31, 1997, escalating from $50,000 per quarter for the
first year to $68,750 per quarter in the second year, $91,250 per quarter for
the next year, $133,333 for the final three quarters, and a balloon payment for
the remaining balance due December 15, 2000. The loan is guaranteed by Genzyme
and includes a covenant requiring the Company to maintain stockholders equity of
at least $20 million. Based on the borrowing rates currently available to the
Company for an unguaranteed loan with similar maturity, the fair value of the
$2.1 million remaining balance on the term loan is $2 million at December 28,
1997.
In June 1995, TSI received a $1 million increase in its lease line with a
commercial leasing company. Leases require monthly payments over 36 months at an
annual interest rate of 11% with a fair market value buyout not to exceed 15% of
original cost at the end of the lease term. The Lease Agreement required a 25%
cash deposit at inception which was reduced to 10% or fully refunded under
certain conditions. In December 1995, the lease line was increased by $1 million
and, during 1996, the lease line was increased by an additional $2 million.
Leases under the increased line require monthly payments over 48-60 months with
a fair market value buyout and no cash deposit. In February of 1997, the Company
received a commitment for an additional $2 million in lease line availability
from a second leasing company to fund 1997 capital additions. Leases under this
line will have a term of 48 months at 11% per annum with a fair market value
buyout at expiration. At December 28, 1997, there was no availability under any
of the lease lines (see Note 13).
On March 29, 1996 the Company entered into a Convertible Debt and Development
Funding Agreement (the"Agreement") with Genzyme under which Genzyme agreed to
provide a revolving line of credit ("Genzyme Credit Line") in the amount of $10
million and agreed to fund development costs of the Antithrombin III ("AT-III")
program through March 31, 1997. Under the Agreement, GTC granted to Genzyme
co-marketing rights to AT-III in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between the
parties prior to March 31, 1997. The line of credit carries a rate of 7% and is
convertible into the Company's common stock (at the average market price for the
20-day period ending two days before any conversion), at GTC's option, to
maintain GTC's tangible net worth at the end of each quarter at a level between
$4.0 million and $4.2 million or by Genzyme at any time for up to the full
amount outstanding. Any amount so converted reduces by an equivalent amount the
availability on the line. During 1996, approximately $1.7 million of debt was
converted into 219,565 shares of common stock, resulting in availability of $8.3
million on the line of credit.
In March 1997, the Company amended the Agreement with Genzyme to provide for
continued funding by Genzyme of the development costs of the AT-III program
through June 30, 1997. In June 1997, the Company agreed to extend the Agreement
until December 31, 1997. Under the agreements in effect in 1997, Genzyme
provided $7 million in development funding.
In July 1997, the Company and Genzyme announced an agreement to establish a
joint venture for the development, marketing and distribution of AT-III, subject
to the execution of a definitive agreement. A definitive collaboration agreement
for ATIII LLC ("Genzyme Joint Venture") was executed on January 1, 1998. Under
the terms of the agreement, Genzyme will provide 70% of the next $33 million of
development costs and the Company will fund the remaining 30%. Development costs
in excess of $33 million will be funded equally by the partners. In addition to
the funding, both partners will contribute manufacturing, marketing and other
resources to the Genzyme Joint Venture at cost and will share profits from
product sales equally. The agreement covers all territories other than Asia and
may include milestone payments from Genzyme to the Company after the product has
been approved by the United States Food and Drug Administration.
In September 1997, the Company and Genzyme amended the terms of the $8.3 million
Genzyme Credit Line. The expiration date of the revolving credit line was
extended to March 31, 2000, with an option, at that date, for the Company to
convert the outstanding balance to a three-year term loan. The interest rate
remains at 7% through April 1, 1998, increasing annually through the end of the
term loan; starting at the lower of 8% or prime in the first year increasing to
the lower of 10% or prime lending rate +2% in the final year of the term loan.
Financial covenants require positive quarterly earnings before interest, taxes,
depreciation, amortization and unfunded research and development expense
starting April 1, 1998. As of December 28, 1997, there was $6,000,000
outstanding on the Genzyme Credit Line. Interest expense of $6,000 was incurred
during 1997 on the line of credit (see Notes 10 and 13).
In June 1997, the Company completed financing for the expansion of its Mason
Laboratory. The financing package provides $5 million in available funds from a
consortium of federal, state and local government agencies in conjunction with a
commercial bank. The loan carries a ten year amortization schedule with a
variable interest rate adjusted annually. The current rate is 9.25%. The Company
utilized $3.8 million of the line in June to fund the initial phase of
renovations and to refinance approximately $800,000 of existing mortgage debt on
the facility. The remaining $1.2 million is available through December 31, 1998
for additional renovations of the facility, if any. In connection with the
financing, the Company issued the warrants to purchase 20,000 shares of the
Company's common stock for a period of ten years at the then current market
price of $8.75 per share. Warrants valued at $130,000 are being amortized over
the life of the mortgage.
In June 1997, the Company's Redfield Laboratories subsidiary obtained $1,050,000
in financing from a commercial bank in conjunction with a state government
agency for the refinancing of approximately $750,000 in existing mortgage debt
and to fund expansion of its facility. The financing consists of two notes, both
at 10% annual interest. The first note, in the amount of $350,000, has a ten
year term. The second note, in the amount of $750,000, has a ten year
amortization with a balloon payment due in May 1999. The annual balloon
requirement is intended to be refinanced each year.
In July 1997, Redfield Laboratories obtained an additional $350,000 in financing
for the expansion of its facility from a combination of federal, state and
county government agencies. The loan is amortized over a fifteen year term and
carries an interest rate of 5.5%.
The Company's long-term debt consisted of the following:
December 28,
1997
-----------------
Note payable with monthly payments of $48,750 through June 2007,
interest at 9.25%, collateralized by real estate. $ 3,689
Note payable, with escalating quarterly payments of $50,000
beginning March 1997, interest is variable, collateralized by real estate. 2,100
Mortgage note payable, with monthly payments of $9,251 through
May 1999, interest at 10%, collateralized by real estate. 675
Note payable, with quarterly payments of $8,605 through
July 2012, interest at 5.5%, collateralized by real estate. 342
Mortgage note payable with monthly payments of $4,625 through
June 2007, interest at 10%, collateralized by real estate. 338
Note payable with monthly payments of $6,066 through December
2000, interest at 8%, collateralized by real estate. 188
Capital lease obligations, with monthly payments of $142,288 through
February 1998 and December 2002, interest varies, collateralized
by property. 4,326
Other 104
-------
$11,762
Less current portion 1,900
-------
$ 9,862
=======
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the value of the notes payable
approximates fair value.
Maturities of long-term debt over the next five years are as follows:
1998................................................ $1,900
1999................................................ 2,368
2000................................................ 2,009
2001................................................ 2,180
2002................................................ 701
Thereafter.......................................... 2,604
-------
$11,762
=======
Cash paid for interest for the fiscal years ended December 28, 1997, December
29, 1996, and December 31, 1995 was $1,098,000, $1,138,000 and $615,000,
respectively.
NOTE 6. STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 40,000,000 shares of common
stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share. Prior to the Company's IPO, the Board of Directors
designated 4,000,000 shares of Preferred Stock as Series A Convertible Preferred
Stock ("Series A Stock"), none of which is outstanding.
In October 1994, the Company acquired TSI for 4,367,601 shares of the Company's
common stock (see Note 3). In addition, all warrants to purchase TSI common
stock then outstanding were converted into warrants to purchase the Company's
common stock at the acquisition exchange ratio.
