<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: AUGUST 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-10824
GENOME THERAPEUTICS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2297484
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 24, 1997 was approximately $123,461,072.
The number of shares outstanding of the registrant's common stock as of
November 24, 1997 was 18,211,543.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for use at its Special Meeting
of Shareholders in lieu of an Annual Meeting to be held on January 26, 1998 are
incorporated by reference into Part III.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the field
of genomics-based drug discovery -- the identification and functional
characterization of genes. The Company has over ten years of experience in
positional cloning, having served as one of the primary researchers under genome
programs sponsored by the United States government, and has developed numerous
techniques and tools that are widely used in this field. GTC's commercial gene
discovery strategy capitalizes on its pioneering work in genomics by applying
its high-throughput sequencing technology and positional cloning, its experience
and skills in pathogen functional genomics and its bioinformatics capabilities.
The two areas of focus are: the discovery and characterization of (i) genes of
pathogens that are responsible for many serious diseases and (ii) human disease
genes. The Company believes that its genomic discoveries may lead to the
development of novel therapeutics, vaccines and diagnostic products by it and
its strategic partners. The Company has entered into several corporate
collaborations in connection with its pathogen and human gene discovery
programs.
SCIENTIFIC BACKGROUND
Human disease is caused by a variety of factors, including genetic defects,
pathogens and environmental factors, with many of the most common
life-threatening and chronic diseases believed to have a genetic basis. Genes,
which define the inherited characteristics of an organism, are found in all
living cells (e.g., human, animal and pathogen cells). Each gene codes for a
specific protein that performs a specific function in the body, such as the
production of insulin. In humans, a defect in a gene, or the absence of a
critical gene, may lead to overproduction, underproduction, improper function or
absence of a protein resulting in the onset of disease or an undesirable
physical condition. Genetic defects can be inherited or can accumulate during
the lifetime of an individual. Human diseases caused by pathogens also have a
genetic foundation in that specific genes in the pathogen are required for that
organism to survive and infect its human host.
The genetic content of an organism consists of DNA, a chemically complex
material comprised of four different nucleotides (adenine, guanine, cytosine,
and thymine) which are the building blocks of DNA. The sequence in which these
nucleotides are linked together in a molecule of DNA determines the
informational content of genes. The entire genetic content of an organism,
including humans, is referred to as its genome.
The human genome consists of 23 pairs of chromosomes. These chromosomes
contain approximately 100,000 human genes distributed over approximately three
billion nucleotides. Human genes are found in the chromosomes as coding regions
of DNA ("exons") interrupted by non-coding regions of DNA ("introns"). The
number of exons found in human genes can be quite large as can be the distance
between exons. The function of the majority of human DNA is unknown. The DNA
sequence of a human gene is transcribed into a messenger RNA molecule ("mRNA")
which is processed to contain only the exon sequences. The information in the
mRNA molecule is, in turn, translated into a protein product.
Genomes of pathogens are significantly less complex than the human genome
and generally consist of a single chromosome containing several thousand genes
distributed over millions of nucleotides. The majority of DNA in pathogens
typically is comprised of genes as uninterrupted DNA sequences.
Proteins expressed by genes are the targets of most current drugs. As a
result, the identification of human disease genes and the protein product of
these genes may lead to new therapeutics and diagnostic tests. In the case of
diseases caused by pathogens, the identification of the biologically important
genes of the pathogen may lead to the development of new drugs and vaccines to
combat the pathogen. Moreover, because of the simpler nature of the genomes of
pathogens relative to the human genome, efforts to identify and characterize
pathogen genes may lead to product development candidates more quickly than
human gene discovery efforts. The two principal technologies currently being
used to discover genes are sequencing and positional cloning.
2
<PAGE> 3
SEQUENCING
Sequencing is the process of identifying genes through the determination of
the order or sequence of nucleotides in DNA fragments. In recent years,
high-throughput procedures, such as those being employed by the Company, have
been developed which now enable sequencing to be performed on a larger scale and
with greater speed than was previously possible.
There are generally two ways of applying high-throughput sequencing to
discover genes: random discovery and targeted discovery. In random discovery,
high-throughput sequencing is used to identify the genes in a genome without
regard to the function of the genes. In targeted discovery, high-throughput
sequencing is used to identify the genes in a specific chromosomal region or
tissue after the region or the tissue has been implicated in or associated with
a specific disease.
High-throughput sequencing offers a practical way of randomly identifying
all of the genes in a pathogen because the genomes of pathogens consist of
relatively small numbers of uninterrupted gene sequences. In contrast, the human
genome is very large with only small portions of the DNA containing genes which
are present as interrupted DNA sequences. As a result, although high-throughput
sequencing of the DNA in a particular chromosomal region is used in human gene
discovery, sequencing of all of the DNA in the human genome is not a practical
means to identify large numbers of human genes. Instead, several groups are
randomly discovering large numbers of human genes by sequencing expressed copies
of genes, which contain only exons and are called cDNA, which they synthesize
from mRNA.
Although random discovery permits the rapid identification of pathogen and
human genes, it generally does not provide an understanding of the function of a
gene or of the gene's role in a particular disease. Any determination of
function of randomly discovered genes is dependent on the detection of
structural similarities, or homology, existing between the protein product of
such sequenced genes and genes with a known function or the analysis of the
signaling pathways both upstream and downstream from such sequenced genes.
Targeted gene discovery by high-throughput sequencing of human DNA
typically is applied as part of positional cloning (described below) after a
specific chromosomal region has been identified which is believed to contain a
particular gene. In this targeted gene discovery procedure, the entire
chromosomal region is sequenced in an effort to identify, from all the genes
present in that region, the one gene located in that region which is responsible
for causing the specific disease.
Another type of targeted gene discovery involves the use of high-throughput
sequencing of cDNA to identify genes believed to cause or maintain a particular
disease. In this procedure, which is referred to as "comparative gene
expression," mRNA present in healthy and diseased tissues is converted into cDNA
and then sequenced to identify the genes whose protein product is present in
each. Candidate genes responsible for causing or maintaining the disease are
identified by comparing which genes are expressing or producing their protein
product and at what level this expression is occurring in both the healthy and
diseased tissue.
POSITIONAL CLONING
Positional cloning is the process of analyzing disease inheritance patterns
to identify the genes responsible for causing human disease. The first step in
positional cloning is the identification of individual families or genetically
homogeneous populations in which the occurrence of the disease in individuals
within such families or populations is substantially higher than in the general
population. Blood samples are collected from individuals within the family or
population to provide DNA to be used to identify the region on a particular
chromosome where the disease-causing gene is located. This process is referred
to as "genetic linkage mapping."
In genetic linkage mapping, DNA probes are used to detect genetic markers,
regions of DNA that vary in sequence content from person to person. The position
of these genetic markers on a chromosome, as detected by the DNA probes,
constitutes a genetic linkage map of the chromosome. The chromosomal regions
which are initially examined are those regions which have been identified as
containing genes that are likely candidates for causing or predisposing an
individual to the disease. Because only a limited number of human
3
<PAGE> 4
genes have been mapped to date, most genetic mapping is done genome-wide with a
set of DNA probes that span the genome. By following the inheritance patterns of
genetic markers and looking for the coinheritance of the genetic markers and the
disease, the gene responsible for causing or predisposing an individual to that
disease can be located within a specific chromosomal region. Using additional
DNA probes, the chromosomal region containing the targeted disease gene can be
narrowed to a region consisting of approximately 1,000,000 to 3,000,000
nucleotides in size containing between approximately 30 to 100 genes.
Next, libraries comprised of large DNA fragments are examined to find those
fragments which contain pieces of DNA from the relevant chromosomal region. The
aligning of these DNA fragments so that their resulting order represents how
these DNA fragments are related to each other in the relevant chromosomal region
is called physical mapping. The physical map of the relevant chromosomal region
can then be used to identify the genes which are contained within the region.
These genes can be identified in two ways. First, "exon trapping" is used,
whereby individual exons within this chromosomal region can be isolated and then
used to obtain a complete copy of the gene from a cDNA library. Alternatively or
in combination with exon trapping, the DNA of the chromosomal region can be
sequenced using high-throughput procedures and, through the use of special
computer software, the exons which are contained within the chromosomal region
can be predicted. This sequencing information is then used to search cDNA
libraries for DNA fragments which contain these presumed exons.
Each gene identified through this process is a candidate for causing the
disease. By determining the sequence of these genes in individuals with the
disease and comparing it to the sequence of that gene from healthy individuals,
the gene involved in the disease can be identified. DNA sequence differences,
which are only found in individuals who have inherited the disease, identify the
gene which is believed to be responsible for causing the disease.
COMPANY TECHNOLOGY
The Company applies its proprietary technologies and know-how in
high-throughput sequencing, positional cloning and functional genomics in its
gene discovery programs. In its pathogen programs, the Company uses its high-
throughput sequencing capabilities to sequence the genomes of pathogens. In its
human gene discovery programs, the Company combines its proprietary positional
cloning capabilities, together with its high-throughput sequencing capabilities,
in its efforts to identify human genes associated with disease. Both the
Company's pathogen and human genomics programs utilize substantial
bioinformatics skills to identify genes, tentatively assign them a likely
function, and possibly select genes as targets for drug and vaccine development.
In its pathogen program, the Company has fully developed functional genomics and
drug discovery skills, including drug discovery target validation (via gene
"knock-outs") and high-throughput drug discovery assay development.
HIGH-THROUGHPUT SEQUENCING AND FINISHING
GTC has an automated process using DNA sequencers and computers to sequence
and analyze genes in its discovery research programs. Using its technology, the
Company has randomly sequenced the genomes of several pathogens and various
chromosomal regions of the human genome. GTC's sequencing production currently
generates approximately .5 billion nucleotides of raw sequence annually.
Finishing is the "end game" of high-throughput sequencing. It is the
process of producing a complete genome once the majority of the sequence has
been generated by the high-throughput shotgun process. Finishing is necessary
because shotgun sequencing is a random process; the individual clones that are
sequenced contain small randomly selected fragments of the complete genome.
These fragments are assembled using sophisticated computer software which
identifies overlapping regions of sequence and arranges the fragments into large
contiguous sequence regions called "contigs". As more sequence is generated, the
fragments assemble into larger contigs covering more of the genome. At an
appropriate point in a sequencing project, the process moves from a random to a
directed sequencing approach in order to specifically target and obtain sequence
for the missing regions and, thereby, "finish" the genome sequence.
4
<PAGE> 5
The Company has developed a proprietary quality control process to assure a
high-quality sequenced genome. Sequence quality is expressed in terms of the
probability of error at any given base location in the sequence. The integrated
computational and biochemical techniques used in the finishing process, when
coupled with the sequence quality measurements generated by the high-throughput
sequencing process, allow the Company to specify the required quality of the
end-product sequence and then direct the process to achieve the desired quality
level.
Finishing is also very important in the later stages of human gene
discovery where the identification of disease-associated mutations requires gene
sequences of much higher quality than in the early stages of gene
identification. The quality of the sequence must be such as to allow the
detection of two different nucleotides in a given position.
POSITIONAL CLONING
The Company has over 10 years of experience in various aspects of
positional cloning. GTC was one of the pioneers in the use of genetic linkage
mapping and developed numerous techniques and tools that are widely used in the
positional cloning field. GTC has considerable experience in identifying genetic
markers for specific chromosomal regions. This ability is needed when additional
genetic markers are required to narrow the size of the chromosomal region
believed to contain the disease gene. The Company also has several libraries of
large DNA fragments arranged in a format which facilitates the isolation of DNA
fragments from a specific chromosomal region. These libraries are used to
develop physical maps of chromosomal regions thought to contain disease genes.
In addition, the Company uses specialized tools to trap the exons present in
large DNA fragments. These tools are used to isolate exons from the genes
present in chromosomal regions believed to contain disease genes.
BIOINFORMATICS
The process of identifying and characterizing genes generates vast amounts
of data which must be organized and managed. Such data result from genetic
linkage and physical mapping, DNA sequencing and biological experiments
performed on identified genes. The use of computers, software and databases to
track, process, store, retrieve and analyze data generated by genomic research
is referred to as "bioinformatics," which is an emerging subspecialty of
genomics and a key capability of any participant in the field. Because of its
early work in large-scale genetic linkage analysis, GTC was one of the first
companies to develop significant bioinformatics capabilities.
The Company continually refines its bioinformatics systems. The Company
currently is focusing these efforts in four areas: upgrading and standardizing
its bioinformatics hardware and software; developing enhanced data management
systems; expanding its software engineering capabilities; and expanding its
resources in computational molecular biology. These enhancements are expected to
result in more effective data management by allowing for higher-throughput
sequencing, providing for smooth integration of laboratory automation,
supporting more rapid analyses and comparison of genomic data and facilitating
the identification of gene targets for the development of therapeutic, vaccine
and diagnostic products. As part of its enhancement of its bioinformatics
capabilities, the Company continues to increase the number of its bioinformatics
personnel.
FUNCTIONAL GENOMICS (PATHOGEN)
Once the genome of a pathogen has been sequenced, the Company uses its
bioinformatics expertise and the information in its proprietary and public
databases to identify and locate the genes within the genome and assign features
to the genes which helps identify their likely function. Relying on these
assigned functions and using the criteria for the product to be developed (drug
or vaccine; narrow or broad spectrum), the Company examines sequences from the
genomes of various pathogens in its proprietary and public databases and from
human cDNAs and the entire genome of Saccharomyces cerevisiae (bakers yeast) to
select genes as potential targets for drug or vaccine development
5
<PAGE> 6
The criteria used for selecting gene targets against which small molecules
(drugs) will be developed include such features as essentiality, uniqueness, and
assayability. The gene should be essential for the survival of the organism. The
gene or its protein product should have novel biochemistry or special
characteristics to make it unique to the organism(s) against which the drug is
to be active. In order to reduce possible side effects, such genes should be
absent or have little homology to genes found in humans. The gene or its protein
product should have general features which make it possible to construct
high-throughput screening assays.
If protein or polypeptide vaccines are to be developed, then the criteria
used for selecting gene targets include such features as whether the protein
product is likely to be secreted or found on the cell surface or in the membrane
of the organism or shows homology to a major antigen in other organisms.
For small molecule targets, the transition from bioinformatics to
functional genomics begins by demonstrating that the gene is essential for the
viability or virulence of the organism. That is, the gene must be required for
the survival of the organism on a culture plate (in vitro) or in an animal model
(in vivo). To determine the essentiality of a gene, the Company has developed
high-throughput techniques for either directly or randomly inactivating, i.e.
"knocking-out", specific genes within the genome of a pathogen. After targets
have been validated for their biological relevance, the Company then develops
screening assays for these targets. These assays include conventional
biochemical assays in which the gene target is over-expressed in a recombinant
host and the protein product is purified and used to develop a non-cellular,
high-throughput assay. Assay systems for gene targets of unknown function
include the construction of an over or under-expressing strain for use in
high-throughput bio- or genetic whole cell assays.
For vaccine targets, functional genomics begins with the demonstration that
the gene product is not subject to significant antigenic variation between
strains or under different growth conditions. Gene targets are then
over-expressed in a recombinant host, and the resulting protein product is
purified for testing in an appropriate animal model.
FUNCTIONAL GENOMICS (HUMAN)
In many cases, the protein products of a gene or genes causing a human
disease are pharmaceutically not suitable as drug discovery targets. Therefore,
new targets need to be identified, based on a thorough understanding of the
gene's function, including interaction with other proteins and genes. Thus, in
order to bridge the gap between gene discovery and drug discovery target
identification, the Company mobilized a group which solely focuses on Functional
Genomics. This department is developing new technologies to accelerate the
functional analysis of important disease genes, including high-throughput
signaling pathway analyses in mammalian and non-mammalian systems, gene
knock-outs and transgenics. This will be complemented with high-throughput drug
discovery assay development skills which are already implemented in the
Company's pathogen functional genomics program.