In July 1995, Genzyme provided a guarantee of the Company's line of credit (see
Note 5). In consideration for the guarantee, the Company issued warrants to
purchase 145,000 shares of common stock at the then current market price of
$2.84375 per share.
In connection with the commercial lease line, the Company has assumed warrants
to purchase 4,000 shares of common stock at a price of $0.10 per share which
were originally issued to the commercial leasing company by TSI in September
1994. In June 1995, the Company issued additional warrants to purchase 2,000
shares of common stock at the then current market price of $2.75 per share.
During fiscal 1996, warrants to purchase an additional 2,000 shares at the then
current market price of $6.50 per share were issued in connection with an
increase in the lease line which was made available in December 1995 (see Note
5).
In connection with the financing for the expansion of the Mason Laboratories,
the Company issued warrants to purchase 20,000 shares of the Company's common
stock at the then current market price of $8.75 per share (see Notes 5 and 13).
A summary of the outstanding GTC warrants as of December 28, 1997, all of which
are currently exercisable, is as follows:
Common Shares Exercise Warrant Expiration
Issuable for Price Per Share Date
--------------- --------------- -------------------
37,600 $0.05000 October 28, 1998
4,000 $0.10000 January 1, 2000
145,000 $2.84375 July 3, 2005
2,000 $2.75000 December 31, 2001
2,000 $6.50000 December 31, 2001
20,000 $8.75000 June 26, 2007
------
210,600
=======
In February 1995, Genzyme purchased an additional 500,000 shares of the
Company's common stock at $8.00 per share pursuant to the Common Stock Put
Agreement and, in June 1995, Genzyme entered into a Common Stock Purchase
Agreement under which it obtained 1,333,333 shares of the Company s common stock
in exchange for a $4 million reduction in the amount due to Genzyme. In July
1995, the Company purchased BDL and entered into a Consulting and
Non-Competition Agreement with the principal stockholder of BDL in exchange for
1,207,233 shares of the Company s common stock (see Note 3).
In March 1996, Genzyme entered into the Convertible Debt and Development Funding
Agreement (see Note 10) under which it converted $1,673,000 of debt into 219,565
shares of the Company's common stock. In July 1996, the Company completed a
secondary public offering of 3,450,000 shares of its common stock priced at
$4.00 per share. The proceeds to the Company, after deducting commissions and
offering expenses, were $12.7 million.
As of December 28, 1997, the Company has reserved 3,125,984 shares of common
stock, subject to adjustment, for future issuance under the various classes of
warrants, Stock Option and Employee Stock Purchase Plans (see Note 7).
NOTE 7. EMPLOYEE BENEFIT PLANS
Stock Options and Purchase Plan
In May 1993, the Board of Directors adopted and the stockholders approved the
1993 Equity Incentive Plan (the "Equity Plan"), the 1993 Director Stock Option
Plan (the "Director Plan") and the 1993 Employee Stock Purchase Plan (the
"Purchase Plan").
Under the Equity Plan, 2,015,000 shares of common stock were issued or reserved
for issuance pursuant to incentive stock options, non-statutory stock options,
restricted stock awards, stock appreciation rights or stock units in accordance
with specific provisions to be established by a committee of the Board of
Directors at the time of grant. To date, all options have been issued at 85% or
greater of the fair value at the grant date. The Equity Plan also permits the
Company to assume outstanding options in an acquisition without using shares
reserved under the Plan. Of the foregoing total, 224,350 shares are subject to
options assumed by the Company in the acquisition of TSI. In May 1997, the Board
of Directors increased the number of shares reserved for issuance under this
plan to 2,515,000 shares.
Under the Director Plan, 50,000 shares of common stock were reserved for
issuance as non-statutory stock options at the rate of 2,000 shares for each
year of service to members of the Board of Directors who are not employees of
the Company. Such options are automatically granted at fair market value upon
the election or reelection of each director. In May 1997, the Board of Directors
increased the number of shares reserved for issuance under this plan to 100,000
shares.
Under these plans, an option's maximum term is ten years and vest ratably 20% on
the date of issuance and 20% thereafter on the anniversary of the grant.
Under the Purchase Plan, 300,000 shares of common stock were reserved for the
grant of purchase rights to employees in one or more offerings in accordance
with provisions to be established by a committee of the Board of Directors prior
to commencement of any offering period. In May 1997, the Board of Directors
increased the number of shares reserved for issuance under this plan to 900,000
shares. Participants may purchase shares of common stock at not less than 85% of
the lower of the market value at the beginning of each offering or on the
purchase date. Purchase dates occur every three months for a period of two years
from the offering date. Participants may not carry over balances from one
purchase date to the next. Offering dates occur every six months. A total of
510,937 and 26,321 shares of common stock remained available for issuance under
the plan at December 28, 1997 and December 29, 1996, respectively. The purchases
of common stock under the plan during fiscal 1997 and fiscal 1996 were 115,384
shares at an aggregate purchase price of approximately $572,000 and 164,879
shares at an aggregate purchase price of approximately $511,000, respectively.
No compensation expense has been recorded related to the employee stock purchase
plan.
In 1996, the Company adopted, Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting For Stock-Based Compensation. SFAS 123 requires
that companies either recognize compensation expense for grants of stock, stock
options and other equity instruments based on fair value, or provide pro forma
disclosure of net income and earnings per share in the notes to the financial
statements. The Company adopted the disclosure provisions of SFAS 123 in 1996
and has applied APB Opinion 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS 123, the Company's net loss and loss per share for the
years ended December 28, 1997, December 29, 1996 and December 31, 1995 would
have been increased to the pro forma amounts indicated below:
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
Earnings Per Share Earnings Per Share Earnings Per Share
Net Loss (basic and diluted) Net Loss (basic and diluted) Net Loss (basic and diluted)
-------- ------------------ -------- ------------------ -------- ------------------
As Reported $(9,343) $(0.54) $(7,746) $(0.52) $(4,133) $(0.35)
Pro Forma (11,458) (0.66) (8,988) (0.61) (4,755) (0.40)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.
A summary of the status of the Company's stock option plans as of December 28,
1997, December 29, 1996 and December 31, 1995 and changes during the years
ending on those dates is presented below:
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 664,308 $6.9485
- ----------------------------------------------------------------------------------------------------------
Granted
Price = Fair value 653,225 $3.0902
Price > Fair value 6,750 $3.3750
Exercised (2,800) $2.9900
Cancelled (85,818) $8.3865
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 1,235,665 $4.7751
- ----------------------------------------------------------------------------------------------------------
Granted
Price = Fair value 389,910 $8.0901
Price > Fair value 130,519 $6.5974
Exercised (87,131) $4.3939
Cancelled (72,449) $5.0537
- ----------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 1,596,514 $5.7432
- ----------------------------------------------------------------------------------------------------------
Granted
Price = Fair value 647,814 $7.7843
Price > Fair value 10,400 $7.8462
Exercised (120,377) $4.5246
Cancelled (132,362) $5.9003
- ----------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 2,001,989 $6.4611
==========================================================================================================
At December 28, 1997, December 29, 1996 and December 31, 1995, there were
991,367, 718,644 and 432,681 shares exercisable at a weighted average exercise
price of $6.1142, $5.6903 and $5.9830, respectively. The weighted average fair
value of options granted during fiscal 1997, 1996 and 1995 was $7.79, $5.15 and
$2.03, respectively.
The following table summarizes information about stock options outstanding at
December 28, 1997:
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$2.7500 - $5.7500 610,885 7.46 $3.4066 374,705 $3.3136
$5.7625 - $7.3750 670,468 8.94 $7.0740 166,143 $6.9552
$7.5000 - $8.7500 373,120 5.82 $7.6330 321,472 $7.5779
$8.8750 - $13.6250 342,256 8.60 $9.2260 123,801 $9.1825
$15.9500 - $55.0000 5,260 2.95 $17.4228 5,246 $17.4143
------- ---- -------- ----- --------
$2.7500 - $55.0000 2,001,989 7.83 $6.4611 991,367 $6.1142
========= =======
At December 28, 1997, 397,783 shares were available for grant.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption: an expected life of five years, expected volatility of 78%, a
dividend yield of 0% and a risk-free interest rate of 6.36% for fiscal 1997,
6.49% for fiscal 1996 and 5.92% for fiscal 1995.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with a dividend yield of 0%, expected volatility of 78%, a
weighted average risk free interest rate of 5.40% and a weighted average
expected life of one year for fiscal 1997; and a dividend yield of 0%, expected
volatility of 78%, a weighted average risk free interest rate of 5.16% and a
weighted average expected life of six months for fiscal 1996; and a dividend
yield of 0%, expected volatility of 78%, a weighted average risk free interest
rate of 6.34% and a weighted average expected life of one year for fiscal 1995.
The average fair value of those purchase rights granted during fiscal 1997,
fiscal 1996 and fiscal 1995 was $2.71, $2.08 and $1.09, respectively.
Other
All GTC employees, subject to certain eligibility requirements, can participate
in the Company's defined contribution plan. Currently, the Company may match up
to 50% of each participating employee's contributions to the plan to a maximum
of 3% of salary. The Company may also contribute an additional 2% of each
employee's salary as a retirement contribution. All contributions are at the
discretion of the Board of Directors. Expense recognized under this plan was
approximately $464,000, $368,000 and $266,000 for the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
NOTE 8. INCOME TAXES
Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using future expected enacted rates. A valuation allowance is
recorded against deferred tax assets if it is more likely than not that some or
all of the deferred tax assets will not be realized.
The income tax (benefit) provision consisted of the following:
1997 1996 1995
---- ---- ----
Current:
Federal 0 0 747
State 48 27 308
Foreign 0 0 238
------- ------- ------
Total Current 48 27 1,293
======= ======= =======
Deferred:
Federal (3,158) (3,882) 828
State 1,241 0 0
Foreign 0 0 0
Change in Valuation Allowance 1,917 3,882 (828)
------- ------- ------
Total Deferred 0 0 0
======= ======= =======
The 1995 tax provision was reflected in operations as a benefit of $2,346,000
offset by a charge of $240,000 to income from discontinued operations and a
charge of $3,401,000 on the gain from the disposal of clinical operations.
The provision for income taxes was at rates different from the U.S. Federal
statutory income tax rate for the following reasons:
Fiscal Years Ended
--------------------------------------------------------------------
December 28, 1997 December 29, 1996 December 31, 1995
----------------- ----------------- -----------------
Federal tax - expense (benefit) (34.0)% (34.0)% (34.0)%
Goodwill 3.2 5.2 6.0
State taxes - net 9.1 0.2 3.3
Gain on sale of GDRU -- -- 40.1
Joint Venture loss 3.0 0.9 3.9
Other (1.3) 0.4 1.4
Change in valuation allowance 20.5 27.6 --
---- ---- ----
Effective tax rate 0.5% 0.3% 20.7%
==== ==== ====
The components of the deferred tax assets and liabilities at December 28, 1997
and December 29, 1996, respectively, are as follows (dollars in thousands):
December 28, 1997 December 29, 1996
----------------- -----------------
Deferred Tax Assets/(Liabilities):
Accrued compensation reserves $ 1,091 $ 868
Other reserves 1,020 1,120
Tax credits 584 408
Net operating loss carryforwards 22,100 20,780
Depreciation 289 -
Other 9 -
--------- ---------
$ 25,093 $ 23,176
Total deferred tax asset $ 25,093 $ 23,176
Valuation allowance (25,093) (23,176)
--------- ---------
$ - $ -
========== =========
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets.
At December 28, 1997, the Company had U.S. net operating loss ("NOL")
carryforwards of approximately $58.5 million for federal income tax purposes.
These carryforwards expire through 2010. Utilization of these net operating loss
carryforwards reflected above are limited pursuant to provisions Section 382 of
the Internal Revenue Code of 1986, and to the extent that the Separate Return
Limitation Year ("SRLY") rules apply.
Approximately $40.6 million of these NOL's were acquired in connection with its
acquisition of TSI. Consequently, any realization of the benefit of these
purchased NOL's will be recorded as a reduction of goodwill. In 1995, goodwill
was reduced by approximately $1 million as a result of the utilization of
purchased NOL's to offset taxable gain principally resulting from the sale of
GDRU.
The Company paid taxes of $48,000, $27,000 and $238,000 in fiscal 1997, 1996 and
1995, respectively.
NOTE 9. REVENUE INFORMATION
Revenues from the U.S. government accounted for 4% of total revenues in fiscal
1997, 6% in fiscal 1996 and 7% in fiscal 1995. Revenues from the Joint Venture
accounted for 7% of total revenues in fiscal 1997, 2% in fiscal 1996 and 12% in
fiscal 1995. Revenues from Genzyme accounted for 11% of total revenues in fiscal
1997, 13% in fiscal 1996 and 0% in fiscal 1995.
A summary of export sales by fiscal year follows:
Asia Europe Total
1997 .............. $9,178 $ 4,640 $13,818
1996 .............. 3,291 780 4,071
1995 .............. 5,311 1,311 6,622
NOTE 10. ARRANGEMENTS WITH GENZYME CORPORATION
From the Company's inception, certain facilities and support services, including
both research and administrative support, have been provided by Genzyme. For
these services, the Company was charged $8,073,000, $3,824,000 and $3,156,000
for the fiscal years ended December 28, 1997, December 29, 1996 and December 31,
1995, respectively. These charges represent an allocation of the Company's
proportionate share of Genzyme's overhead costs using formulae which management
believes are reasonable based upon the Company's use of the facilities and
services. All other costs for all periods presented, including payroll costs,
are directly attributable to the Company and have been paid by Genzyme and
charged to the Company.
In April 1993, the Company entered into several agreements under which Genzyme
has agreed to provide various services, facilities and funding to the Company as
described below:
Services Agreement
Under the Services Agreement, the Company receives certain basic support
services in exchange for a fixed monthly payment ($42,415 per month during 1997)
adjusted annually. These basic services include laboratory support, as well as
assistance with certain administrative functions including purchasing, data
processing, risk management, corporate communications and treasury activities.
If the Company requests additional services from Genzyme, the Company has agreed
to pay Genzyme fully allocated costs of those services. The Services Agreement
is automatically renewed each year thereafter unless terminated by either party
not less than 90 days prior to the end of any annual period. Under the Services
Agreement, the Company made payments of $509,000, $582,000 and $390,000 for the
fiscal years ended December 28, 1997, December 29, 1996 and December 31, 1995,
respectively.