The Company's integrated approach to gene function and signal pathway
analysis is supported by multiple technology platforms. These include:
a) Rapid analysis of differential gene expression profiles. Such
analysis can be applied to identify genes differentially expressed in
normal vs. disease states, or, using cellular model systems developed by
the Company, of genes differentially expressed in response to conditional
and controlled expression of specific disease genes.
b) Functional expression cloning of signaling molecules, associated
with and regulating specific disease pathways. This approach takes
advantage of recent advances in retroviral gene transfer technologies to
search for regulatory components of signaling pathways encoded by complex
cDNA libraries.
c) High-throughput protein-protein interaction screening, to identify
critical interactors and regulators of disease gene-encoded protein
products and their downstream signaling mediators. The Company employs
various in vitro and cell-based technologies to identify physiologically
relevant and novel protein-protein interactions. These include yeast and
mammalian cell-based screening assays. The Company's high-throughput DNA
sequencing, automation, and bioinformatics capabilities provide critical
support to
6
<PAGE> 7
the gene identification process, data analysis and management, and the
development of signal pathway databases.
The identification of novel disease pathway-associated signaling
molecules represents a critical step towards the selection of novel
candidate therapeutic targets. Candidate targets are validated by multiple
approaches, including antisense and gene "knock-out" technologies.
High-throughput drug discovery assay development skills, which are already
implemented in the Company's pathogen programs, will be applied to specific
validated targets towards the identification of novel therapeutic agents.
GTC STRATEGY
The Company's objective is to use its sequencing, positional cloning,
functional genomics and bioinformatics capabilities to identify and validate
gene targets for the development of novel therapeutic, vaccine and diagnostic
products in collaboration with pharmaceutical and biotechnology company
partners. The Company is using the following strategies to achieve this
objective:
SEQUENCING OF PATHOGENS
Over the past four years, the Company has devoted a significant portion of
its resources to, and obtained considerable experience in, sequencing the
genomes of pathogens. The Company has randomly sequenced the genomes of several
disease-causing pathogens. The Company plans to continue to identify and
characterize genes of these and other pathogens for which the Company believes
new or improved therapeutic, vaccine or diagnostic products represent a
significant commercial opportunity. In particular, the Company plans to focus
its efforts on pathogens where the incidence of antibiotic resistance or other
factors limit the use or efficacy of currently available therapies, creating a
need for novel antibiotics and vaccines. The Company believes its pathogen gene
discovery programs will lead to product development candidates more quickly than
human gene discovery efforts.
DISCOVERY OF HUMAN DISEASE GENES
In the human gene discovery area, the Company plans to build on its decade
of experience and knowledge in positional cloning, genotyping, sequencing and
bioinformatics capabilities by obtaining exclusive rights to collections of DNA
samples from relevant family resources in order to map, identify and
characterize genes responsible for selected human diseases. The Company actively
seeks collaborations with clinicians and academic researchers to obtain these
rights. The Company believes that access to these family and other resources
will bolster its existing human gene discovery programs and enable it to
initiate additional programs directed at human genes associated with significant
diseases.
STRATEGIC COLLABORATIONS
The Company continues to seek strategic collaborations with pharmaceutical
and biotechnology companies for the development and commercialization of
products based on the Company's genomic discoveries. This strategy is designed
to provide the Company access to the scientific and product development
expertise of its partners and permit the Company to benefit from the
commercialization of products based on the Company's gene discoveries without
incurring the substantial costs required for pharmaceutical product development
and commercialization. The Company generally expects to license (either
exclusively or non-exclusively) to its partners most rights to therapeutic
products and vaccines (and, depending upon the gene, diagnostic products) which
may be developed from the particular genetic database licensed-out by the
Company. In exchange, the Company generally expects to receive a combination of
up-front license fees, research funding, milestone payments and royalty payments
on product sales. Through August 1997, the Company has entered into three
collaborations, two of which relates to pathogens and one which relates to
asthma genetics. The collaboration with Astra is for the development of
therapeutic, diagnostic and vaccine products effective against gastrointestinal
infections and other diseases caused by H. pylori, and the one with
Schering-Plough is providing for the use by Schering-Plough of the genomic
sequence of Staph. aureus to
7
<PAGE> 8
identify new gene targets for the development of antibiotics and vaccines
effective against drug resistant infectious organisms.
GOVERNMENT GRANTS AND CONTRACTS
The Company has served as one of the primary researchers under genomic
programs sponsored by the United States government programs. These programs
strengthened the Company's genomics technology base and increased the number and
enhanced the expertise of its scientific personnel. From January 1991 through
August 1997, the United States government awarded the Company grants and
contracts providing for aggregate payments over their terms of approximately $37
million. However, as of the end of fiscal 1997, the Company has substantially
reduced its reliance on government grants and contracts as it implements its
commercial strategy.
NON-EXCLUSIVE DATABASE SUBSCRIPTIONS
In May 1997, the Company introduced to the market a database of genomic
information from over a dozen pathogens and fungi, PathoGenome(TM). This
database is available through non-exclusive subscriptions to pharmaceutical and
other drug discovery companies. Together with the sequence modules, GTC will
offer some functional genomics modules which would allow for exclusive
collaborations. As of August 31, 1997, the Company had subscribed one customer
to the PathoGenome(TM) database; however, subsequent to the fiscal year end, the
company added two additional subscribers to the PathoGenome(TM) database.
DRUG DEVELOPMENT PROGRAMS
In order to maximize the commercial utilization of novel drug discovery
targets derived from GTC's genomics approach, the Company's alliance strategy
with pharmaceutical companies will be complemented with internal drug discovery
programs. These internal drug discovery efforts were initially focused in the
Pathogen area, since GTC has extensive expertise in this field based on its
existing pharmaceutical alliances. The non-exclusive business strategy of the
PathoGenome(TM) database allows GTC to choose its own drug discovery targets.
The Company's internal programs include drug discovery target validation through
gene knock-outs, protein expression and purification, development of
high-throughput assays, and -- via external collaborations -- lead compounds
identification and lead optimization. In the second phase of the Company's drug
development program, the expertise from the Pathogen drug discovery efforts will
be transferred to select targets derived from its Human Genetics and Functional
Genomics Program.
GENE DISCOVERY PROGRAMS
The Company is currently conducting gene discovery programs directed at
both pathogen genes and human disease genes. The factors the Company considers
in determining whether to initiate these programs include the projected
commercial potential, the effectiveness of current therapies, the likelihood of
attracting a pharmaceutical or biotechnology company as a collaborator, the
status of competitive programs and anticipated development costs.
PATHOGEN PROGRAMS
Antibiotics are the standard therapy for bacterial and fungal infections.
During the twelve month period ended August 1997, approximately 300 million
prescriptions for antibiotics were written in the United States for such
infections and approximately $7 billion was expended in the United States for
oral and injectable antibiotics. The approximately 100 antibiotics in use in the
United States today are primarily variations of a small number of original
antibiotic compounds. In the past decade, a growing number of infections have
been caused by pathogens which are becoming resistant to an increasing number of
currently available antibiotics. This problem of growing resistance to
antibiotics is particularly problematic in the approximately 6,500 acute care
hospitals in the United States in which approximately 2.1 million patients each
year develop infections. Examples of pathogens that have exhibited resistance to
a number of current antibiotics include Staph., M. tuberculosis, Streptococcus
pneumonia, and Enterococcus. To date, the primary response of pharmaceutical
8
<PAGE> 9
companies to the resistance problem has been to modify existing antibiotics.
However, in many cases, the pathogens that are the targets of these antibiotics
have further mutated, often quite rapidly, and thereby developed resistance to
the modified antibiotics. The Company believes that the development of novel
antibiotics and vaccines based on new pathogen targets identified using genomic
information may be less prone to the rapid development of resistance than
antibiotics that are only modified versions of existing drugs.
Helicobacter pylori. H. pylori is the pathogen believed responsible for causing
90% of duodenal peptic ulcers, the most common type of ulcer, and 70% of gastric
peptic ulcers. Peptic ulcer disease is a chronic inflammatory condition of the
stomach and duodenum. Although frequently asymptomatic, all persons infected by
H. pylori have chronic gastric inflammation (gastritis). It is estimated that
approximately 4.5 million people suffer from active peptic ulcers each year, and
approximately 500,000 new cases are diagnosed annually in the United States.
Approximately 600,000 patients are hospitalized each year in the United States
for peptic ulcer disease. Serious complications occur in approximately one-third
of these cases, including intestinal obstruction, upper gastrointestinal
hemorrhage and perforation. Further, each year over 6,000 deaths in the United
States are directly caused by ulcer disease, and peptic ulcers are a
contributing factor in an additional 11,000 deaths. Approximately 10% of the
population in the United States will develop peptic ulcer disease during their
lifetimes. Studies have also linked H. pylori with the development of certain
stomach cancers and coronary heart disease.
The most common medication for treating peptic ulcers are anti-secretory
drugs, such as H2 antagonists (e.g., Tagamet(TM) and Zantac(TM)), and proton
pump inhibitors (e.g., Prilosec(TM)). Although anti-secretory drugs reduce ulcer
symptoms by inhibiting gastric acid secretion, they do not eradicate the H.
pylori which is the primary cause of the disease. In 1994, the market for such
drugs for the treatment of ulcers totaled approximately $7 billion worldwide. An
approach being developed to treat recurrent peptic ulcer disease recognizes the
role of H. pylori and involves the administration of antibiotics, often in
combination with bismuth or anti-secretory drugs. The most effective antibiotic
treatments may be complicated by the need to treat for prolonged periods with
multiple drugs, by side effects and problems with patient compliance, by
relapses if treatment is interrupted, and by the development of
antibiotic-resistant strains of the bacteria.
Using its sequencing technology, the Company completed the random
sequencing of the genome of a clinical isolate of H. pylori in December 1994.
Under its agreement with Astra, the Company is identifying the genes critical to
the survival of H. pylori and proteins on the surface of the bacterium that are
believed to be likely targets for therapeutic products and vaccines,
respectively. See "Collaborative Agreements -- Pharmaceutical Company
Collaborations."
Staphylococcus aureus. Staph. is the most common cause of skin, wound and
blood infections. Staph. infections are typically treated with antibiotics. The
percentage of Staph. isolates resistant to penicillin and certain other
antibiotics increased from 2.4% in 1975 to 29% by 1991. Moreover, clinical
isolates of Staph. exist which are resistant to all known antibiotics other than
vancomycin. Vancomycin resistance has appeared in Enterococcus, a pathogen
related to Staph., which has raised the possibility that untreatable strains of
Staph. could appear. Using its high-throughput sequencing capabilities, the
Company has randomly sequenced the genome of a clinical isolate of
methicillin-resistant Staph. Under its agreement with Schering-Plough, the
Company is using the sequence of Staph. aureus to identify and validate gene
targets for the development of new small molecules to treat pathogens which have
become resistant to current antibiotics.
HUMAN GENE DISCOVERY PROGRAMS
GTC has initiated a variety of programs to identify human genes that are
responsible for various diseases. In some of these programs, the Company is
using positional cloning strategies, while in others it is employing a
multi-faceted approach incorporating positional cloning and comparative gene
expression. The Company's current primary human gene discovery programs are
directed at asthma, cancer, osteoporosis and neuropsychiatric disorders.
Asthma. Asthma is a significant health problem that affects approximately
5% of the U.S. population. Both twin and family studies suggest a strong genetic
component in the etiology of the disease. Despite a clear genetic contribution
to the disease, no consistent mode of inheritance has been observed, suggesting
that
9
<PAGE> 10
multiple genetic factors as well as environmental influences play a role. The
Company has initiated a research program to use positional cloning strategies to
identify genes involved in the etiology of asthma. Newly identified asthma genes
will facilitate the development of superior diagnostics and novel therapeutic
agents. This program is being conducted in collaboration with a leading academic
asthma research center which provides access to appropriate family resources and
clinical insight to asthma pathophysiology.
Osteoporosis. Osteoporosis is a major health problem that affects roughly
50% of post-menopausal women and nearly 25% of elderly men. In the U.S. alone,
there are in excess of 1.3 million osteoporotic bone fractures per year. As
defined by low bone mineral density, both twin and family studies suggest a
strong genetic component to the disease. The Company has initiated a research
program to identify genes involved in the etiology of osteoporosis. Given the
complex nature of this disorder, and the lack of information about biochemical
defects involved, the Company is using a multi-faceted approach including
positional cloning and comparative gene expression strategies to identify
osteoporosis genes. The Company expects the identification of genes regulating
bone density and disease progression will significantly influence the
development of diagnostic tests and the discovery of novel therapeutic agents.
Atherosclerosis. The Company's atherosclerosis programs focuses on
identifying genes which regulate high density lipoproteins (HDL).
Epediomiological studies in man and animal experimentation have established that
HDL is a major risk factor for atherosclerosis. Although there is strong
evidence for genetic determinants, genes that regulate HDL levels have not yet
been identified. In addition, there currently are no effective drugs for raising
HDL levels. Given these opportunities, the company is using positional cloning
to identify genes regulating HDL levels for the purpose of defining new
atherosclerotic drug discovery targets.
Cancer Program. The Company's strategy is to identify novel signaling
molecules in cellular pathways that control tumor cell survival and are linked
to the most commonly mutated cancer genes known to date, such as the p53 tumor
suppressor gene. Multiple technology platforms are used to paint a comprehensive
picture of such cancer gene signaling pathways. These include tools for the
development of biological model systems, differential gene expression profiling,
functional expression cloning, and protein-protein interaction analysis.
The identification of cancer pathway signaling molecules is expected to
provide an important resource of new therapeutic targets whose inhibition
selectively sensitizes tumor cells to cell death, and, thus, the development of
novel anticancer agents that may be administered either alone or in combination
with currently known chemotherapeutic agents to inhibit tumor growth.
Other Programs. The Company is also conducting preliminary research on
schizophrenia and manic depressive illness. These neuropsychiatric disorders
affect large numbers of people in the U.S. and throughout the world and are
believed to have a genetic basis. The Company is currently evaluating various
family resources for research on these diseases and may expand its research in
this area.
COLLABORATIVE AGREEMENTS
An important part of the Company's strategy is to pursue strategic
collaborations with pharmaceutical and biotechnology companies for the
development and commercialization of products based on the Company's genomic
discoveries. The Company also plans to continue to seek government grants and
research contracts related to the Company's technology and research programs.
PHARMACEUTICAL COMPANY COLLABORATIONS
Astra. In August 1995, the Company entered into a collaboration agreement
with Astra to develop pharmaceutical, vaccine and diagnostic products effective
against gastrointestinal infections or any other disease caused by H. pylori.
The Company granted Astra exclusive access to the Company's H. pylori genomic
sequence database and exclusive worldwide rights to make, use and sell products
based on the Company's H. pylori technology. The agreement also provides for a
four-year research collaboration to further develop and annotate the Company's
H. pylori genomic sequence database, identify therapeutic and vaccine targets
and
10
<PAGE> 11
develop appropriate biological assays. This research is being directed by a
Joint Management Committee and a Joint Research Committee, each consisting of
representatives from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain product
development milestones, up to approximately $22 million (and possibly a greater
amount if more than one product is developed under the agreement) in license
fees, expense allowances, research funding and milestone payments. Of such fees,
$500,000 are creditable against any future royalties payable to GTC by Astra
under the agreement. The Company received approximately $10.7 million in license
fees, expense allowances and research funding under the Astra agreement through
August 31, 1997. For the Company's fiscal years ended August 31, 1995, 1996 and
1997, revenue recognized by the Company under its agreement with Astra accounted
for approximately 31%, 21% and 15%, respectively, of the Company's total
revenue. Astra is obligated to provide funding for the research program for a
minimum of two and one-half years. On July 21, 1997, Astra elected to extend the
research program to at least September 1998.