Sublease Agreement
Under the Sublease Agreement, the Company has leased certain laboratory,
research and office space from Genzyme through May 1998 in exchange for fixed
monthly rent payments which approximate the estimated current rental value for
such space. In addition, the Company reimburses Genzyme for its pro rata share
of appropriate facilities operating costs such as maintenance, cleaning,
utilities and real estate taxes. The sublease is automatically renewed each year
and renewals are subject to earlier termination of the sublease by either party
after the initial five-year term. Under the Sublease Agreement, the Company made
payments for the fiscal years ended December 28, 1997, December 29, 1996 and
December 31, 1995, of $280,000, $178,000 and $169,000, respectively, and is
committed to make annual minimum rental payments of: $53,900 in 1998.
Technology Transfer Agreement
Under the Technology Transfer Agreement, Genzyme has transferred substantially
all of its transgenic assets and liabilities to the Company including its
ownership in the Joint Venture, assigned its relevant contracts and licensed to
the Company technology owned or controlled by it and relating to the production
of recombinant proteins in the milk of transgenic animals (the "Field") and the
purification of proteins produced in that manner. The license is worldwide and
royalty free as to Genzyme although the Company is obligated to Genzyme's
licensors for any royalties due them.
As long as Genzyme's ownership of the Company remains below 50%, Genzyme may use
the transferred technology and the new technology only on its own behalf and
without any royalty obligation to the Company.
Research and Development Agreement
The Research and Development Agreement defines the relationship among the
parties whereby each entity may perform research for the other. This agreement
is in effect through May 1998 and may be renewed by mutual consent. Genzyme has
agreed to use the Company to perform all research in the field of production of
recombinant proteins in transgenic animals. The Company has a similar obligation
to use Genzyme to purify proteins produced transgenically. Each party must
request such services from the other company before seeking them from a third
party although the Company may perform purification services on its own behalf.
These obligations are qualified by the ability of each party to perform the
requested services in accordance with the performance, scheduling, cost and
other specifications reasonably established by the requesting party. Each
company will receive payments from the other equal to the performing party's
fully allocated cost of performing such services, which shall not be less than
80% of the annual budgets established by the parties under the agreement, plus,
in most cases, a fee equal to 10% of such costs. The Company currently provides
development services to Genzyme for which it recognized revenues of $11,000,
$75,000 and $485,000 for the fiscal years ended December 28, 1997, December 29,
1996 and December 31, 1995, respectively. The Company also receives research and
development services from Genzyme, for which it incurred costs of $7.3 million,
$3.1 million and $2.6 million in 1997, 1996 and 1995, respectively (see Note 5).
In March 1996, the Company entered into a Convertible Debt and Development
Funding Agreement (the "Agreement") (see Note 5) with Genzyme under which
Genzyme agreed to provide a revolving line of credit ("Genzyme Credit Line") in
the amount of $10 million and agreed to fund development costs of the AT-III
program. During 1996, Genzyme converted $1,673,000 of debt to equity under this
agreement, leaving the availability under the Genzyme Credit Line at $8.3
million.
In March 1997, the Company amended the Agreement with Genzyme to provide for
continued funding by Genzyme of the development costs of the AT-III program
through June 30, 1997. In June 1997, the Company agreed to extend the Agreement
until December 31, 1997. Under the agreements in effect in 1997, Genzyme
provided $7 million in development funding. Genzyme provided $5.9 million and $0
in development funding in 1996 and 1995, respectively.
In July 1997, the Company and Genzyme announced an agreement to establish a
joint venture for the development, marketing and distribution of AT-III, subject
to the execution of a definitive agreement. A definitive collaboration agreement
for ATIII LLC ("Genzyme Joint Venture") was executed on January 1, 1998. Under
the terms of the agreement, Genzyme will provide 70% of the next $33 million of
development costs and the Company will fund the remaining 30%. Development costs
in excess of $33 million will be funded equally by the partners. In addition to
the funding, both partners will contribute manufacturing, marketing and other
resources to the Genzyme Joint Venture at cost and will share profits from
product sales equally. The agreement covers all territories other than Asia and
may include milestone payments from Genzyme to the Company after the product has
been approved by the United States Food and Drug Administration.
In September 1997, the Company and Genzyme amended the terms of the $8.3 million
Genzyme Credit Line. The expiration date of the revolving credit line was
extended to March 31, 2000, with an option, at that date, for the Company to
convert the outstanding balance to a three-year term loan. The interest rate
remains at 7% through April 1, 1998, increasing annually through the end of the
term loan; starting at the lower of 8% or prime in the first year increasing to
the lower of 10% or prime lending rate +2% in the final year of the term loan.
Financial covenants require positive quarterly earnings before interest, taxes,
depreciation, amortization and unfunded research and development expense
starting April 1, 1998 (see Notes 5 and 13).
Any amounts outstanding under the credit line may be converted into the
Company's common stock at Genzyme's option at any time for up to the full amount
outstanding or at the Company's option on a quarterly basis limited to an amount
sufficient to maintain a minimum tangible net worth. All such conversions are to
be based on the average closing stock price over 20 trading days prior to
conversion.
As of December 28, 1997, there was $6 million outstanding under the Genzyme
Credit Line.
NOTE 11. OTHER AGREEMENTS
Tufts University School of Veterinary Medicine ("Tufts")
Since 1988, pursuant to a cooperation agreement, the Company has funded an
ongoing program to develop transgenic animals at Tufts. During the term of the
agreement, which extends through September 1998, Tufts has agreed to work
exclusively with the Company for commercial applications within the field of
transgenic protein production in milk. The Company paid Tufts $284,000, $517,000
and $665,000 for the fiscal years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively. Sales of products derived from transgenic goats
produced by Tufts, or from their offspring, are subject to royalties payable to
Tufts.
NOTE 12. JOINT VENTURE
In 1990, Genzyme entered into a joint venture with Sumitomo Metal Industries to
develop proteins produced transgenically (the "Joint Venture"). The Joint
Venture has engaged the Company, as the successor to Genzyme s transgenics
business, to perform research and development for which the Company is
reimbursed a portion of its costs and receives additional payments based on
achievement of specified milestones. However, GTC does not have any intercompany
profits or losses as a result of its transactions with the Joint Venture. This
three-year program ended during 1993 and the parties decided to extend the
contract for an additional three years.
The Joint Venture has a license, exclusive as to Asia and non-exclusive as to
Europe, to use the Company's transgenic technology and to market and sell
products and transgenic animals produced by the Joint Venture based on that
technology. The Company retained the exclusive right to market and sell such
products within the Americas. Each party is obligated to make royalty payments
based on its sales of products developed by the Joint Venture and, additionally,
the Company is obligated to pay royalties on sales of other transgenically
produced proteins in Asia.
The Company's initial $1,077,000 investment in the Joint Venture represented a
25% ownership interest. In 1992, the Company invested an additional $381,000,
less than 25% of the aggregate new investment resulting in a decline of its
ownership to 19.7%. In March 1994, the Company and its partner agreed to extend
the Joint Venture contract and contribute an additional $1.2 million and $4.6
million, respectively, increasing the Company's ownership percentage to 22%. In
October 1995, the Company contributed an additional $807,000 to maintain the
Company's ownership percentage at 22%. In February 1997, the Company reached an
agreement with the Joint Venture entitling the Company to receive up to $4.4
million in future milestone payments for the development of AT-III. In March
1997, the Joint Venture partners agreed to raise $2.4 million in additional
equity, of which the Company contributed $528,000 in April 1997 to maintain its
22% ownership. For the fiscal years ended December 28, 1997, December 29, 1996
and December 31, 1995, the Company recognized revenue of $4,413,000, $857,000
and $3,874,000, respectively, under the Joint Venture agreement.
Summarized financial information (unaudited) for the Joint Venture is as
follows:
At December 31,
-----------------------------------
1997 1996
---- ----
Balance Sheet Data:
Current assets $ 603 $1,301
Noncurrent asset 5 2
Current Liabilities 1,334 19
Partners capital (726) 1,284
For the Fiscal Years Ended
--------------------------
1997 1996 1995
---- ---- ----
Statement of Operations Data:
Research and development expenses $4,613 $1,381 $3,183
Administrative expense 203 11 1,083
Revenue (316) - (961)
------ ------ ------
Net loss $4,500 $1,392 $3,305
====== ====== ======
NOTE 13. SUBSEQUENT EVENTS
In February 1998, the Company received an additional $3 million commitment from
a commercial leasing company. Leases under this line will have a term of 48
months and an interest rate of 11% per annum, subject to adjustment proportional
to the change in the weekly average of interest rates of like term United States
Treasury Securities.
In February 1998, the Company announced that it had established a new
subsidiary, Primedica Corporation, to provide a unified identity and a dedicated
structure for further growth of its CRO operations. Initially 100% owned by GTC,
Primedica is expected to serve as a vehicle to pursue acquisitions.
In March 1998, the Company completed a private placement of $20 million of
Series A Convertible Preferred Stock (the "Preferred Stock") to three
institutional investors. The Preferred Stock carries a $1,000 face value per
share, and is subject to mandatory redemption, if not previously converted, in
three years. Such redemption may be in the form of cash or stock, at the
Company's option. The Preferred Stock may be converted into the Company's common
stock at a price of $14.55 per share through December 20, 1998. Thereafter, it
may be converted into common stock at a per share price equal to the lower of
$14.55 or the average of any five closing bid prices over the twenty trading
days prior to conversion. Dividends will only accrue if the holders are unable
to convert their Preferred Stock into common stock in certain circumstances. In
connection with the financing, warrants to purchase 450,000 shares of the
Company's common stock were issued. Each warrant has a four year term at an
exercise price of $15.1563 per share. As a result of this financing, the amount
of the Genzyme Credit Line was reduced to approximately $6.4 million.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENZYME TRANSGENICS CORPORATION
By: /s/ James A. Geraghty
----------------------------- ,
James A. Geraghty, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ James A. Geraghty Chairman of the Board, President 3/27/98
- ------------------------- ------------
James A. Geraghty and Chief Executive Officer
/s/ John B. Green Chief Financial Officer 3/27/98
- ------------------------- ------------
John B. Green
/s/ Robert W. Baldridge Vice Chairman of the Board 3/27/98
- ------------------------- ------------
Robert W. Baldridge
/s/ Henri A. Termeer Director 3/27/98
- ------------------------- ------------
Henri A. Termeer
/s/ Alan E. Smith Director 3/27/98
- ------------------------- ------------
Alan E. Smith
/s/ Henry E. Blair Director 3/27/98
- ------------------------- ------------
Henry E. Blair
/s/ Alan W. Tuck Director 3/27/98
- ------------------------- ------------
Alan W. Tuck
/s/ Francis J. Bullock Director 3/27/98
- ------------------------- ------------
Francis J. Bullock
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of June 14, 1994, among
TSI Corporation ("TSI"), Genzyme Transgenics Corporation ("GTC")
and New Acorn Corporation. Filed as Appendix A to the Joint Proxy
Statement--Prospectus included in Part I of the Company's
Registration Statement on Form S-4 (File No. 33-80924) (the "GTC
S-4") and incorporated herein by reference.
2.2 Asset Purchase and Sale Agreement, dated as of January 3, 1995,
between The TSI Center for Diagnostic Products, Inc. and BioVest,
Inc. Filed as Exhibit 2.2 to the original filing of the Company's
Annual Report on Form 10-K for the year ended December 31, 1994
(Commission File No. 0-21794) (the "GTC 1994 10-K") and
incorporated herein by reference. Pursuant to Item 601(b)(2) of
Regulation S-K, the schedules to this Agreement are omitted. A
list of such schedules appears in the table of contents to the
Agreement. The Company hereby undertakes to furnish
supplementally upon request a copy of any such schedule to the
Commission.
2.3 Agreement and Plan of Merger, dated May 23, 1995, among GTC,
Biodevelopment Laboratories, Inc. and BDL Acquisition Corp. Filed
as Exhibit 2 to the Company's Current Report on Form 8-K dated as
of July 3, 1995 (File No. 0-21794) and incorporated herein by
reference.
2.4 Share Purchase Agreement, dated as of September 1, 1995, among
GTC, TSI and Quintiles Holdings Limited. Filed as Exhibit 2 to
the Company's Current Report on Form 8-K dated as of September
19, 1995 (File No. 0-21794) and incorporated herein by reference.
3.1.1 Restated Articles of Organization of GTC, filed with the
Secretary of the Commonwealth of Massachusetts on December 27,
1993. Filed as Exhibit 3.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 0-21794) (the
"GTC 1993 10-K") and incorporated herein by reference.
3.1.2 Articles of Amendment to the Restated Articles of Organization
filed with the Secretary of the Commonwealth of Massachusetts on
October 3, 1994. Filed herewith.
3.1.3 Articles of Amendment to the Restated Articles of Organization
filed with the Secretary of Commonwealth of Massachusetts on June
26, 1997. Filed as Exhibit 3 to GTC's Quarterly Report on Form
10-Q for the quarter ended June 29, 1997 (File No. 0-21794) (the
"GTC June 1997 10-Q") and incorporated herein by reference.
3.1.4 Certificate of Vote of Directors Establishing a Series of a Class
of Stock (Series A Convertible Preferred Stock). Filed with the
Secretary of the Commonwealth of Massachusetts on March 20, 1998.
Filed herewith.
3.2 By-Laws of GTC, as amended to date. Filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33-62782)
(the "GTC S-1") and incorporated herein by reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to the
GTC S-1 and incorporated herein by reference.
4.2 Specimen Series A Convertible Preferred Stock Certificate. Filed
herewith.
4.3.1 TSI Specimen Warrant Certificate. Filed as Exhibit 4.8 to TSI's
Registration Statement on Form S-3 (File No. 33-48107) and
incorporated herein by reference.
4.3.2 Form of Notice of Assumption by GTC of the TSI warrants to which
Exhibit 4.2.1 of this Report relates. Filed as Exhibit 4.2.2 to
the original filing of the GTC 1994 10-K and incorporated herein
by reference.
4.4.1 TSI Common Stock Purchase Warrant No. F-1 issued, on October 28,
1993, to The First National Bank of Boston ("FNBB"). Filed as
Exhibit 4.6 to the GTC S-4 and incorporated herein by reference.
4.4.2 TSI Common Stock Purchase Warrant No. G-1, dated September 27,
1994, issued to Financing for Science International, Inc.
("FSI"). Filed as Exhibit 4.4 to the original filing of the GTC
1994 10-K and incorporated herein by reference.
4.4.3 Form of Notice of Assumption by GTC of the TSI Common Stock
Purchase Warrants Nos. F-1 and G-1. Filed as Exhibit 4.5 to the
original filing of the GTC 1994 10-K and incorporated herein by
reference.
4.5 Common Stock Purchase Warrant, dated June 30, 1995, issued to
FSI. Filed as Exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the period ended July 2, 1995 (Commission File No.
0-21794) (the "GTC July 1995 10-Q") and incorporated herein by
reference.