The Company will also be entitled to receive royalties on Astra's sale of
any products (i) protected by the claims of patents licensed exclusively to
Astra by the Company pursuant to the agreement, or (ii) the discovery of which
was enabled in a significant manner by the genomic database licensed to Astra by
the Company. GTC has the right under certain circumstances to convert Astra's
license to a nonexclusive license in the event Astra is not actively pursuing
commercialization of the licensed technology.
Schering-Plough. In December 1995, the Company entered into a
collaboration and license agreement with Schering-Plough providing for the use
by Schering-Plough of the genomic sequence of Staph. aureus to identify new gene
targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic sequence
databases. The Company also granted Schering-Plough a non-exclusive license to
use the Company's bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to microbial survival and to develop
biological assays to be used by Schering-Plough in screening natural product and
compound libraries to identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough has agreed to pay the Company a
minimum of $13.3 million in an up-front license fee, research funding and
milestone payments. Subject to the achievement of additional product development
milestones and Schering-Plough's election to extend the research collaboration,
Schering-Plough has agreed to pay the Company up to an additional approximately
$30.2 million in research funding and milestone payments. The Company received
approximately $11.9 million in an up-front license fee, research funding and
milestone payments through August 31, 1997. For the Company's fiscal years ended
August 31, 1996 and 1997, revenue recognized by the Company under its agreement
with Schering-Plough accounted for approximately 37% and 17%, respectively, of
the Company's total revenue.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. GTC has also granted Schering-
Plough a right of first negotiation if during the term of the research plan GTC
desires to enter into a collaboration with a third party with respect to the
development or sale of any compounds which are targeted against, as their
primary indication, the pathogen that is the principal subject of the Company's
agreement with Schering-Plough. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, GTC retained the rights to make, use, and sell diagnostic products
developed based on the Company's genomic database licensed to Schering-Plough or
the technology developed in the course of the research program.
In December 1996, the Company entered into its second research
collaboration and license agreement with Schering-Plough. This agreement calls
for the use of genomics to discover new therapeutics for treating
11
<PAGE> 12
asthma. As part of the agreement, the Company will employ its high-throughput
positional cloning, bioinformatics, and genomics sequencing capabilities to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals. Under this agreement, the Company has granted
Schering-Plough exclusive access to (i) certain gene sequence databases made
available under this research program, (ii) information made available to the
Company under certain third party research agreements, (iii) an exclusive
worldwide right and license to make, use and sell pharmaceutical and vaccine
products based on the rights to develop and commercialize diagnostic products
that may result from this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments to the Company, as well as pay royalties to the
Company based upon sales of therapeutics products developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will approximate $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development objectives. The company received approximately $5.8 million in
up-front license fees, research funding and expense allowances through August
31, 1997. For the Company's fiscal year ended August 31, 1997, revenue
recognized under this agreement with Schering-Plough accounted for approximately
23% of the Company's total revenue.
Government Collaborations
Since 1989, the Company has been awarded a number of grants and contracts
by various agencies of the United States government pursuant to the government's
genomics programs. The scope of the research covered by the grants and contracts
encompasses technology development, sequencing production, technology automation
projects and positional cloning projects.
Under the government grants, the Company has, subject to certain rights of
the government described below, exclusive ownership rights to any commercial
applications of inventions first reduced to practice under the grants, including
all gene discoveries and technology improvements created or discovered. The
Company is strongly encouraged under certain of the government grants to make
data and materials resulting from the research public within 180 days from the
date such data and materials are developed. Under the Company's government
research contracts, the government has ownership rights in the data, clones,
genes and other material derived from the material furnished to the Company by
the government, and the Company has ownership rights in other inventions
developed solely by the Company under the contracts. The government also retains
certain rights, described below under the caption "Patents and Proprietary
Technology", to the inventions first reduced to practice by the Company under
the government grants and contracts. The Company currently has two principal
government research contracts, one with the National Institute of Neurological
Disorders and Stroke relating to the preparation of DNA samples for sequencing,
the isolation of DNA fragments and genotyping, and one with the NIMH relating to
the identification of genes responsible for manic depressive illness. See
"Patent and Proprietary Technology" and "Human Gene Discovery Programs -- Other
Programs."
The Company's government grants and research contracts include both
cost-plus-fixed-fee arrangements and fixed price contracts. Under
cost-plus-fixed-fee arrangements, the Company receives reimbursement of its
direct costs associated with the research, a portion of its indirect or overhead
costs as well as fees in excess of such costs. The amount of overhead
reimbursement varies with each contract. Under fixed price contracts, the
Company agrees to perform a particular research plan for an agreed upon payment.
From January 1991 through August 1997, the United States government awarded
the Company grants and contracts providing for aggregate payments over their
terms of approximately $37 million. These grants and research contracts are
typically funded annually and are subject to the appropriation by the United
States Congress of funding in each year. In addition, funding under these grants
and contracts may be discontinued or reduced at any time by the United States
Congress. For the Company's fiscal year ended August 31, 1997,
12
<PAGE> 13
the Company recognized revenue under its government collaborations of $4.5
million which accounted for approximately 23% of the Company's total revenue.
DATABASE SUBSCRIPTIONS
Bayer AG. In May 1997, the Company entered into a license agreement with
Bayer AG, (Bayer) to provide Bayer with a non-exclusive access to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated information
relating to microbial organisms. The subscription agreement calls for the
Company to provide Bayer with periodic data updates, analysis tools and software
support. Under the agreement, Bayer has agreed to pay a license fee, annual
subscription fee and royalties on any molecules developed as a result of access
to the information provided by Pathogenome(TM). The Company retains all rights
associated with protein therapeutic, diagnostic and vaccine use of bacterial
genes or gene products. For the Company's fiscal year ended August 31, 1997,
revenue recognized under this agreement with Bayer accounted for approximately
3% of the Company's total revenue.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will be dependent in part on its ability
to obtain patent protection on genes, or products based on genes, discovered by
it. The current criteria for obtaining patent protection for partially sequenced
genes and for genes whose biological functions have not been characterized are
unclear. The Company's current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous sequences. Where the biological function of a gene or gene fragment
has not been characterized at the time of filing a patent application, the
Company intends to supplement such patent filing as soon as additional
information with respect to the biological function of such gene or gene
fragment is available. However, there can be no assurance that the Company will
be able to obtain patent protection on such genes or gene fragments, and even if
such patents are issued, the scope of the coverage or protection provided by any
such patents is uncertain. In addition, there can be no assurance that any
patents, if issued, will provide protection against any competitors, will
provide the Company with competitive advantages, will provide protection for any
therapeutic, vaccine or diagnostic products based on the Company's gene
discoveries or will not be successfully challenged by others. Furthermore,
others have filed and are likely to file in the future patent applications which
have not yet been published covering genes or protein sequences similar or
identical to the Company's. No assurance can be given that any such patent
application will not have priority over patent applications filed by the Company
or that any patent applications filed by the Company will result in issued
patents.
There have been, and continue to be, intensive discussions on the scope of
patent protection for both gene fragments and full-length genes. In November
1995, the PTO scheduled a hearing and requested public comment on the patenting
of a complete genome of an organism as well as the patenting of human gene
fragments. Although the PTO canceled the hearings and request for comments, they
may be rescheduled at a future date. There can be no assurance that these or
other proposals will not result in changes in, or interpretations of, the patent
laws which will adversely affect the Company's patent position.
The PTO issued new Utility Guidelines in July 1995 that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics. While the guidelines do not require clinical efficacy data
for issuance of patents for human therapeutics, the guidelines have been issued
only recently and there can be no assurance that the PTO's interpretations of
such guidelines, and any changes to such interpretations will not delay or
adversely affect the Company's or its collaborators' ability to obtain patent
protection. The biotechnology patent situation outside the United States is even
more uncertain and is currently undergoing review and revision in many
countries.
The Company has filed patent applications and will continue to do so with
respect to a number of full length genes and corresponding proteins and partial
genes resulting from its pathogens program. The Company plans to file foreign
counterparts of these U.S. applications within the appropriate time frames.
These applications seek to protect these full length and partial gene sequences
and corresponding proteins, as well as
13
<PAGE> 14
equivalent sequences, such as substantially homologous sequences, and products
derived therefrom and uses therefor. These applications also identify possible
biological functions for the genes and gene fragments based in part on a
comparison to genes or gene fragments included in public databases but do not
contain any laboratory or clinical data with respect to such biological
functions.
Under the Company's government grants and contracts, the government has a
statutory right to practice or have practiced, and, under certain circumstances
(including inaction on the part of the Company or its licensees to achieve
practical application of the invention or a need to alleviate public health or
safety concerns not reasonably satisfied by the Company or its licensees), to
grant to other parties licenses under any inventions first reduced to practice
under the government grants and contracts. In addition, under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
technology developed solely by the Company under the contracts. Under the
Company's CRADA with the NIH, any inventions or discoveries made in whole or in
part by NIH researchers are the property, either solely or jointly with the
Company, of NIH, and the Company has the right to negotiate with the NIH to
obtain an exclusive license to such inventions and discoveries. The Company is
also strongly encouraged under certain government grants to make data and
materials resulting from the research public within 180 days from the date such
data and materials are developed. If this requirement results in premature
publication of the Company's discoveries and inventions, the Company's ability
to obtain patent protection for such discoveries and inventions may be adversely
affected.
The Company also relies on trade secret protection for its confidential and
proprietary information. There can be no assurance that the Company can maintain
adequate protection for its trade secrets or other proprietary information. In
addition, while the Company has entered into proprietary information agreements
with its employees, consultants and advisors, there can be no assurance that
these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information. Moreover, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
COMPETITION
The Company faces intense competition both with respect to its human gene
and pathogen gene discovery programs. There is a finite number of genes in the
human genome and the Company believes virtually all of such genes will be
identified albeit largely without known function. The Company also believes that
the primary genes that cause or predispose individuals to most common diseases
will eventually be identified and characterized. In addition, the Company
believes that the genomes of many commercially important pathogens will be
sequenced within the next three years.
Competitors of the Company include pharmaceutical and biotechnology
companies both in the United States and abroad. In addition, significant
research to identify and sequence genes is being conducted by universities,
other non-profit research institutions and United States and foreign
government-sponsored entities. A number of commercial, scientific and
governmental entities are attempting to sequence human genes and the genomes of
other organisms. Other entities are utilizing positional cloning to identify and
characterize human disease genes. Certain of the Company's competitors' human
gene programs are more advanced than the Company's and any one of these
companies or other entities may discover and establish a competitive advantage
in one or more pathogen development programs which the Company has commenced.
The Company also faces competition in its human gene discovery programs in
gaining access to family DNA samples for use in positional cloning.
The Company believes that its ability to compete is dependent, in part,
upon its ability to create and maintain advanced technology, the speed with
which it can identify and characterize the genes involved in human diseases, the
Company's ability to rapidly sequence the genomes of selected pathogens, its
collaborators' ability to develop and commercialize therapeutic, vaccine and
diagnostic products based upon the Company's gene discoveries, as well as its
ability to attract and retain qualified personnel, obtain patent
14
<PAGE> 15
protection or otherwise develop proprietary technology or processes and secure
sufficient capital resources for the expected substantial time period between
technological conception and commercial sales of products based upon the
Company's gene discoveries.
Many of the Company's competitors have greater research and product
development capabilities and financial, scientific, marketing and human
resources than the Company. These competitors may succeed in identifying or
sequencing genes or developing products earlier than the Company or its
collaborators, obtaining authorization from the FDA for such products more
rapidly than the Company or its collaborators or developing products that are
more effective than those proposed to be developed by the Company or its
collaborators. Any potential products based on genes identified by the Company
will face competition both from companies developing gene-based products and
from companies developing other forms of diagnosis or treatment for the
particular diseases targeted by the Company. There can be no assurance that
products developed by others will not render the products which the Company or
its collaborators may seek to develop obsolete or uneconomical or result in
diagnoses, treatments or cures superior to any products developed by the Company
or its collaborators, or that any product developed by the Company or its
strategic collaboration partners will be preferred to any existing or newly
developed technologies.
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the development, manufacturing and
marketing of any products which may be developed by the Company or its
collaborators. The nature and the extent to which such regulation may apply to
the Company or its collaborators will vary depending on the nature of any such
products. Virtually all of the Company's or its collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic and vaccine products are
subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The process of obtaining
these approvals and the subsequent compliance with appropriate federal and
foreign statutes and regulations are time consuming and require the expenditure
of substantial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Products based on the
Company's technologies could potentially fall into all three categories.
Generally, in order to gain FDA pre-market approval of a new drug or biological
product, a company first must conduct pre-clinical studies in the laboratory and
in animal model systems to gain preliminary information on an agent's efficacy
and to identify any safety problems. The results of these studies are submitted
as a part of an investigational new drug application ("IND"), which the FDA must
review before human clinical trials of a drug or biologic can commence. In order
to commercialize any products, the Company or its collaborators will be required
to sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and are likely to take a number of years to
complete. After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is classified as a new drug, the
Company or its collaborators will be required to file a New Drug Application
("NDA") and receive approval before commercial marketing of the drug. If the
product is classified as a biologic (e.g., a vaccine), the Company or its
collaborator will be required to file a product license application and an
establishment license application ("ELA") and receive approval of both before
commercial marketing of the product can take place. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approvals will be granted on a timely basis, if at all.
Even if FDA regulatory clearances are obtained, a marketed product is
subject to continual review, and later discovery of previously unknown problems
or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions. In addition, biologic
products may be subject to batch certification and lot release requirements. To
the extent that any of the Company's products involve recombinant DNA
technology, additional layers of government regulation and review are possible.
For
15
<PAGE> 16
marketing outside the United States, the Company will also be subject to FDA
export regulations and foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
The Company or its collaborators may also develop diagnostic products based
upon the human or pathogen genes that the Company identifies. The Company
believes that the diagnostic products to be developed by the Company or its
collaborators are likely to be regulated by the FDA as devices rather than drugs
or biologics. The nature of the FDA requirements applicable to such diagnostic
devices depends on their classification by the FDA. A diagnostic device
developed by the Company or a collaborator would most likely be classified as a
Class III device, requiring pre-market approval. Obtaining pre-market approval
involves the costly and time-consuming process, comparable to that for new drugs
or biologics, of conducting pre-clinical studies, obtaining an investigational
device exemption to conduct clinical tests, filing a pre-market approval
application, and obtaining FDA approval. Again, there can be no assurance that
any approval will be granted on a timely basis, if at all.
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state,
federal and local laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any liability could exceed the resources of the Company.
MANUFACTURING AND MARKETING
The Company does not generally expect to directly manufacture or market
products in the near term. However, the Company may, in the future, consider
taking such actions if it believes they are appropriate under the circumstances.
The Company has no recent experience in developing pharmaceutical products or in
manufacturing or marketing products. The Company may not have the resources to
develop or manufacture or market by itself any products based on genes
identified by it. In the event the Company decides to establish a manufacturing
facility, the Company will require substantial additional funds and will be
required to hire and train significant additional personnel and comply with the
extensive "good manufacturing practice" regulations applicable to such a
facility. In addition, if any products produced at the Company's facilities were
regulated as biologics, the Company would be required to file and obtain
approval of an ELA for its facilities.
HUMAN RESOURCES
As of August 31, 1997, the Company had 211 full-time employees, of whom 187
were engaged in research and development activities, and 24 in general and
administrative functions. Thirty-nine of the Company's employees hold Ph.D.
degrees and 55 others hold other advanced degrees.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.