4.6 Common Stock Purchase Warrant, dated July 3, 1995, issued to
Genzyme. Filed as Exhibit 10.5 to the GTC July 1995 10-Q and
incorporated herein by reference.
4.7 Common Stock Purchase Warrant, dated March 13, 1996, issued to
FSI. Filed as Exhibit 4.8 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 (File No. 0-21794) (the
"GTC 1995 10-K") and incorporated herein by reference.
4.8 Common Stock Purchase Warrant, dated as of June 26, 1997, issued
to Government Land Bank d/b/a The MassDevelopment
("MassDevelopment"). Filed as Exhibit 4 to the GTC June 1997 10-Q
and incorporated herein by reference.
4.9 Form of Common Stock Purchase Warrant issued to the purchasers of
Series A Convertible Preferred Stock, dated March 20, 1998,
together with schedule of holders. Filed herewith.
4.10 Form of Common Stock Purchase Warrant issued to Shoreline Pacific
Institutional Finance and affiliates, dated as of March 20, 1998.
Filed herewith.
10.1 Technology Transfer Agreement between GTC and Genzyme Corporation
("Genzyme"), dated as of May 1, 1993. Filed as Exhibit 2.1 to the
GTC S-1 and incorporated herein by reference.**
10.2 Research and Development Agreement between GTC and Genzyme, dated
as of May 1, 1993. Filed as Exhibit 10.1 to the GTC S-1 and
incorporated herein by reference.
10.3 Services Agreement between GTC and Genzyme, dated as of May 1,
1993. Filed as Exhibit 10.2 to the GTC S-1 and incorporated
herein by reference.
10.4 Sublease Agreement between GTC and Genzyme, dated as of May 1,
1993. Filed as Exhibit 10.3 to the GTC S-1 and incorporated
herein by reference.
10.5 License Agreement between GTC and Genzyme, as successor to IG
Laboratories, Inc., dated as of May 1, 1993. Filed as Exhibit
10.4 to the GTC S-1 and incorporated herein by reference.
10.6 Series A Convertible Preferred Stock Purchase Agreement between
GTC and Genzyme, dated as of May 1, 1993. Filed as Exhibit 10.5
to the GTC S-1 and incorporated herein by reference.
10.7.1 Mortgage and Security Agreement, dated as of June 30, 1995,
between GTC and Genzyme. Filed as Exhibit 10.6 to the GTC July
1995 10-Q and incorporated herein by reference.
10.7.2 First Amendment to Mortgage and Security Agreement, dated as of
December 15, 1995, between GTC and Genzyme. Filed as Exhibit
10.7.2 to the GTC 1996 10-K and incorporated herein by reference.
10.8* GTC 1993 Equity Incentive Plan, as amended through May 28, 1997.
Filed as Exhibit 10.3 to the GTC June 1997 10-Q and incorporated
herein by reference.
10.9* GTC 1993 Employee Stock Purchase Plan, as amended through May 28,
1997. Filed as Exhibit 10.4 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.10* GTC 1993 Director Stock Option Plan, as amended through May 28,
1997. Filed as Exhibit 10.5 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.11 GTC Form of Confidential and Proprietary Information Agreement
signed by GTC employees. Filed as Exhibit 10.9 to the GTC S-1 and
incorporated herein by reference.
10.12 GTC Form of Agreement Not to Compete. Filed as Exhibit 10.10 to
the GTC S-1 and incorporated herein by reference.
10.13 Form of Indemnification Agreement between GTC and its directors.
Filed as Exhibit 10.12 to the original filing of the GTC 1994
10-K and incorporated herein by reference. Such agreements are
materially different only as to the signing directors and the
dates of execution.
10.14 License Agreement between GTC and Biogen, Inc., dated December
26, 1990. Filed as Exhibit 10.12 to the GTC S-1 and incorporated
herein by reference.**
10.15 Agreement between GTC, SMI Genzyme Limited ("SMIG") and a
European pharmaceutical company, dated as of September 29, 1990.
Filed as Exhibit 10.13 to the GTC S-1 and incorporated herein by
reference.**
10.16 Research and Development Agreement between Genzyme and SMIG,
dated as of September 11, 1990, filed as Exhibit 10.14 to the GTC
S-1, as amended by an Agreement between GTC and SMIG, dated as of
March 15, 1994, filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994, and, in
each case, incorporated herein by reference.**
10.17 Joint Venture and Shareholders Agreement between GTC, Sumitomo
Metal Industries, Ltd. ("SMI") and SMIG, dated as of September 7,
1990. Filed as Exhibit 10.15 to the GTC S-1 and incorporated
herein by reference.
10.18 Shareholders' Subscription Agreement among GTC, SMI and SMIG,
dated as of March 15, 1994. Filed as Exhibit 10.17 to the GTC
1993 10-K and incorporated herein by reference.**
10.19.1 Cooperation and Licensing Agreement between GTC and Tufts
University, dated September 6, 1988, as amended through May 13,
1993 (the "Cooperation and Licensing Agreement"). Filed as
Exhibit 10.18 to the GTC 1994 10-K and incorporated herein by
reference.**
10.19.2 Amendment No. 7, dated April 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the period ended October 1,
1995 (File No. 0-294) (the "GTC October 1995 10-Q") and
incorporated herein by reference.
10.19.3 Amendment No. 8, dated October 21, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.7 to the GTC October
1995 10-Q and incorporated herein by reference.
10.19.4 Amendment No. 9, dated December 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.8 to the GTC October
1995 10-Q and incorporated herein by reference.**
10.19.5 Amendment No. 10, dated November 1, 1993, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.9 to the GTC October
1995 10-Q and incorporated herein by reference.
10.19.6 Amendment No. 11, dated May 25, 1995, to Cooperation and
Licensing Agreement. Filed as Exhibit 10.10 to the GTC October
1995 10-Q and incorporated herein by reference.
10.20 United States Patent No. 4,873,191 Sublicense Agreement between
DNX, Inc. and Genzyme Regarding Transgenic Experimental Animals
and Transgenic Mammary Production Systems, dated February 1,
1990; and letter of amendment, dated April 19, 1991. Filed
together as Exhibit 10.17 to the GTC S-1 and incorporated herein
by reference.**
10.21.1 Indenture of Lease, dated March 17, 1986, between TSI Mason
Laboratories, Inc. ("Mason") and Stephen W. Wolfe and William C.
Greene as Trustees of the Fifty-Seven Union Street Trust (the
"Mason Lease"). Filed as Exhibit 10.15 to TSI's Registration
Statement on Form S-1 (File No. 33-33708) and incorporated herein
by reference.
10.21.2 Amendment to the Mason Lease, dated September 30, 1993. Filed as
Exhibit 10.4 to Amendment No. 1 to TSI's Annual Report on Form
10-K for the fiscal year ended June 27, 1993 (the "TSI 1993
10-K") and incorporated herein by reference.
10.21.3 Guaranty by TSI of the obligations of Mason under the TSI Mason
Lease. Filed as Exhibit 10.41 to the TSI 1993 10-K and
incorporated herein by reference.
10.22 Lease Agreement, dated September 25, 1989, between TSI and
Laboratory Animal Services, Inc. and Greg E. Beatty and Betty L.
Beatty. Filed as Exhibit 10.15 to TSI's Annual Report on Form
10-K for the fiscal year ended July 1, 1990 and incorporated
herein by reference.