FACILITIES
The Company's executive offices and its research and development activities
are conducted at facilities located at 100 Beaver Street and 1365 Main Street,
Waltham Massachusetts. The Company's executive offices and laboratories are
located at 100 Beaver Street, Waltham Massachusetts, where the Company has
leased approximately 80,000 square feet of space expiring November 15, 2006 with
options to extend for two consecutive five-year periods. The Company has
additional labs at 1365 Main Street where the Company has leased approximately
14,000 square feet of space under a lease expiring December 31, 1997. The
Company plans to consolidate its operations at its Beaver Street facility during
fiscal 1998 at an estimated cost of $6,500,000 which consists of office and
laboratory renovations. As of August 31, 1997, the Company had
16
<PAGE> 17
incurred approximately $847,000 of capital improvements and plans to spend an
estimated $5,653,000 during fiscal 1998 on this renovation project.
During fiscal 1997, the Company incurred aggregate rental costs, excluding
maintenance, taxes and utilities, for all facilities of approximately $949,000.
The aggregate minimum rental cost to be paid in fiscal 1998 is expected to be
approximately $1,015,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market System
(ticker symbol "GENE"). The table below sets forth the range of high and low
quotations for each fiscal quarter of the Company during 1997 and 1996 as
furnished by the National Association of Securities Dealers Quotation System.
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
HIGH LOW HIGH LOW
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter................. 10 1/2 7 3/8 8 1/2 6 5/8
Second Quarter................ 12 1/2 8 5/8 15 7
Third Quarter................. 10 1/8 5 7/8 15 8 1/2
Fourth Quarter................ 8 7/8 6 1/2 12 1/8 6 1/8
</TABLE>
As of November 24, 1997, there were approximately 1,305 shareholders of
record of the Company's Common Stock.
The Company has not paid any dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on its Common Stock will be declared in
the foreseeable future. Any future dividends will be subject to the discretion
of the Company's Board of Directors and will depend upon, among other things,
future earnings, the operating and financial condition of the Company, its
capital requirements and general business conditions.
17
<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31, 1993 1994 1995 1996 1997
- ------------------------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaborative research,
licenses, subscription
fees and service.......... $ 1,114,864 $ 251,529 $ 3,870,620 $12,548,724 $ 11,550,786
Government research.......... 5,021,975 6,077,346 7,014,280 6,795,393 4,454,828
Royalties.................... 139,713 148,458 90,541 127,112 647,150
Interest income.............. 173,788 141,584 231,662 1,785,164 2,965,866
Total........................ $ 6,450,340 $ 6,618,917 $11,207,103 $21,256,393 $ 19,618,630
Net income (loss).............. $(3,481,857) $(1,078,718) $ 585,204 $ 1,920,710 $(11,302,391)
Net income (loss) per common
share........................ $ (0.33) $ (0.10) $ 0.05 $ 0.11 $ (0.64)
Weighted average common and
common equivalent shares..... 10,668,628 11,097,224 12,961,734 18,129,794 17,617,614
Cash, cash equivalents,
restricted cash and long and
short-term marketable
securities................... $ 3,915,306 $ 4,311,854 $ 9,011,247 $53,768,562 $ 47,843,597
Working capital................ 3,264,454 3,244,260 5,498,782 25,904,641 35,868,618
Total assets................... 5,288,691 5,910,682 11,528,674 63,279,017 60,688,379
Shareholders' equity........... 3,676,333 4,224,555 7,238,503 54,312,758 43,946,197
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leader in the field of genomics-based drug discovery --
the identification and functional characterization of genes. The Company has
over ten years of experience in positional cloning, having served as one of the
primary researchers under genome programs sponsored by the United States
government, and has developed numerous techniques and tools that are widely used
in the field. The Company's commercial gene discovery strategy capitalizes on
its pioneering work in genomics by applying its high-throughput sequencing
technology and positional cloning, its experience and skills in functional
genomics and its bioinformatics capabilities. The two areas of focus are: the
discovery and characterization of (i) genes of pathogens that are responsible
for many serious diseases and (ii) human disease genes. The Company believes
that its genomic discoveries may lead to the development of novel therapeutics,
vaccines and diagnostic products by it and its strategic partners. The Company
has entered into several corporate collaborations in connection with its
pathogen and human gene discovery programs.
The Company does not anticipate revenues from product sales on a sustained
basis until such time that products based on the Company's research efforts are
commercialized, if at all. The Company's product development strategy is to form
collaborations with pharmaceutical and biotechnology companies generating
revenues from licensing fees, sponsored research and milestone payments.
Additionally, the Company will sell non-exclusive access to its proprietary
genome sequence database, PathoGenome(TM). These collaborations are expected to
result in the discovery and commercialization of novel therapeutics, vaccines
and diagnostics, generating royalty payments to the Company from product sales
downstream. In order for a product to be commercialized based on the Company's
research, it will be necessary for the collaborators to conduct preclinical
tests and clinical trials, obtain regulatory clearances and make manufacturing,
distribution and marketing arrangements. Accordingly, the Company does not
expect to receive royalties based upon product revenues for many years.
For the past several years, the Company's primary sources of revenue have
been government research grants and contracts and collaborative agreements with
pharmaceutical company partners. As of August 31, 1997, the Company had three
collaborative research agreements and one subscriber to its proprietary genome
sequence database, PathoGenome(TM). In September 1997, subsequent to fiscal year
end, the Company entered into its fourth collaborative research agreement and
added two additional subscribers to its PathoGenome(TM) database. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H.
18
<PAGE> 19
Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the Company's Staph. aureus genomic database to identify new
gene targets for the development of novel antibiotics. In December 1996, the
Company entered into its second research collaboration with Schering-Plough to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals for treating asthma. In September 1997,
subsequent to the fiscal year end, the Company entered into its third research
collaboration with Schering-Plough to use genomics to discover and develop new
pharmaceutical products to treat fungal infections. In May 1997, the Company
sold its first subscription to its proprietary genome sequence database,
PathoGenome(TM) to Bayer AG ("Bayer"). Under the agreement, Bayer will receive
nonexclusive access to the Company's PathoGenome(TM) database and associated
information relating to microbial organisms. In September 1997, subsequent to
the fiscal year end, the Company sold two additional subscriptions to its
PathoGenome(TM) database to Bristol-Myers Squibb and Schering-Plough.
For fiscal 1995, 1996, and 1997, the Company expended $7,892,000,
$14,074,000 and $26,524,000, respectively, on research and development, of which
$6,414,000, $6,150,000 and $4,455,000, respectively, was sponsored by the United
States government. As of August 31, 1997, the Company had outstanding
approximately $2,968,000 of government research grants and contracts under which
services were yet to be performed. These grants and contracts call for services
to be performed over the next 30 months. The Company's government grants and
contracts are typically funded annually and are subject to appropriation by the
United States Congress each year. Funding may be discontinued or reduced at any
time by Congress. As of August 31, 1997, the funded portion of these grants and
contracts was $2,416,000. For fiscal 1995, 1996 and 1997, revenue recognized
pursuant to United States government grants and research contracts accounted for
approximately 63%, 32% and 23%, respectively, of the Company's total revenues.
The Company expects government revenue, in absolute dollars and as a percentage
of total revenues, to decline in the future periods as the Company focuses its
resources towards company-sponsored research and development programs in order
to pursue its strategy of attaining additional corporate partnerships with the
goal of advancing the Company's genomic technologies and gene discovery programs
and of obtaining revenues sufficient to cover a portion of the Company's cash
requirements. There can be no assurance that the Company will be able to pursue
this strategy successfully.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $44,556,000 at August 31, 1997. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new collaborative agreements and government research
grants and contracts. The Company is subject to risks common to companies in its
industry including unproven technology and business strategy, availability of,
and competition for, family resources, reliance upon collaborative partners and
others, reliance on United States government funding, history of operating
losses, need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty of
pharmaceutical pricing, health care reform and related matters, product
liability exposure, and volatility of the Company's stock price.
RESULTS OF OPERATIONS
REVENUE
Total revenues decreased 8% from $21,256,000 in fiscal 1996 to $19,619,000
in fiscal 1997 and increased 90% from $11,207,000 in fiscal 1995 to $21,256,000
in fiscal 1996. Collaborative research, licenses and subscription fees decreased
8% from $12,549,000 in fiscal 1996 to $11,551,000 in fiscal 1997 due to lower
license fees and milestone payments received in fiscal 1997 under the Company's
collaborative research agreements with Astra and Schering-Plough. Collaborative
research, licenses and subscription fees increased 224% from $3,871,000 in
fiscal 1995 to $12,549,000 in fiscal 1996 primarily due to revenue received in
fiscal 1996 under the Company's collaborative research agreements with Astra and
Schering-Plough of $4,539,000 and $7,868,000, respectively, consisting of
milestone payments, license fees and sponsored research.
Government research revenue decreased 34% from $6,795,000 in fiscal 1996 to
$4,455,000 in fiscal 1997 and decreased 3% from $7,014,000 in fiscal 1995 to
$6,795,000 in fiscal 1996. The decrease in government
19
<PAGE> 20
research revenue in both fiscal 1996 and 1997 was primarily attributable to a
shift in personnel from government research programs to Company sponsored
research and development programs, in particular, the microbial genetic database
program, PathoGenome(TM). Revenue derived from government research grants and
contracts is generally based upon direct cost such as labor, laboratory
supplies, as well as an allocation for reimbursement of a portion of overhead
expenses. The Company expects government research revenue to continue to
decrease, in absolute dollars and as a percentage of total revenues, in the
future periods as the Company continues to focus its resources in
company-sponsored research and development programs in order to obtain
additional corporate partnerships.
The Company had royalty revenue of $91,000, $127,000 and $647,000 in fiscal
1995, 1996 and 1997, respectively, from the Company's rennin patent. In October
1996, the Company assigned its rights to the rennin patent to Pfizer, Inc. for
$671,000 and no further royalties will be received.
Interest income increased 66% from $1,785,000 in fiscal 1996 to $2,966,000
in fiscal 1997 and increased 671% from $232,000 in fiscal 1995 to $1,785,000 in
fiscal 1996 reflecting the increase in funds available for investment as a
result of (i) proceeds received from the sale of Common Stock through a public
offering in February 1996, (ii) the sale of Common Stock in a private placement
in March 1995 and (iii) payments received under the Company's collaborative
agreements.
COST AND EXPENSES
Total cost and expenses, excluding noncash charges for stock option grants,
increased 81% from $17,015,000 in fiscal 1996 to $30,842,000 in fiscal 1997 and
increased 61% from $10,596,000 in fiscal 1995 to $17,015,000 in fiscal 1996.
Research and development expense, which includes company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators increased 179% from $7,924,000 in fiscal 1996 to
$22,069,000 in fiscal 1997 and increased 436% from $1,478,000 in fiscal 1995 to
$7,924,000 in fiscal 1996. The increase in research and development expenses in
both fiscal 1996 and fiscal 1997 was primarily attributable to increases in both
personnel and laboratory expenses associated with the Company's expansion of its
pathogen, microbial genetic database, human gene discovery and functional
genomics research programs. The increase consisted primarily of increases in
payroll and related expenses, laboratory supplies and overhead expenses. The
Company expects to continue to increase research and development expenditures in
the future periods, particularly with respect to its fungal, osteoporosis,
atherosclerosis, oncology and functional genomics projects.
The cost of government research decreased 28% from $6,150,000 in fiscal
1996 to $4,455,000 in fiscal 1997 and decreased 4% from $6,414,000 in fiscal
1995 to $6,150,000 in fiscal 1996. The decrease in cost of government research
in both fiscal 1996 and fiscal 1997 was due primarily to a decrease in
government research revenue. Cost of government research, as a percentage of
government research revenue, was 100%, 91% and 91% in fiscal 1997, 1996 and
1995, respectively.
Selling, general and administrative expenses increased 35% from $2,727,000
in fiscal 1996 to $3,686,000 in fiscal 1997 and increased 4% from $2,618,000 in
fiscal 1995 to $2,727,000 in fiscal 1996. The increase in selling, general and
administrative expenses in fiscal 1997 was primarily due to increases in payroll
and related expenses and legal fees. The increase in legal fees in fiscal 1997
was directly attributable to the Company's new collaborative agreements with
Schering-Plough, Bayer and Bristol-Myers Squibb. The increase in selling,
general and administrative expenses in fiscal 1996 was primarily due to
increases in payroll and related expenses and consulting fees.
Interest expense increased 195% from $214,000 in fiscal 1996 to $631,000 in
fiscal 1997 and increased 150% from $86,000 in fiscal 1995 to $214,000 in fiscal
1996. The increase in interest expense for each period was attributable to
increases in the Company's outstanding balance under its capital lease
arrangements.
In November and December 1995, the Company's Board of Directors granted
certain employees, officers, and directors options to purchase an aggregate of
440,000 shares of common stock which were subject to shareholder approval. The
options were granted at exercise prices ranging from $7.25 to $9.56 per share,
in each case, the fair market value of the common stock on the date the
Company's Board of Directors granted the option. The Company recorded deferred
compensation of $2,565,000 which represents an amount equal to the difference
between the fair market value of the common stock on February 16, 1996, the date
of
20
<PAGE> 21
shareholder approval, and the per share exercise price of the options.
Additionally, in March 1997, the Company granted options valued at approximately
$51,000 to certain consultants in lieu of cash for services. The Company
recorded $79,000, $2,320,000 and $26,000 as compensation expense in fiscal 1997,
1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been
revenue from government grants and contract, revenue from collaborative research
agreements and subscription fees, borrowings under equipment lending facilities
and capital leases and proceeds from sale of equity securities.
In fiscal 1995, the Company received net proceeds of approximately
$2,403,000 from the private sale of common stock and warrants and the exercise
of stock options. In August 1995, the Company entered into a collaborative
research agreement with Astra under which it received $3,500,000.
In fiscal 1996, the Company received approximately $11,671,000 in
collaborative payments from its collaborative partners consisting of an up-front
license fee, milestone payments and sponsored research funding. In fiscal 1996,
the Company closed a public offering of 3,000,000 shares of its common stock at
$13.00 per share, resulting in proceeds of approximately $36,007,000, net of
issuance costs. The Company also sold an additional 450,000 shares of its common
stock in the underwriter's over-allotment, resulting in proceeds of $5,515,000,
net of issuance costs. Additionally, the Company received proceeds of $1,311,000
from the issuance of 534,831 shares of common stock from the exercise of stock
options and warrants during fiscal 1996.
In fiscal 1997, the Company received payments of $13,496,000 from its
collaborative partners consisting of an up-front license fee, subscription fee,
expense allowance, milestone payments and sponsored research funding.
As of August 31, 1997, the Company had cash, cash equivalents, restricted
cash and long and short-term marketable securities of approximately $47,844,000.
The Company has various arrangements under which it can finance certain office
and laboratory equipment and leasehold improvements. Under these arrangements,
the Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, debt service coverage and minimum restricted cash balances. At August 31,
1997, the Company had approximately $6,420,000 available under these
arrangements for future borrowings and had an outstanding balance of
approximately $10,744,000 which is repayable over the five year period ending
August 2002. Under one of these arrangements, the Company received a $2,500,000
advance in July 1997 to finance office and laboratory renovations at its Beaver
Street facility of which approximately $1,653,000 had not been expended at
August 31, 1997.
The Company's operating activities used cash of approximately $4,757,000 in
fiscal 1997 and provided cash of approximately $2,976,000 and $2,693,000 in
fiscal 1996 and 1995, respectively. The Company primarily used cash in fiscal
1997 to fund the Company's operating loss which was partially offset by
increases in deferred revenue, accounts payable and accrued liabilities. Net
cash provided in fiscal 1995 and 1996 was comprised primarily of deferred
revenue, accounts payable, accrued liabilities and operating income.
The Company's investing activities provided cash of approximately
$2,257,000 and $5,600 in fiscal 1997 and 1995, respectively, and used cash of
approximately $40,258,000 in fiscal 1996. The Company used cash primarily for
purchases of marketable securities and to a lesser extent the purchase of
equipment and leasehold improvements. In addition, the Company financed
$1,340,000, $4,724,000 and $5,843,000 of property and equipment in fiscal 1995,
1996 and 1997, respectively, under equipment financing arrangements.
Capital expenditures totaled $6,138,000 during fiscal 1997 consisting of
laboratory, computer and office equipment. The Company currently estimates that
it will acquire approximately $6,200,000 in capital equipment in fiscal 1998
consisting of primarily computer and laboratory equipment which it intends to
finance under existing and new financing arrangements. The Company also plans to
consolidate its operations at its Beaver Street facility during fiscal 1998 at
an estimated cost of $6,500,000 which consists of office and
21
<PAGE> 22
laboratory renovations. As of August 31, 1997, the Company had incurred
approximately $847,000 of capital improvements and plans to spend an estimated
$5,653,000 during fiscal 1998 on this renovation project. The Company plans to
utilize existing and new capital lease and equipment financing arrangements to
finance substantially all of these capital improvements.
Financing activities provided cash of approximately $422,000, $42,075,000
and $2,074,000 in fiscal 1997, 1996 and 1995, respectively, primarily from the
sale of equity securities and the exercise of stock options and warrants, net of
payments of capital lease obligations.
At August 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 and $1,128,000, respectively. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period in
excess of 50%. The Company does not believe it has experienced a cumulative
ownership change in excess of 50%. However, there can be no assurance that
ownership changes will not occur in future periods which will limit the
Company's ability to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing
and expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10K that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by Item 8 are set
forth at the pages indicated in Item 14(a) below.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Pursuant to General Instruction G(3) to Form 10-K, the information required
for Part III (Items 10, 11, 12 and 13) is incorporated herein by reference from
the Company's proxy statement for the Special Meeting of Shareholders in Lieu of
an Annual Meeting to be held on January 26, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See
"Index to Consolidated Financial Statements and Financial Statement Schedules"
appearing on page F-1.
22
<PAGE> 23
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................................................... F-2
Consolidated Balance Sheets as of August 31, 1996 and 1997.................................................. F-3
Consolidated Statements of Operations for the Years Ended August 31, 1995, 1996 and 1997................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended August 31, 1995, 1996 and 1997.......... F-5
Consolidated Statements of Cash Flows for the Years Ended August 31, 1995, 1996 and 1997.................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corp. and subsidiaries (a Massachusetts corporation) as of August
31, 1996 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 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 financial statements referred to above present fairly,
in all material respects, the financial position of Genome Therapeutics Corp.
and subsidiaries as of August 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
October 10, 1997
F-2
<PAGE> 25
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $10,679,287 $ 8,602,698
Marketable securities..................................................... 17,429,488 34,814,601
Accounts receivable....................................................... 1,338,418 55,142
Interest receivable....................................................... 1,296,657 1,280,611
Unbilled costs and fees................................................... 345,773 140,320
Note receivable from officer.............................................. -- 160,000
Prepaid expenses and other current assets................................. 552,903 408,240
----------- -----------
Total current assets............................................... 31,642,526 45,461,612
----------- -----------
Equipment and Leasehold Improvements, at cost:
Laboratory and scientific equipment....................................... 6,403,221 11,855,630
Equipment and furniture................................................... 581,533 792,342
Leasehold improvements.................................................... 1,939,545 1,964,981
Construction-in-progress.................................................. 77,027 1,111,526
----------- -----------
9,001,326 15,724,479
Less -- Accumulated depreciation............................................ 3,266,068 5,352,999
----------- -----------
5,735,258 10,371,480
Restricted Cash............................................................. 195,500 301,500
Long-Term Marketable Securities............................................. 25,464,287 4,124,798
Other Assets................................................................ 241,446 428,989
----------- -----------
$63,279,017 $60,688,379
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................... $ 864,279 $ 1,288,391
Accrued expenses.......................................................... 1,731,220 2,373,788
Deferred revenue.......................................................... 1,035,504 2,335,695
Current maturities of long-term obligations............................... 2,106,882 3,595,120
----------- -----------
Total current liabilities.......................................... 5,737,885 9,592,994
----------- -----------
Long-Term Obligations, net of current maturities............................ 3,228,374 7,149,188
----------- -----------
Commitments and Contingencies (Note 4)
Shareholders' Equity:
Common stock, $.10 par value --
Authorized -- 34,375,000 shares
Issued and outstanding -- 17,460,966 and 17,782,929 shares at August 31,
1996 and 1997, respectively............................................ 1,746,097 1,778,293
Series B restricted stock, $.10 par value --
Authorized -- 625,000 shares
Issued and outstanding -- none.......................................... -- --
Additional paid-in capital................................................ 86,067,176 86,942,034
Accumulated deficit....................................................... (33,253,515) (44,555,906)
Deferred compensation..................................................... (247,000) (218,224)
----------- -----------
Total shareholders' equity......................................... 54,312,758 43,946,197
----------- -----------
$63,279,017 $60,688,379
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 26
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Collaborative research, licenses and subscription
fees.......................................... $ 3,870,620 $12,548,724 $ 11,550,786
Government research.............................. 7,014,280 6,795,393 4,454,828
Royalties........................................ 90,541 127,112 647,150
Interest income.................................. 231,662 1,785,164 2,965,866
----------- ----------- ------------
Total revenues........................... 11,207,103 21,256,393 19,618,630
----------- ----------- ------------
Costs and Expenses:
Research and development......................... 1,478,247 7,924,113 22,068,996
Cost of government research...................... 6,414,148 6,150,234 4,454,828
Selling, general and administrative.............. 2,617,787 2,726,855 3,686,385
Interest expense................................. 85,759 214,264 631,442
Noncash charge for stock option grants........... 25,958 2,320,217 79,370
----------- ----------- ------------
Total costs and expenses................. 10,621,899 19,335,683 30,921,021
----------- ----------- ------------
Net income (loss)........................ $ 585,204 $ 1,920,710 $(11,302,391)
=========== =========== ============
Net Income (Loss) per Common Share:
Primary.......................................... $ 0.05 $ 0.11 $ (.64)
=========== =========== ============
Fully diluted.................................... $ 0.04 $ -- $ --
=========== =========== ============
Weighted Average Number of Common and Common
Equivalent Shares Outstanding:
Primary.......................................... 12,961,734 18,129,794 17,617,614
=========== =========== ============
Fully diluted.................................... 13,036,741 -- --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 27
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
---------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31,
1994................. 11,778,946 $1,177,894 $38,833,865 $(35,759,429) $ (27,775) $ 4,224,555
Exercise of stock
options........... 244,166 24,417 394,982 -- -- 419,399
Amortization of
deferred
compensation...... -- -- -- -- 25,958 25,958
Sale of common stock
and warrants...... 1,453,023 145,302 1,838,085 -- -- 1,983,387
Net income........... -- -- -- 585,204 -- 585,204
---------- ---------- ----------- ------------ ----------- ------------
BALANCE, AUGUST 31,
1995................. 13,476,135 1,347,613 41,066,932 (35,174,225) (1,817) 7,238,503
Exercise of stock
options, including
tax effects....... 496,756 49,676 1,151,079 -- -- 1,200,755
Exercise of
warrants.......... 38,075 3,808 106,643 -- -- 110,451
Deferred compensation
from grant of
stock options..... -- -- 2,565,400 -- (2,565,400) --
Amortization of
deferred
compensation...... -- -- -- -- 2,320,217 2,320,217
Sale of common
stock............. 3,450,000 345,000 41,177,122 -- -- 41,522,122
Net income........... -- -- -- 1,920,710 -- 1,920,710
---------- ---------- ----------- ------------ ----------- ------------
BALANCE, AUGUST 31,
1996................. 17,460,966 1,746,097 86,067,176 (33,253,515) (247,000) 54,312,758
Exercise of stock
options........... 321,963 32,196 824,264 -- -- 856,460
Deferred compensation
from grant of
stock options..... -- -- 50,594 -- (50,594) --
Amortization of
deferred
compensation...... -- -- -- -- 79,370 79,370
Net loss............. -- -- -- (11,302,391) -- (11,302,391)
---------- ---------- ----------- ------------ ----------- ------------
BALANCE, AUGUST 31,
1997................. 17,782,929 $1,778,293 $86,942,034 $(44,555,906) $ (218,224) $ 43,946,197
========== ========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 28
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 585,204 $ 1,920,710 $(11,302,391)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization....................... 350,230 887,907 2,382,286
Loss on disposal of fixed assets.................... -- -- 227,864
Deferred compensation............................... 25,958 2,320,217 79,370
Changes in assets and liabilities--
Accounts receivable.............................. 77,544 (1,057,514) 1,283,276
Interest receivable.............................. (47,186) (1,216,768) 16,046
Unbilled costs and fees.......................... (29,960) (86,768) 205,453
Loan to officer.................................. -- -- (160,000)
Prepaid expenses and other current assets........ (27,754) (502,763) 144,663
Accounts payable................................. 124,568 454,997 424,112
Accrued expenses................................. 897,974 (5,349) 642,568
Deferred contract revenue........................ 736,057 261,456 1,300,191
----------- ------------ ------------
Total adjustments.............................. 2,107,431 1,055,415 6,545,829
----------- ------------ ------------
Net cash provided by (used in) operating
activities................................... 2,692,635 2,976,125 (4,756,562)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.................... (5,332,248) (49,553,183) (20,575,625)
Proceeds from the sale of marketable securities....... 6,000,000 9,000,000 24,530,000
Purchases of equipment and leasehold improvements..... (97,016) (164,211) (1,370,028)
(Increase) decrease in restricted cash................ (689,797) 588,971 (106,000)
(Increase) decrease in other assets................... 124,687 (129,233) (220,850)
----------- ------------ ------------
Net cash provided by (used in) investing
activities................................... 5,626 (40,257,656) 2,257,497
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, including tax
benefits............................................ 419,399 1,200,755 856,460
Proceeds from the exercise of warrants................ -- 110,451 --
Proceeds from sale of common stock and warrants....... 1,983,387 41,522,122 --
Proceeds from long-term obligations................... -- -- 2,500,000
Payments on long-term obligations..................... (329,025) (758,694) (2,933,984)
----------- ------------ ------------
Net cash provided by financing activities...... 2,073,761 42,074,634 422,476
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 4,772,022 4,793,103 (2,076,589)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 1,114,162 5,886,184 10,679,287
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 5,886,184 $ 10,679,287 8,602,698
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year......................... $ 85,759 $ 214,264 631,442
=========== ============ ============
Income taxes paid during the year..................... $ 6,824 $ 43,240 36,612
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital
leases.............................................. $ 1,340,611 $ 4,723,678 $ 5,843,037
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 29
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. (the Company) is a leader in the field of
genomics-based drug discovery -- the identification and functional
characterization of genes. The Company has over ten years of experience in
positional cloning, having served as one of the primary researchers under genome
programs sponsored by the United States government, and has developed numerous
techniques and tools that are widely used in this field. GTC's commercial gene
discovery strategy capitalizes on its pioneering work in genomics by applying
its high-throughput sequencing technology and positional cloning, its experience
and skills in pathogen functional genomics and its bioinformatics capabilities.
The two areas of focus are: the discovery and characterization of (i) genes of
pathogens that are responsible for many serious diseases and (ii) human disease
genes.
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
(a) Revenue Recognition
Research and contract revenues are derived from government grants and
contract arrangements as well as collaborative agreements with pharmaceutical
companies. Research revenues are recognized as earned under government grants,
which consist of cost-plus-fixed-fee contracts and fixed-price contracts.
Revenues are recognized under collaborative agreements as earned. Milestone
payments from collaborative research and development arrangements are recognized
when they are achieved. License fees and royalties are recognized as earned.
Unbilled costs and fees represent revenue recognized prior to billing. Deferred
revenue represents amounts received prior to revenue recognition.
Subscription fee revenues from the PathoGenome(TM) database are recognized
ratably over the life of the subscription agreement.
(b) Equipment and Leasehold Improvements
Equipment and leasehold improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful life for
leasehold improvements is the lesser of the term of the lease or the estimated
useful life of the assets. Equipment and all other depreciable assets' useful
lives vary from three to seven years. The majority of the Company's equipment
and leaseholds are financed through capital leases. Construction-in-progress
primarily consists of renovations and expansions of the Company's headquarters.
(c) Net Income (Loss) per Common and Common Equivalent Share
Net income per common and common equivalent share is computed by dividing
net income by the weighted average number of common and common equivalent shares
outstanding during the period using the treasury method. Net loss per share is
computed by dividing the net loss by the weighted average number of common
shares outstanding during the year.
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
SFAS No. 128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or potential
common stock.
This statement is effective for fiscal years ending after December 15, 1997
and early adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt this
statement for its fiscal year ending August 31, 1998. For the years ended August
31,
F-7
<PAGE> 30
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, 1996 and 1997, basic earnings per share would have been $.05, $.12 and
$(.64), respectively. Diluted earnings per share would have been $.04, $.11 and
$(.64), respectively, for the same periods.
(d) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet or
concentration of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company maintains its cash
and cash equivalents and marketable securities balances with several
nonaffiliated institutions.
The Company had revenues from the following significant customers:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL REVENUES
SIGNIFICANT -------------------
CUSTOMERS A B C
--------- --- --- ---
<S> <C> <C> <C> <C>
Year Ended August 31,
1995...................................... 2 31% 63% --%
1996...................................... 3 21 32 37
1997...................................... 3 15 23 41
</TABLE>
The Company had the following significant accounts receivable balances from
the following customers:
<TABLE>
<CAPTION>
PERCENTAGE
OF ACCOUNTS
NUMBER OF RECEIVABLE
SIGNIFICANT --------------
CUSTOMERS A B
--------- ----- -----
<S> <C> <C> <C>
As of August 31,
1996........................................... 2 25% 75%
1997........................................... 1 100% --%
</TABLE>
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable and
long-term debt, approximates carrying value.
(g) Loan to Officer
On December 6, 1996, the Company loaned $160,000 to an officer of the
Company. The loan bears interest at prime plus 1% and is due August 31, 1998.
(h) Reclassifications
The Company has reclassified certain prior year information to conform with
the current year's presentation.
F-8
<PAGE> 31
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At August 31, 1997, the Company's cash equivalents
and marketable securities are classified as held-to-maturity, as the Company has
the positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Marketable securities are investment securities with
original maturities of greater than three months. Cash equivalents are carried
at cost, which approximates market value, and consist of money market funds,
repurchase agreements and debt securities. Marketable securities are recorded at
amortized cost, which approximates market value. The Company has not recorded
any realized gains or losses on its marketable securities. Marketable securities
consist of commercial paper and U.S. Government debt securities.
The aggregate fair value and costs of the investments at August 31, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
AMORTIZED MARKET AMORTIZED MARKET
MATURITY COST VALUE COST VALUE
---------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Less than one year--
Corporate and other debt
securities................... $17,429,488 $17,413,011 $34,814,601 $34,806,434
Greater than one year--
U.S. Government and agency
securities................... $ 2,998,931 $ 2,988,420 $ 654,529 $ 657,406
Corporate and other debt
securities (average maturity
of 1.7 and 1.5 years in 1996
and 1997, respectively)...... 22,465,356 22,296,279 3,470,269 3,462,547
----------- ----------- ----------- -----------
$25,464,287 $25,284,699 $ 4,124,798 $ 4,119,953
=========== =========== =========== ===========
</TABLE>
The Company has $195,500 and $301,500 in restricted cash at August 31, 1996
and 1997, respectively, in connection with certain long-term obligations (see
Note 5).
(3) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes, which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse. SFAS No.
109 requires deferred tax assets and liabilities to be adjusted when the tax
rates or other provisions of the income tax laws change.