10.23.1 Lease Agreement, dated November 14, 1990, between TSI and
Hechinger Enterprises ("the Hechinger Lease"). Filed as Exhibit
10.21 to Amendment No. 2 to TSI's Registration Statement on Form
S-1 (File No. 33-39008) and incorporated herein by reference.
10.23.2 First Amendment to the Hechinger Lease, dated January 20, 1991.
Filed as Exhibit 10.22 to Amendment No. 1 to TSI's Registration
Statement on Form S-1 (File No. 33-39008) and incorporated herein
by reference.
10.24 Non-Competition and Confidentiality Agreement, dated as of August
7, 1991, between TSI and Mildred S. Christian. Filed as Exhibit
10.27 to Amendment No. 2 to TSI's Registration Statement on Form
S-1 (File No. 33-44724) and incorporated herein by reference.
10.25 Agreement to Terminate Existing Leases and Contemporaneously to
Enter Into a New Lease, dated as of July 1, 1992, between
Heffernan and Partners and Argus Research Laboratories, Inc.
Filed as Exhibit 10.31 to the TSI 1993 10-K and incorporated
herein by reference.
10.26.1 Lease Agreement, dated as of October 8, 1992, between W.M.
Rickman Construction Company and TSI Washington Laboratories,
Inc. (the "Washington Lease"). Filed as Exhibit 10.32 to the TSI
1993 10-K and incorporated herein by reference.
10.26.2 Amendment to the Washington Lease, dated as of January 17, 1995.
Filed herewith.
10.26.3 Second Amendment and accompanying Side Agreement to the
Washington Lease, dated as of July 7, 1997. Filed herewith.
10.27.1 Revolving Credit Agreement, dated July 3, 1995, among GTC,
certain of its subsidiaries and FNBB (the "Revolving Credit
Agreement"). Filed as Exhibit 10.2 to the GTC July 1995 10-Q and
incorporated herein by reference.
10.27.2 First Amendment to Revolving Credit Agreement, dated as of
September 15, 1995 among GTC, certain of its subsidiaries and
FNBB. Filed as Exhibit 10.28.2 to the GTC 1996 10-K and
incorporated herein by reference.
10.27.3 Second Amendment to Revolving Credit Agreement, dated as of
December 22, 1995 among GTC, certain of its subsidiaries and
FNBB. Filed as Exhibit 10.28.3 to the GTC 1996 10-K and
incorporated herein by reference.
10.27.4 Third Amendment to Revolving Credit Agreement, dated as of March
29, 1996 among GTC, certain of its subsidiaries and FNBB. Filed
as Exhibit 10.28.4 to the GTC 1996 10-K and incorporated herein
by reference.
10.27.5 Fourth Amendment to Revolving Credit Agreement, dated as of
October 1, 1996 among GTC, certain of its subsidiaries and FNBB.
Filed herewith.
10.27.6 Fifth Amendment to Revolving Credit Agreement, dated as of
February 21, 1997 among GTC, certain of its subsidiaries and
FNBB. Filed herewith.
10.27.7 Sixth Amendment to Revolving Credit Agreement, dated as of March
17, 1997 among GTC, certain of its subsidiaries and FNBB. Filed
herewith.
10.27.8 Seventh Amendment to Revolving Credit Agreement, dated as of June
17, 1997, among GTC, certain of its subsidiaries and FNBB. Filed
as Exhibit 10.7 to the GTC June 1997 10-Q and incorporated herein
by reference.
10.27.9 Eighth Amendment to Revolving Credit Agreement, dated as of March
20, 1998, among GTC, certain of its subsidiaries and FNBB. Filed
herewith.
10.28.1 Security Agreement, dated as of July 3, 1995, by GTC and certain
of its subsidiaries in favor of Genzyme (the "Security
Agreement"). Filed as Exhibit 10.3 to the GTC July 1995 10-Q and
incorporated herein by reference.
10.28.2 First Amendment to Security Agreement, dated as of December 15,
1997. Filed herewith.
10.29.1 Reimbursement Agreement, dated as of July 3, 1995, among GTC,
certain of its subsidiaries and Genzyme. Filed as Exhibit 10.4 to
the GTC July 1995 10-Q and incorporated herein by reference.
10.29.2 First Amendment to Reimbursement Agreement, dated as of December
15, 1995, among GTC, certain of its subsidiaries and Genzyme.
Filed as Exhibit 10.30.2 to the GTC 1996 10-K and incorporated
herein by reference.
10.30 Amended and Restated Convertible Debt Agreement, dated as of
September 4, 1997, between the Company and Genzyme. Filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1997 (the "GTC September 1997
10-Q") and incorporated herein by reference.
10.31 Subordination Agreement, dated as of March 29, 1996, among GTC,
Genzyme and FNBB. Filed as Exhibit 10.32 to the GTC September
1997 10-Q and incorporated herein by reference.
10.32.1 Term Loan Agreement, dated as of December 15, 1995, among GTC,
FNBB and Genzyme. Filed as Exhibit 10.33.1 to the GTC September
1997 10-Q and incorporated herein by reference.
10.32.2 First Amendment to Term Loan Agreement, dated as of March 29,
1996, among GTC, FNBB and Genzyme. Filed as Exhibit 10.33.1 to
the GTC September 1997 10-Q and incorporated herein by reference.
10.32.3 Second Amendment to Term Loan Agreement, dated as of October 1,
1996, among GTC, FNBB and Genzyme. Filed herewith.
10.32.4 Third Amendment to Term Loan Agreement, dated as of February 21,
1997, among GTC, FNBB and Genzyme. Filed herewith.
10.32.5 Fourth Amendment to Term Loan Agreement, dated as of June 17,
1997, among GTC, FNBB and Genzyme. Filed as Exhibit 10.6 to the
GTC June 1997 10-Q and incorporated herein by reference.
10.32.6 Fifth Amendment to Term Loan Agreement, dated as of March 20,
1998, among GTC, FNBB and Genzyme. Filed herewith.
10.33 Amendment to Standby Letter of Credit, dated as of June 29, 1994,
issued by FNBB in favor of Stephen W. Wolfe and William C.
Greene, as Trustees of the Fifty-Seven Union Street Trust. Filed
as Exhibit 10.43 to the GTC S-4 and incorporated herein by
reference.
10.34 Master Equipment Lease Agreement, dated as of September 27, 1994,
between TSI and FSI. Filed as Exhibit 10.33 to the original
filing of the GTC 1994 10-K and incorporated herein by reference.
10.35.1 Reserve Pledge and Security Agreement, dated as of September 27,
1994, between TSI and FSI. Filed as Exhibit 10.34 to the original
filing of the GTC 1994 10-K and incorporated herein by reference.
10.35.2 Modification to Reserve Pledge and Security Agreement, dated as
of June 30, 1995, between TSI and FSI. Filed herewith.
10.36 Security Agreement, dated as of September 27, 1994, between TSI
and FSI. Filed as Exhibit 10.35 to the original filing of the GTC
1994 10-K and incorporated herein by reference.
10.37 Intercreditor Agreement, dated as of July 3, 1995, among GTC,
TSI, certain other subsidiaries of GTC, FNBB and FSI. Filed as
Exhibit 10.7 to the GTC July 1995 10-Q and incorporated herein by
reference.
10.38 Guaranty of Lease, dated as of December 26, 1996, by GTC in favor
of FSI. Filed herewith.
10.39 Conversion and Registration Rights Agreement, dated as of June
29, 1994, between GTC and TSI. Filed as Exhibit 10.47 to the GTC
S-4 and incorporated herein by reference.