At August 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 and $1,128,000, respectively,
available to reduce federal taxable income and federal income taxes,
respectively, if any. Net operating loss carryforwards and credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in the ownership interest of
significant shareholders over a three-year period in excess of 50%. In the years
ended August 31, 1995 and 1996, the Company utilized approximately $1,100,000
and $4,398,000, respectively, of net operating loss carryforwards to offset
taxable income. In the year ended August 31, 1997, the Company did not utilize
any loss carryforwards.
F-9
<PAGE> 32
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net operating loss carryforwards and tax credits expire approximately
as follows:
<TABLE>
<CAPTION>
NET OPERATING RESEARCH INVESTMENT
LOSS TAX CREDIT TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
--------------- ------------- ------------- -------------
<S> <C> <C> <C>
1997........................................ $ -- $ 80,000 $103,000
1998........................................ 6,886,000 208,000 90,000
1999........................................ 5,039,000 273,000 143,000
2000........................................ 3,829,000 84,000 75,000
2001........................................ 4,812,000 24,000 3,000
2002-2011................................... 28,498,000 8,000 37,000
</TABLE>
The components of the deferred tax assets recognized in the Company's
balance sheet at the respective dates are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 11,997,000 $ 17,743,000
Research and development credits........................ 677,000 677,000
Investment tax credits.................................. 451,000 451,000
Other, net.............................................. 1,173,000 1,856,000
------------ ------------
14,298,000 20,727,000
Valuation allowance..................................... (14,298,000) (20,727,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax assets.
(4) COMMITMENTS
(a) Lease Commitments
At August 31, 1997, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006. Minimum
lease payments and facilities charges under the leases at August 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year Ending August 31,
1998.......................................... $ 1,285,061
1999.......................................... 1,171,325
2000.......................................... 1,171,325
2001.......................................... 1,171,325
2002.......................................... 1,219,780
Thereafter.................................... 5,174,025
-----------
$11,192,841
===========
</TABLE>
Rental expense was approximately $411,000, $472,000 and $949,000 in the
years ended August 31, 1995, 1996 and 1997, respectively. Rental expense for
fiscal 1997 includes the expansion of laboratory and office space at its primary
facility.
F-10
<PAGE> 33
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Research and Development Commitments
The Company has entered three research and development alliances with
companies and research institutions. These agreements provide for the funding of
research activities by the Company and the possibility of royalties and, in some
cases, license fees. At August 31, 1997, the Company's obligations under these
arrangements totaled $1,715,000, of which $1,161,000 and $554,000 was payable
for the fiscal years ending August 31, 1998 and 1999, respectively.
(c) Employment Agreements
The Company has employment agreements with certain executive officers which
provide for bonuses, as defined, and severance benefits upon termination of
employment as defined.
(5) LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment line of credit
under which it can finance up to $6,000,000 of laboratory, computer and office
equipment. Borrowings are payable in 48 monthly installments at a variable
interest rate of prime (8.5% as of August 31, 1997) plus one-quarter of one
percent. At any time during the term of this agreement, the Company may elect to
convert to a fixed rate loan at the prevailing interest rate. The Company is
required to maintain certain restricted cash balances, as defined (see Note 2).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage. The Company has approximately $2,920,000 available under this
equipment line of credit at August 31, 1997.
On July 31, 1997, the Company entered into a financing arrangement under
which it can finance up to $6,000,000 of laboratory and office renovations at
its Beaver Street facility. The principal amount of the loan will be repaid over
48 consecutive months commencing July 1, 1998 at the prevailing 12 month
Eurodollar rate (12-month Eurodollar rate was 6% as of August 31, 1997) plus
1 1/2%. The Company is required to maintain certain financial ratios pertaining
to minimum cash balances, debt to net worth and tangible net worth. At August
31, 1997, the Company borrowed $2,500,000 under this arrangement; of which
approximately $1,653,000 has not been utilized to finance the Company's
purchases, and is included in cash and cash equivalents. The Company has
approximately $3,500,000 available under this financing arrangement at August
31, 1997. The Company is required to maintain certain restricted cash balances,
upon the occurrence of certain events, as defined.
The Company has entered into capital lease arrangements under which it
financed approximately $9,214,000 of certain laboratory, computer and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 7.52% to 11.42%. The Company is required to maintain certain
restricted cash balances, as defined (see Note 2). In addition, the Company is
required to maintain certain financial ratios pertaining to minimum cash
balances, tangible net worth, debt to tangible net worth and debt service
coverage. The Company has no additional borrowing capacity under these capital
lease agreements at August 31, 1997.
Additionally, in connection with its facilities lease, the Company issued a
$100,000 note payable in September 1994 to its lessor to finance leasehold
improvements. The note bears interest at 9% and is payable in 60 monthly
payments of $2,076.
F-11
<PAGE> 34
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term obligations at August 31, 1997 are as follows:
<TABLE>
<S> <C>
Year Ending August 31,
1998................................................... $ 4,388,053
1999................................................... 4,134,793
2000................................................... 1,857,887
2001................................................... 1,416,028
2002................................................... 616,420
-----------
Total minimum payments............................ 12,413,181
Less -- Amount representing interest................... 1,668,873
-----------
Present value of total minimum payments.............. 10,744,308
Less -- Current portion................................ 3,595,120
-----------
$ 7,149,188
===========
</TABLE>
(6) SHAREHOLDERS' EQUITY
(a) Public Offering
In February 1996, the Company closed a public offering of 3,000,000 shares
of its common stock at $13.00 per share, resulting in proceeds of approximately
$36,007,000, net of issuance costs. In March 1996, the Company sold an
additional 450,000 shares of its common stock in the underwriter's
overallotment, resulting in proceeds of approximately $5,515,000, net of
issuance costs.
(b) Private Placement
On March 20, 1995, the Company completed a private placement of 850,000
shares of common stock at $2.43 per share, resulting in proceeds of
approximately $2,000,000, net of issuance costs. In connection with the private
placement, the Company issued warrants to purchase 1,020,000 shares of common
stock at an exercise price of $2.43 per share. These warrants were exercised on
July 18, 1995 through a cashless exercise and resulted in the net issuance of
603,023 shares of common stock. The net issuance represents the excess fair
market value of the shares purchasable pursuant to the warrants on the date of
exercise over the total exercise price of such warrants.
(c) Stock Options
The Company has granted stock options to key employees and consultants
under its 1988, 1991 and 1993 Stock Option Plans. In February 1996, the
Company's stockholders approved the 1995 Stock Option Plan (the 1995 Plan)
covering 750,000 options. The purchase price and vesting schedule applicable to
each option grant are determined by the stock option and compensation committee
of the Board of Directors. In addition, under separate agreements not covered by
any plan, the Company has granted certain key employees and certain directors of
the Company, options to purchase common stock.
On November 16, 1995 and December 21, 1995, the Board of Directors of the
Company granted, and the shareholders approved on February 16, 1996,
nonqualified stock options outside the 1995 Plan for the purchase of an
aggregate of 380,000 shares of common stock to four members of the Board of
Directors and the Company's Chief Executive Officer. The options were granted
with an exercise price of $7.25 and $8.87 per share, respectively, the fair
market value on the date of grant, and vest at the end of five years or in
earlier installments based upon the average closing price of the Company's
common stock, as defined.
On January 2, 1996, the Board of Directors of the Company granted, and the
shareholders approved on February 16, 1996, stock options for the purchase of
60,000 shares of common stock to an employee. The
F-12
<PAGE> 35
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options were granted with an exercise price of $9.56 per share, the fair market
value on the date of grant, and vest over a four-year period.
On July 11, 1996 and March 12, 1997, the Board of Directors of the Company
granted nonqualified stock options outside the 1995 Plan for the purchase of
600,000 and 150,000 shares of common stock, respectively, to two executives of
the Company. The options were granted with an exercise price of $7.44 and $9.06
per share, respectively, the fair market value on the date of grant and vest at
the end of seven years or in earlier installments based upon the average closing
price of the Company's common stock, as defined.
During fiscal 1997, the Board of Directors of the Company granted
nonqualified stock options outside of the 1995 Plan for the purchase of an
aggregate 65,000 shares of common stock to a director of the company and two
consultants. The options were granted with an exercise price equal to the fair
market price at the date of grant and vest over a four-year period. In
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company computed the fair value of the options granted to the consultants at
$50,594 using the Black-Scholes option pricing model. Of this amount, $5,270 was
charged to operations for the year ended August 31, 1997 and the remaining
amount will be amortized over the remaining vesting periods of the options.
The Company records deferred compensation when stock options are granted at
an exercise price per share that is less than the fair market value on the date
of the grant for options granted to non-employees. Deferred compensation for
employees is recorded in an amount equal to the excess of the fair market value
per share over the exercise price times the number of options granted. In 1996
and 1997, the Company recorded $2,565,400 and $50,594, respectively, of deferred
compensation for certain options described above. Deferred compensation is being
recognized as an expense over the estimated vesting period of the underlying
options. Compensation expense included in the statements of operations was
approximately $26,000, $2,320,000 and $79,000 for the years ended August 31,
1995, 1996 and 1997, respectively.
There were 154,430 common shares available for future grant at August 31,
1997 under the 1995 Plan. The following is a summary of all stock option
activity:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE RANGE AVERAGE
--------- -------------- --------
<S> <C> <C> <C>
Outstanding, August 31, 1994................... 3,499,702 $ .20 - $ 8.00 $1.87
Granted...................................... 355,275 $2.03 - $ 5.34 3.12
Exercised.................................... (244,166) $ .81 - $ 4.00 1.72
Canceled..................................... (70,624) $ .81 - $ 5.25 1.60
--------- -------------- -----
Outstanding, August 31, 1995................... 3,540,187 $ .20 - $ 8.00 $2.01
Granted...................................... 1,361,775 $1.56 - $14.50 $7.96
Exercised.................................... (496,756) $ .20 - $ 8.00 2.16
Canceled..................................... (56,992) $1.56 - $ 7.25 2.25
--------- -------------- -----
Outstanding, August 31, 1996................... 4,348,214 $ .20 - $14.50 $3.85
Granted...................................... 797,950 $6.19 - $ 9.69 8.58
Exercised.................................... (321,963) $ .88 - $ 7.25 2.66
Canceled..................................... (178,513) $1.56 - $14.50 6.86
--------- -------------- -----
Outstanding, August 31, 1997................... 4,645,688 $ .20 - $14.50 $4.63
========= ============== =====
Exercisable.................................. 2,795,938 $ .20 - $14.50 $2.78
========= ============== =====
</TABLE>
F-13
<PAGE> 36
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Pro Forma Disclosure of Stock-Based Compensation
The Company applies SFAS No. 123, Accounting for Stock-Based Compensation,
which requires the measurement of the fair value of stock options or warrants
granted to employees to be included in the consolidated statement of operations
or, alternatively, disclosed in the notes to consolidated financial statements.
The Company has determined that it will continue to account for stock-based
compensation for employees and non-employee directors under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company records the fair market value of stock options and
warrants granted to nonemployees in the consolidated statement of operations.
The Company has computed the pro forma disclosures required under SFAS No. 123
for stock options granted in 1996 and 1997 using the Black-Scholes option
pricing model. The weighted average assumptions used for 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Risk-free interest rate..................... 6.13% - 6.52% 6.20% - 6.73%
Expected life............................... 7 years 7 years
Expected volatility......................... 65% 65%
</TABLE>
The total value of the options granted to employees during fiscal 1996 and
fiscal 1997 was computed as $5,691,880 and $3,857,026, respectively. Of these
amounts, $811,018 and $2,951,660 would be charged to operations for the years
ended August 31, 1996 and 1997, respectively. The remaining amount,
approximately $3,067,000, would be amortized over the remaining vesting periods.
The pro forma effect of these option grants for the years ended August 31, 1996
and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss)................ $ 1,920,710 $ 1,109,692 $(11,302,391) $(14,254,051)
========= ========= =========== ===========
Net income (loss) per share...... $ 0.11 $ 0.06 $ (0.64) $ (0.81)
========= ========= =========== ===========
</TABLE>
The weighted average remaining contractual life of options outstanding at
August 31, 1997 was 7.12 years. The resulting pro forma compensation expense may
not be representative of the amount to be expected in future years, as the pro
forma expense may vary based on the number of options granted. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
(e) Warrants
In connection with the sales of common stock in March and May 1994, the
Company issued three-year warrants for the purchase of 30,075 shares of common
stock at $3.09 per share and 8,000 shares of common stock at $2.19 per share,
respectively. These warrants were exercised during the year ended August 31,
1996. In connection with the Company's public offering described in Note 6(a),
the Company issued two-year warrants to its underwriters for the purchase of
224,250 shares of common stock at $15.60 per share. These warrants are
outstanding and exercisable as of August 31, 1997.
F-14
<PAGE> 37
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCENTIVE SAVINGS PLAN 401(k)
The Company maintains an incentive savings plan (the Plan) for the benefit
of all employees. On October 1, 1996, the Company changed its matching
contribution from 50% of the first 2% of salary and 25% of the next 4% of
salary, limited to the first $50,000 of annual salary to 100% of the first 2% of
salary and 50% of the next 2% of salary, limited to the first $100,000 of annual
salary. The Company contributed $43,533, $58,354 and $165,778 to the Plan for
the years ended August 31, 1995, 1996 and 1997, respectively.
(8) COLLABORATION AGREEMENTS
(a) Astra Hassle AB
In August 1995, the Company entered into a collaboration agreement with
Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infection or any other disease
caused by H. pylori. The Company granted Astra exclusive access to the Company's
H. plyori genomic sequence database and exclusive worldwide rights to make, use
and sell products based on the Company's H. pylori technology. The agreement
also provides for a four-year research collaboration to further develop and
annotate the Company's H. pylori genomic sequence database, identify therapeutic
and vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representatives from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain product
development milestones, up to approximately $22 million (and possibly a greater
amount if more than one product is developed under the agreement) in license
fees, expense allowances, research funding and milestone payments. Of such fees,
$500,000 is creditable against any future royalties payable to the Company by
Astra under the agreement. Astra is obligated to provide funding for the
research program for a minimum of two and one-half years. On July 21, 1997,
Astra elected to extend the research program to at least September 1998.
The Company will also be entitled to receive royalties on Astra's sale of
products (i) protected by the claims of patents licensed exclusively to Astra by
the Company pursuant to the agreement, or (ii) the discovery of which was
enabled in a significant manner by the genomic database licensed to Astra by the
Company. The Company has the right, under certain circumstances, to convert
Astra's license to a nonexclusive license in the event Astra is not actively
pursuing commercialization of the technology.
The Company has recognized $3,500,000, $4,539,496 and $2,859,262 in revenue
under the agreement in the years ended August 31, 1995, 1996 and 1997,
respectively. The revenue in the year ended August 31, 1995 consisted of a
nonrefundable license fee and capital allowance. The revenue in the years ended
August 31, 1996 and 1997 consisted of milestone payments and collaborative
research revenues. The Company has recorded $650,504 and $502,996 of deferred
revenue under this agreement at August 31, 1996 and 1997, respectively.
(b) Schering-Plough
In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd. (collectively
Schering-Plough) providing for the use by Schering-Plough of the genomic
sequence of a specified pathogen. The Company is sequencing to identify new gene
targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic sequence
databases. The Company also granted Schering-Plough a nonexclusive license to
use the Company's bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to
F-15
<PAGE> 38
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough has agreed to pay the Company a
minimum of $13.3 million for an up-front license fee, research funding and
milestone payments. Subject to the achievement of additional product development
milestones and Schering-Plough's election to extend the research collaboration,
Schering-Plough has agreed to pay the Company up to an additional $30.2 million
in research funding and milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds that are targeted against,
as their primary indication, the pathogen that is the principal subject of the
Company's agreement with Schering-Plough. The Company will be entitled to
receive royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, the Company retained the rights to make, use and sell diagnostic
products developed based on the Company s genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
The Company has recognized $7,867,579 and $3,364,810 in revenue in the
years ended August 31, 1996 and 1997, respectively, under this collaborative
agreement. The revenue in the year ended August 31, 1996 consisted of a license
fee, collaborative research revenue and milestone payments. The revenue in the
year ended August 31, 1997 consisted of collaborative research revenue. The
Company recorded $382,421 and $17,610 as deferred revenue at August 31, 1996 and
1997, respectively.