10.40 Common Stock Purchase Agreement, dated as of June 8, 1995,
between GTC and Genzyme. Filed as Exhibit 10.1 to the GTC July
1995 10-Q and incorporated herein by reference.
10.41* Amended and Restated Employment Agreement, dated as of August 28,
1997, between the Company and James A. Geraghty. Filed as Exhibit
10.1 to the GTC September 1997 10-Q and incorporated herein by
reference.
10.42* Amended and Restated Employment Agreement, dated as of August 28,
1997, between the Company and John B. Green. Filed as Exhibit
10.2 to the GTC September 1997 10-Q and incorporated herein by
reference.
10.43* Amended and Restated Employment Agreement, dated as of September
16, 1997, between the Company and Peter Glick. Filed as Exhibit
10.3 to the GTC September 1997 10-Q and incorporated herein by
reference.
10.44* Employment Agreement, dated as of March 27, 1996, between GTC and
Harry Meade. Filed as Exhibit 10.44 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996 and
incorporated herein by reference.
10.45* Form of Employment and Consulting Agreement among GTC, TSI and
Robert W. Baldridge. Filed as Exhibit 10.56 to the GTC S-4 and
incorporated herein by reference.
10.46.1 Agreement, dated as of September 21, 1994, between GTC and Gene
Pharming Europe B.V. ("Pharming B.V."). Filed as Exhibit 10.49 to
the Company's Registration Statement on Form S-1 (File No.
333-05843) and incorporated herein by reference.**
10.46.2 Amendment Agreement, dated as of April 23, 1997, between GTC and
Pharming B.V. Filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997 (File
No. 0-21794) (the "GTC March 1997 10-Q") and incorporated herein
by reference.
10.47 Development and Commercialization Agreement, dated as of
September 25, 1997, between the Company and Advanced Cell
Technology, Inc. Filed as Exhibit 10.5 to the GTC September 1997
10-Q and incorporated herein by reference.**
10.48 Development and Commercialization Agreement, dated as of
September 25, 1997, between the Company and B. Braun Melsungen
AG. Filed as Exhibit 10.6 to the GTC September 1997 10-Q and
incorporated herein by reference.**
10.49.1 Loan Agreement, dated as of May 22, 1997, between Redfield and
Simmons First National Bank ("SFNB"). Filed herewith in order to
correct a typographical error regarding the date of the agreement
as contained in the version previously filed as Exhibit 10.9.1 to
the GTC June 1997 10-Q.
10.49.2 Promissory Note in the amount of $700,000.00, dated as of May 22,
1997, executed by Redfield and issued to SFNB. Filed herewith in
order to correct a typographical error regarding the date of the
agreement as contained in the version previously filed as Exhibit
10.9.2 to the GTC June 1997 10-Q.
10.49.3 Promissory Note in the amount of $350,000.00, dated as of May 22,
1997, executed by Redfield and issued to SFNB. Filed herewith in
order to correct a typographical error regarding the date of the
agreement as contained in the version previously filed as Exhibit
10.9.3 to the GTC June 1997 10-Q.
10.49.4 Mortgage, dated as of May 22, 1997, entered into by and between
Redfield and SFNB. Filed herewith in order to correct a
typographical error regarding the date of the agreement as
contained in the version previously filed as Exhibit 10.9.4 to
the GTC June 1997 10-Q.
10.49.5 Security Agreement, dated as of May 22, 1997, entered into by and
between Redfield and SFNB. Filed herewith in order to correct a
typographical error regarding the date of the agreement as
contained in the version previously filed as Exhibit 10.9.5 to
the GTC June 1997 10-Q.
10.49.6 Unconditional Guaranty, dated as of May 22, 1997, executed by TSI
Corporation, Inc. in connection with the Loan Agreement, dated as
of May 22, 1997, between Redfield and SFNB. Filed herewith in
order to correct a typographical error regarding the date of the
agreement as contained in the version previously filed as Exhibit
10.9.6 to the GTC June 1997 10-Q.
10.49.7 Unconditional Guaranty, dated as of May 22, 1997, executed by the
Company in connection with the Loan Agreement, dated as of May
22, 1997, between Redfield and SFNB. Filed herewith in order to
correct a typographical error regarding the date of the agreement
as contained in the version previously filed as Exhibit to 10.9.7
the GTC June 1997 10-Q.
10.50.1 Loan Agreement, dated as of May 22, 1997, between TSI Redfield
Laboratories, Inc. ("Redfield") and Jefferson County, Arkansas
("Jefferson County"). Filed as Exhibit 10.2.1 to the GTC June
1997 10-Q and incorporated herein by reference.
10.50.2 Promissory Note in the amount of $350,000.00, dated as of May 22,
1997, executed by Redfield and issued to Jefferson County. Filed
as Exhibit 10.2.2 to the GTC June 1997 10-Q and incorporated
herein by reference.
10.50.3 Mortgage, dated as of May 22, 1997, entered into by and between
Redfield and Jefferson County, Arkansas. Filed as Exhibit 10.2.3
to the GTC June 1997 10-Q and incorporated herein by reference.
10.50.4 Guaranty Agreement, dated as of May 22, 1997, executed by the
Company in connection with the Loan Agreement, dated as of May
22, 1997, between Redfield and Jefferson County. Filed as Exhibit
10.2.4 to the GTC June 1997 10-Q and incorporated herein by
reference.
10.51.1 Loan Agreement, dated as of June 26, 1997, between GTC Mason
Laboratories ("Mason") and MassDevelopment. Filed as Exhibit
10.8.1 to the GTC June 1997 10-Q and incorporated herein by
reference.
10.51.2 Promissory Note in the amount of $5,000,000.00, dated as of June
26, 1997, executed by Mason and issued to MassDevelopment. Filed
as Exhibit 10.8.2 to the GTC June 1997 10-Q and incorporated
herein by reference.
10.51.3 Mortgage and Security Agreement, dated as of June 26, 1997,
entered into by and between Mason and MassDevelopment. Filed as
Exhibit 10.8.3 to the GTC June 1997 10-Q and incorporated herein
by reference.
10.51.4 Guaranty, dated as of June 26, 1997, executed by the Company in
connection with the Loan Agreement, dated as of June 26, 1997,
between Mason and MassDevelopment. Filed 10.8.4 as Exhibit to the
GTC June 1997 10-Q and incorporated herein by reference.
10.51.5 Hazardous Materials Indemnification Agreement, dated as of June
26, 1997, entered into by and between Mason and MassDevelopment.
Filed as Exhibit 10.8.5 to the GTC June 1997 10-Q and
incorporated herein by reference.
10.52.1 Amended and Restated Operating Agreement of ATIII LLC dated as of
January 1, 1998. Filed herewith.**
10.52.2 Purchase Agreement between GTC and Genzyme dated as of January 1,
1998, transferring an interest in ATIII LLC from Genzyme to GTC.
Filed herewith.**
10.52.3 Collaboration Agreement among Genzyme, GTC and ATIII LLC, dated
as of January 1, 1998. Filed herewith.**
10.53 Registration Rights Agreement, dated March 20, 1998, between GTC
and certain stockholders named therein. Filed herewith.
10.54 Securities Purchase Agreement, dated as of March 20, 1998,
between GTC and certain purchasers named therein. Filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith.
27 Financial Data Schedule. Filed herewith.
99 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- ----------------------------
* Indicates a management contract or compensatory plan.
** Certain confidential information contained in the document has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2
promulgated under the Securities and Exchange Act of 1934, as amended.