In December 1996, the Company entered into its second research
collaboration and license agreement with Schering-Plough. This agreement calls
for the use of genomics to discover new therapeutics for treating asthma. As
part of the agreement, the Company will employ its high-throughput positional
cloning, bioinformatics, and genomics sequencing capabilities to identify genes
and associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third-party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments to the Company, as well as pay royalties to the
Company based on sales of therapeutics products developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will approximate $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development milestones.
The Company has recognized $4,603,805 in revenue in the year ended August
31, 1997 under this agreement, which consisted of a license fee, expense
allowance and collaborative research revenues. The Company recorded $1,399,803
as deferred revenue at August 31, 1997.
F-16
<PAGE> 39
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) DATABASE SUBSCRIPTIONS
In May 1997, the Company entered into a license agreement with Bayer AG,
(Bayer) to provide Bayer with nonexclusive access to the Company's proprietary
genome sequence database, PathoGenome(TM) and associated information relating to
microbial organisms. The subscription agreement calls for the Company to provide
Bayer with periodic data updates, analysis tools and software support. Under the
agreement, Bayer has agreed to pay a license fee, an annual subscription fee and
royalties on any molecules developed as a result of access to the information
provided by the PathoGenome(TM) database.
The Company retains all rights associated with protein therapeutic,
diagnostic and vaccine use of bacterial genes or gene products.
The Company has recognized $666,667 in revenue under this agreement in the
year ended August 31, 1997 consisting of license and subscription fees. The
Company recorded $333,333 as deferred revenue at August 31, 1997 under this
agreement.
(10) HARVARD LICENSE AGREEMENT
On November 12, 1993, the Company entered into an agreement with Harvard
College for an exclusive worldwide license for commercial applications of their
patented multiplex sequencing technology. Under this agreement, the Company has
paid a nonrefundable license fee of $100,000, of which $50,000 can be credited
against future royalties. In addition, the Company must pay minimum royalties
ranging from $5,000 in 1995 to $35,000 in 1998 and beyond. The Company may
terminate this agreement upon 90 days notice. The Company recorded a $115,000,
$135,000 and $20,000 expense under this agreement in the years ended August 31,
1995, 1996 and 1997, respectively, primarily relating to the collaborative
agreements with Astra and Schering-Plough, as well as the subscription agreement
with Bayer. In 1997, the Company discontinued use of its multiplex sequencing
technology; however, the Company will continue to incur royalty expense for
future sales, if any, on products developed using the multiplex sequencing
technology.
(11) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Payroll and related expenses................................ $ 893,303 $1,130,296
Professional fees........................................... 77,918 321,626
Facilities.................................................. 34,276 157,228
Employee relocation......................................... 137,622 106,764
License and other fees...................................... 335,434 355,434
All other................................................... 252,667 302,440
---------- ----------
$1,731,220 $2,373,788
========== ==========
</TABLE>
(12) SUBSEQUENT EVENTS
(a) Bristol-Myers Squibb
On September 16, 1997, the Company entered into a license agreement with
Bristol-Myers Squibb to provide Bristol-Myers Squibb with nonexclusive access to
the Company's proprietary genome sequence database, PathoGenome(TM) and
associated information relating to microbial organisms. The subscription
agreement calls for the Company to provide Bristol-Myers Squibb with periodic
data updates, analysis tools and software support. Under the agreement,
Bristol-Myers Squibb has agreed to pay annual subscription fees,
F-17
<PAGE> 40
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
milestones and royalties on any molecules developed as a result of access to the
information provided by PathoGenome(TM). The Company retains rights associated
with therapeutic, diagnostic and vaccine use of bacterial genes or gene
products.
(b) Schering-Plough
On September 24, 1997, the Company entered into a research collaboration
and license agreement with Schering Corporation and Schering-Plough Ltd.
(collectively Schering-Plough) to use genomics to discover and develop new
pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the collaboration related to two fungal pathogens, Candida albicans
and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed in the
course of the research program. In return, Schering-Plough has agreed to fund a
research program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $30.7 million, excluding royalties. Of
the total potential payments, approximately $7.7 million represents license fees
and research payments and $23 million represents milestone payments based on
achievement of research and product development milestones.
In a separate agreement, the Company entered into a license agreement with
Schering-Plough to provide Schering-Plough with nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome(TM) and associated
information relating to microbial organisms. The subscription agreement calls
for the Company to provide Schering-Plough with periodic data updates, analysis
tools and software support. Under the agreement, Schering-Plough has agreed to
pay annual subscription fees and royalties on any molecules developed as a
result of access to the information provided by PathoGenome(TM) database. The
Company retains certain rights to use the bacterial genes or gene products as
therapeutics, diagnostics and vaccines.
F-18
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
November 26, 1997.
GENOME THERAPEUTICS CORP.
/s/ ROBERT J. HENNESSEY
-------------------------------------
Robert J. Hennessey
Chief Executive Officer
SIGNATURES
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 indicated as of November 27, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT J. HENNESSEY Chairman, President,
- ------------------------------------------ Chief Executive Officer
Robert J. Hennessey
/s/ PHILIP LEDER Director
- ------------------------------------------
Philip Leder
/s/ LAWRENCE LEVY Director
- ------------------------------------------
Lawrence Levy
/s/ DONALD J. MCCARREN Director
- ------------------------------------------
Donald J. McCarren
/s/ STEVEN M. RAUSCHER Director
- ------------------------------------------
Steven M. Rauscher
/s/ FENEL M. ELOI Sr. Vice President, Treasurer
- ------------------------------------------ Chief Financial Officer
Fenel M. Eloi (Principal Financial and Accounting Officer)
</TABLE>
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<C> <S>
3.2 Amendment dated January 24, 1983 to Restated Articles of Organization(3)
3.3 Amendment dated January 17, 1984 to Restated Articles of Organization(4)
3.4 Amendment dated October 20, 1987 to the By-laws(8)
3.5 Amendment dated December 9, 1987 to Restated Articles of Organization(9)
3.6 Amendment dated October 16, 1989 to the By-laws(11)
3.7 Amendment dated January 24, 1994 to Restated Articles of Organization(15)
3.8 Amendment dated August 31, 1994 to Restated Articles of Organization(15)
4 Series B Restricted Stock Purchase Plan(3)
10.1 Research Agreement with The Dow Chemical Company dated May 21, 1980(1)
10.2 Research Agreement with The Dow Chemical Company dated August 19, 1981(1)
10.3 1981 Amended Stock Option Plan and Form of Stock Option Certificate(1)
10.4 Incentive Stock Option Plan and Form of Stock Option Certificate(1)
10.5 1984 Stock Option Plan and Form of Stock Option Certificate(5)
10.6 Collaborative Research Incentive Savings Plan(6)
10.7 Amendment dated November 4, 1986 to the Collaborative Research Incentive Savings Plan dated March 1, 1985(7)
10.8 Stock Option Agreement with Mr. Lawrence Levy(8)
10.9 Form of Amendment to the 1981 Incentive Stock Option Plan(8)
10.10 Stock Option Agreement with Mr. Mark Friedman(10)
10.11 1988 Stock Option Plan and Form of Stock Option Certificate(10)
10.12 Stock Option Agreement with Dr. Rothchild(11)
10.13 Agreement with Health Sciences Research Institute (Hoken Kagaku Kenkyojyo)(12)
10.14 1991 Stock Option Plan and Form of Stock Option Certificate(13)
10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts(14)
10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts(14)
10.17 License Agreement with President and Fellows of Harvard College(14)
10.18 Agreement with Becton Dickinson and Company(14)
10.19 Employment Agreement with Robert J. Hennessey(14)
10.20 Agreement with Immuno-Cor Inc. dated September 13, 1993(14)
10.21 Agreement with DIANON Systems, Inc.(14)
10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA(15)
10.23 Consulting Agreement with Dr. Philip Leder(15)
10.24 1993 Stock Option Plan and Form of Stock Option Certificate(15)
10.25 Stock and Warrant Purchase Agreement among the Company and certain purchasers named therein dated March 20, 1995(16)
10.26 Registration Rights Agreement among the Company and certain purchasers named therein dated March 20, 1995(16)
10.27 Form of Warrant Certificate issued pursuant to the Stock and Warrant Purchase Agreement(16)
10.28 Agreement between the Company and Astra Hassle AB dated August 31, 1995.(17)*
10.29 Collaboration and License Agreement between the Company, Schering Corporation and
Schering-Plough Ltd., dated as of December 6, 1995.(20)*
</TABLE>
<PAGE> 43
<TABLE>
<C> <S>
10.30 Form of director Stock Option Agreement and schedule of director options granted(18)
10.31 United States government grant from the National Institutes of Health, National
Institute of Arthritis and Musculoskeletal and Skin Diseases for Cloning the Gene
Responsible for FSH Muscular Dystrophy dated September 30, 1994, as amended.(17)
10.32 United States government grant from the National Center for Human Genome Research for
Genome Sequencing Center dated August 16, 1994, as amended.(17)
10.33 United States government grant from the National Center for Human Genome Research for
High Resolution Physical Map of Chromosome 10 dated April 13, 1995, as amended.(17)
10.34 United States government contract from the National Institute of Neurological
Disorders and Stroke, NIH for Large Scale Automated DNA Sequencing of Human Genes
Involved in Neurological Disorders dated November 30, 1993, as amended.(17)
10.35 Cooperative agreement from the United States Department of Energy for Microbial
Genome Sequencing dated December 21, 1994, as amended.(17)
10.36 Credit Agreement between the Company and Silicon Valley Bank dated June 1, 1995, as
amended.(17)
10.37 Lease amendment dated November 15, 1996 to certain property in Watham, MA(21)
10.38 Collaboration and License Agreement between the Company, Schering Corporation and
Schering-Plough Ltd., dated as of December 20, 1996(22)*
10.39 Credit agreement between the Company and Fleet National Bank dated February 28,
1997(23)
10.40 Credit agreement between the Company and Sumitomo Bank, Limited dated July 31,
1997(24)
11.1 Calculation of Shares Used in Determining Net Income (Loss) Per Share(24)
23. Consent of Arthur Andersen LLP Independent Public Accounts(24)
27. Financial Data Schedule(24)
</TABLE>
- ---------------
* Confidential treatment requested with respect to a portion of this Exhibit.
<PAGE> 44
FOOTNOTES
(1) Filed as exhibits to the Company's Registration Statement on Form S-1
(No. 2-75230) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 27, 1982 and incorporated herein by reference.
(3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 26, 1983 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 25, 1984 and incorporated herein by reference.
(5) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1984 and incorporated herein by reference.
(6) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
(7) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1986 and incorporated herein by reference.
(8) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1987 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 28, 1987 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1988 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1989 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1990 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1992 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 and incorporated herein by reference.
(15) Filed as an Exhibit of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994 and incorporated herein by reference.
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 and incorporated herein by reference.
(17) Filed as an Exhibit to the Company's Annual Report on Form 10-K/A3 for the
year ended August 31, 1995 and incorporated herein by reference.
(18) Filed as an Exhibit to the Company Registration Statement on Forms S-8
(File No. 33-61191) and incorporated herein by reference.
(19) Filed as an Exhibit to the Company's amended Annual Report on Form 10-K/A
for the fiscal year ended August 31, 1995 and incorporated herein by
reference.
(20) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 25, 1995 and incorporated herein by reference.
(21) Filed as an Exhibit to the Company's 10-K for fiscal year ended
August 31, 1996.
(22) Filed as an Exhibit to the Company's 10-Q/A for the quarter ended
March 1, 1997.
(23) Filed as an Exhibit to the Company's 10-Q for the quarter ended
May 31, 1997.
(24) Filed herewith.
<PAGE> 1
EXHIBIT 10.40
LOAN AGREEMENT
AMONG
GENOME THERAPEUTICS CORP.,
COLLABORATIVE SECURITIES CORP.
AND
THE SUMITOMO BANK, LIMITED
JULY 31, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. DEFINITIONS 1
Section 1.1. Definitional Provisions 1
ARTICLE II. LOAN 1
Section 2.1. Term Note 1
Section 2.2. Use of Proceeds 4
Section 2.3. Payments 4
Section 2.4. Prepayments 5
Section 2.5. Indemnification; Increased Costs 5
Section 2.6. Investment Account and Custodian Account 7
Section 2.7. Change In Legality 7
ARTICLE III. REPRESENTATIONS AND WARRANTIES 8
Section 3.1. Organization 8
Section 3.2. Power, Authority, Consents 8
Section 3.3. No Violation of Law or Agreements 9
Section 3.4. Due Execution, Validity, Enforceability 9
Section 3.5. Judgments, Actions, Proceedings 9
Section 3.6. No Defaults, Compliance With Laws 9
Section 3.7. No Materially Adverse Contracts, Etc. 10
Section 3.8. Financial Statements. 10
Section 3.9. Title to Properties; Leases 11
Section 3.10. Priority of Liens 11
Section 3.11. Patents, Copyrights, Licenses, Etc 11
Section 3.12. Tax Returns 11
Section 3.13. Regulation U; Margin Stock 11
Section 3.14. Full Disclosure 12
Section 3.15. ERISA 12
Section 3.16. Environmental Compliance 12
Section 3.17. Other Regulations 14
Section 3.18. Compliance with Securities Laws 14
Section 3.19. Solvency 14
Section 3.20. Subsidiaries or Affiliates 14
Section 3.21. Pending Litigation 14
Section 3.22. Compliance with Investment Policy 14
Section 3.23. Nuclear Regulatory Compliance 14
ARTICLE IV. CONDITIONS PRECEDENT 14
Section 4.1. Conditions Precedent to the Effectiveness
of this Agreement 14
ARTICLE V. AFFIRMATIVE COVENANTS 16
Section 5.1 Books and Records 16
Section 5.2. Inspections and Audits 16
Section 5.3. Perform Obligations 16
Section 5.4. Fees and Expenses 17
Section 5.5. Maintenance of Existence; Conduct of Business 17
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 5.6. Insurance 17
Section 5.7. Certain Taxes 18
Section 5.8. Use of Proceeds 18
Section 5.9. Further Assurances With Respect To Accounts 19
Section 5.10. Financial Covenants 19
Section 5.11 Deposits Into Custodian Account 19
ARTICLE VI. DELIVERY OF FINANCIAL REPORTS,DOCUMENTS AND OTHER INFORMATION 20
Section 6.1. Annual Financial Statements 20
Section 6.2. Quarterly Financial Statements 20
Section 6.3. 10Q and 10K Filings 20
Section 6.4. ash and Covenant Reports 21
Section 6.5. Other Information 21
Section 6.6. No Default Certificate 21
Section 6.7. Notices 21
ARTICLE VII. NEGATIVE COVENANTS 22
Section 7.1. Liens 22
Section 7.2. Changes in Business; Merger or Consolidation;
Disposition of Assets 23
Section 7.3. Change of Office Address 24
Section 7.4. Violation of Agreement 24
ARTICLE VIII. EVENTS OF DEFAULT 24
Section 8.1. Events of Default 24
ARTICLE IX. MISCELLANEOUS PROVISIONS 26
Section 9.1. Indemnity; Additional Fees 26
Section 9.2. Survival of Agreements and Representations 27
Section 9.3. Modifications, Consents and Waivers 27
Section 9.4. Entire Agreement 27
Section 9.5. Remedies Cumulative 27
Section 9.6. Further Assurances 27
Section 9.7. Notices 27
Section 9.8. Construction; Governing Law 29
Section 9.9. Waiver of Jury Trial 29
Section 9.10. Jurisdiction 29
Section 9.11. Relationship of the Borrowers and the Bank 30
Section 9.12. Severability 30
Section 9.13. Ending Effect; Assignment 30
Section 9.14. Counterparts 31
Section 9.15. Joint and Several Obligations 31
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS A-1
Exhibit 2.1 Form of Note
Exhibit 2.1(a) Form of Borrower's Request
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C>
Exhibit 2.6 Form of Irrevocable Instructions and Power of Attorney
Schedule 3.5 Judgments, Actions, Proceedings
Schedule 3.9 Title to Properties; Leases
Schedule 3.11 Pending Litigation on Intellectual Property Rights
Schedule 3.15 ERISA
Schedule 3.16 Environmental Compliance
Schedule 3.20 Subsidiary or Affiliate
Schedule 3.21 Pending Litigation Claims
Schedule 5.6 Insurance In Effect
Schedule 8.1(j) Borrowers' Cash Investment Policies
</TABLE>
<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made as of July 31, 1997 by
and among GENOME THERAPEUTICS CORP., a Massachusetts corporation ("Genome"),
COLLABORATIVE SECURITIES CORP., a Massachusetts corporation ("Collaborative",
and jointly and severally together with Genome, the "Borrowers"), and THE
SUMITOMO BANK, LIMITED, a Japanese banking corporation (the "Bank").
The Borrowers and the Bank hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONAL PROVISIONS.
(a) Capitalized terms used in this Agreement and defined in APPENDIX A
hereto, which APPENDIX A is attached to this Agreement and by this reference
made a part hereof, shall have the respective meanings specified in such
APPENDIX A.
(a) All terms defined in APPENDIX A shall have such defined meanings when
used in any certificate or any other document made or delivered pursuant to this
Agreement unless otherwise defined in such other document or certificate.
(a) All accounting terms not specifically defined in this Agreement or in
APPENDIX A hereto shall be construed in accordance with generally accepted
accounting principles as in effect in the United States of America on the date
of this Agreement.
ARTICLE II
LOAN
SECTION 2.1 TERM NOTE.
(a) Subject to the terms and conditions of this Agreement, the Bank shall
loan to the Borrowers from time to time between the Closing Date through the
Advance Termination Date upon three (3) Business Days prior written notice to
the Bank in the form of EXHIBIT 2.1(a) hereto, an aggregate principal amount of
up to Six Million Dollars ($6,000,000) (the "Loan"). The Bank will make an
initial Disbursement to the Borrowers on the Closing Date in the amount of Two
Million Five Hundred Thousand Dollars ($2,500,000). The Borrowers may request
additional Disbursements hereunder following the Closing Date in principal
amounts of not less than $500,000, provided that the aggregate of the principal
amount of all Disbursements (including the one being requested) shall not exceed
$6,000,000. The obligation of the Borrowers to repay the Loan and to pay
interest and all other costs and charges payable hereunder is joint and several
and will be evidenced by a promissory note in the form of EXHIBIT 2.1 (the
"Note") dated the Closing Date and payable to the order of the Bank in the
original principal amount of Six Million Dollars ($6,000,000).
(a) The Loan shall bear interest, and the Borrowers shall pay interest on
the outstanding principal balance of the Loan from the date of each Disbursement
to the Borrowers until the Maturity Date, at the following rates per annum:
(i) with respect to any portion of such Loan which is a Eurodollar Rate
Loan Portion, interest at a rate per annum on such Eurodollar Rate Loan
Portion equal (at all times during each applicable Interest Period) to the
Reserve Adjusted Eurodollar Rate for such applicable Interest Period plus
the Applicable Margin; and
(i) with respect to each portion of such Loan which is not a Eurodollar
Rate Loan Portion, interest at a rate per annum on each such Loan Portion
equal to the Prime Rate.
Except for the initial Disbursement to be made hereunder on the Closing
Date, not later than 12:00 noon (Chicago time) on the third Business Day prior
to the funding of the Loan, the Borrowers shall provide written notice
("Eurodollar Notice") to the Bank of the dollar amount of any Disbursement which
will be a Eurodollar Rate Loan Portion for the initial Interest Period. In the
event that the Borrowers fail to provide the Eurodollar Notice in accordance
with the preceding sentence or if an Event of Default has occurred and is
continuing , then the outstanding principal balance of the Loan shall bear
interest at the Prime Rate until such time as Borrowers have given an Election
Notice in accordance with Section 2.1(c) below. Computations of interest will be
on the basis of a 360 day year, for actual days elapsed with respect to interest
accruing.
(a) The Borrowers, upon written notice (the "Election Notice") given to the
Bank by not later than 12:00 noon (Chicago time) on the third Business Day prior
to the expiration of the Interest Period for any Eurodollar Rate Loan Portion in
the case of any continuation of a Eurodollar Rate Loan Portion as such, and not
later than 12:00 Noon (Chicago time) on the conversion date in the case of any
conversion into a Prime Rate Loan Portion, may elect: (1) to continue such
portion or any part thereof as a Eurodollar
<PAGE> 6
Rate Loan Portion for the next succeeding Interest Period; or (2) to convert
such portion or any part thereof to a Prime Rate Loan Portion; or (3) a
combination thereof, effective the last day of such Interest Period.
At the end of each applicable Interest Period, in the absence
of a timely effective Election Notice to continue the applicable Loan Portion as
a Eurodollar Rate Loan Portion, such Loan Portion shall bear interest at the
Prime Rate. Notwithstanding anything herein to the contrary, if at the end of an
applicable Interest Period for a Eurodollar Rate Loan Portion, an Event of
Default has occurred and is continuing, then the Borrower shall have no right to
give an Election Notice, and the Bank may ignore any attempt by the Borrower to
give an Election Notice.
(a) An Election Notice with respect to any Eurodollar Rate Loan Portion
shall contain the following information:
(i) the dollar amount (if any) which is to be continued as a Eurodollar
Rate Loan Portion; and
(i) with respect to the dollar amount to be continued as a Eurodollar
Rate Loan Portion, the new Interest Period.
Notwithstanding anything herein to the contrary, the outstanding Loan
balance may not at any time be comprised of more than five (5) Eurodollar Rate
Loan Portions at the same time without the Bank's consent, which shall be in the
Bank's sole and absolute discretion. Once received by the Bank, any Election
Notice will be irrevocable for the applicable Eurodollar Rate Loan Portion for
the applicable Interest Period.
The Borrowers hereby authorize the Bank to record on schedule(s)
annexed to the Note (a) the date and amount of each Loan Portion; (b) the term
of the Interest Period for each Eurodollar Rate Loan Portion; (c) the interest
rate or rates for each Prime Rate Loan Portion and the effective date(s) of all
changes in such rates; and (d) the date and amount of each principal and
interest payment on each Loan Portion made by the Borrowers, and the Borrowers
agree that all such notations shall constitute PRIMA FACIE evidence of the
matters noted absent manifest error, provided that the failure of the Bank to
record such information shall not reduce or affect the obligations of the
Borrowers hereunder or under the Note.
(a) In the event that on the date for determining the Reserve Adjusted
Eurodollar Rate to be paid by the Borrowers in respect of any Interest Period,
the Bank determines in good faith (which determination will be conclusive and
binding on the Borrower) that
<PAGE> 7
by reason of circumstances affecting the London Interbank Eurodollar market,
either Eurodollar rates are not offered in the London Interbank Eurodollar
market or adequate and fair means do not exist for ascertaining the Reserve
Adjusted Eurodollar Rate for such Interest Period, the Bank shall promptly give
to the Borrowers telephonic notice (confirmed as soon as practicable in writing)
of such determination. During the existence of such circumstances, any existing
Eurodollar Rate Loan Portion in respect of which such circumstances exist will
convert to a Prime Rate Loan Portion at the end of the applicable Interest
Period.
SECTION 2.2 USE OF PROCEEDS. The proceeds of the Loan shall be used by the
Borrowers for the purpose of funding or replenishing working capital reserves,
funding capital expenditures for enhancement of research and development
facilities and acquisition of laboratory equipment and for general corporate
purposes.
SECTION 2.3 PAYMENTS.
(a) The Borrowers will pay interest hereunder as set forth in Section 2.1.
The Borrowers will repay the principal amount of the Loan in forty-eight (48)
equal consecutive monthly installments of principal (each installment being in
an amount sufficient to amortize the outstanding principal balance of the Loan
over a period of forty-eight (48) months), payable on the first Business Day of
each calendar month commencing with the first payment due on July 1, 1998 and
continuing until the Maturity Date, on which date the Borrowers shall make a
final payment in an amount equal to all the then unpaid principal of the Loan
and all unpaid interest thereon. Notwithstanding the foregoing, repayment of the
Loan and all accrued and unpaid interest thereon may be accelerated upon the
occurrence and continuance of an Event of Default.
(a) The Borrowers shall make all payments hereunder in U.S. Dollars and in
immediately available funds at the Bank's office at 233 S. Wacker Drive, Suite
5400, Chicago, Illinois 60606 (or at such other office as the Bank may notify
the Borrowers in writing) via wire transfer to Sumitomo Bank, Limited, Chicago
Branch, ABA 071001850, through the Federal Reserve Bank of Chicago, Reference:
Genome Therapeutics Corp. Payments not made prior to 12:00 noon (Chicago time)
on the date of payment will be deemed paid on the next Business Day. Payments
which fall due on a day which is not a Business Day will be payable on the next
Business Day, with interest to accrue to such date of payment. All payments
hereunder and under the Note shall be made without set-off or counterclaim and
in such amounts as may be necessary in order that all such payments shall not be
less than the amounts otherwise specified to be paid under this Agreement or the
Note, as the case may be.
<PAGE> 8
(a) Any installment of interest only or of principal and interest paid more
than five (5) days late or any other amount payable hereunder which is not paid
when due, will bear (and the Borrowers shall pay) interest (to the extent
permitted by law) from such due date until such unpaid amount has been paid in
full (whether before or after judgment) at a rate per annum equal to three and
one-half percent (3.5%) in excess of the rate then applicable to each Loan
Portion until the end of any Interest Period then applicable to such Loan
Portion and thereafter at a rate per annum equal to three and one-half percent
(3.5%) in excess of the Prime Rate ("Default Rate").
(a) In partial consideration for the Bank making the Loan to the Borrowers,
the Borrowers shall pay to Bank: (i) a loan disbursement fee ("Loan Fee") in an
amount equal to one and one-eighth percent (1.125%) of each Disbursement amount
being made, such Loan Fee to be due and payable at the time of funding such
Disbursement, and (ii) during the period that the Bank has any lending
commitment hereunder, a commitment fee ("Commitment Fee") in an amount equal to
one quarter of one percent (0.25%) per annum of any portion of the Loan not
disbursed to the Borrowers, with such Commitment Fee to be due and payable, in
arrears, on the last Business Day of each calendar quarter and calculated on the
actual daily amount of the undisbursed portion of the Loan, provided that when
any Disbursement occurs, the Commitment Fee which has accrued on the portion of
the unutilized Loan being disbursed shall be credited against the Loan Fee
payable with respect to such Disbursement, and only the net amount of such Loan
Fee shall be payable at the time of such Disbursement. From and after the
Closing Date, Borrowers hereby authorize Bank to deduct and pay any and all Loan
Fees (including such fee for the initial Disbursement made on the Closing Date),
all Commitment Fees and any and all other reasonable fees and expenses of the
Bank from the available proceeds of the Loan.
SECTION 2.4 PREPAYMENTS. Subject to this Section 2.4, the Borrowers may, upon
five (5) Business Days' prior notice to the Bank, prepay the outstanding amount
of the Loan in whole or in part. In the event that the Borrowers prepay or are
required to prepay any Eurodollar Rate Loan Portion by acceleration or otherwise
or fails to draw down or convert to a Eurodollar Rate Loan Portion after giving
notice thereof, the Borrowers agree to reimburse the Bank for its expenses,
funding losses and loss of anticipated profits due to such prepayment or failure
to draw. The Borrowers and the Bank hereby agree that such expenses, funding
losses and loss of anticipated profits shall consist of the sum of:
(a) Principal amount of each such Eurodollar Rate Loan Portion times
(([number of days between the date of prepayment
<PAGE> 9
and the last day in the applicable Interest Period] divided by 360), times the
applicable Interest Differential); plus
(a) All actual out-of-pocket expenses (other than those taken into account
in the calculation of the Interest Differential) incurred by the Bank (excluding
allocations of any expense internal to the Bank) and reasonably attributable to
such payment or prepayment.
Notwithstanding the foregoing, no prepayment fee shall be payable (and no credit
or rebate shall be required) if the product of the foregoing formula is not a
positive number. The Loan is not in a nature of a revolving loan; therefore,
amounts prepaid or repaid under the Note may not be reborrowed.
SECTION 2.5 INDEMNIFICATION; INCREASED COSTS. If after the date of this
Agreement the Bank reasonably determines that any Regulatory Change, or
compliance by the Bank with any request or directive (whether or not having the
force of law) of any governmental authority, central bank or comparable agency
charged with the interpretation or administration of any applicable law, rule or
regulation which is effective or issued after the date hereof:
(a) Subjects the Bank to any tax, duty or other charge with respect to the
Loan or the Note, or changes the basis of taxation of payments to the Bank of
the principal of or interest on the Loan or any other amounts due under this
Agreement in respect of the Loan except for changes in the rate of tax on the
overall net income of the Bank or its lending office imposed by the Commonwealth
of Massachusetts or the jurisdictions in which the Bank's principal executive
office or applicable lending office is located) (such non-excluded amounts,
"Taxes"); or
(a) Imposes, modifies or deems applicable any reserve (including, without
limitation, any reserve imposed by the Board of Governors of the Federal Reserve
System), special deposit, liquidity, capital maintenance, capital adequacy,
capital ratio (including, but without limitation thereto, any request by or
requirement of any regulatory body or official which affects the manner in which
the Bank allocates capital resources to its obligations hereunder), for the
account of, or credit extended by, the Bank or imposes on the Bank any other
condition affecting the Loan, or the Note;
and the result of any of the foregoing is to (A) impose a cost on or increase
the cost to the Bank of making or maintaining the Loan, or (B) cause an increase
in any capital requirement arising out of the making or maintenance of the Loan
or any obligation to the Borrower hereunder or (C) reduce the amount of any sum
received or
<PAGE> 10
receivable by the Bank under this Agreement or under the Note, by an amount
deemed by the Bank to be material, then, within ten (10) days after demand by
the Bank, the Borrowers shall pay for the account of the Bank such additional
amount or amounts as will compensate the Bank for such increased cost or
reduction as such cost or reduction is incurred by the Bank. If the Bank makes
any claim for compensation under this Section 2.5, the Borrowers may immediately
elect by written notice (or telephonic notice confirmed as soon as practicable
in writing) to the Bank to prepay the Loan (but subject to payment of any other
amounts due under Section 2.4 and this Section 2.5, including any increased cost
or reduction incurred through the date of such prepayment or conversion). The
Bank shall promptly notify the Borrowers of any event of which it has knowledge,
occurring after the date hereof, which will entitle the Bank to compensation
pursuant to this Section 2.5. The Bank shall provide to the Borrowers a
certificate claiming compensation under this Section 2.5, setting forth the
additional amount or amounts to be paid to it hereunder and showing in
reasonable detail the Bank's calculation thereof which shall be presumed to be
correct absent manifest error. In determining such amount, the Bank may use any
reasonable averaging and attribution methods. The Bank shall exercise reasonable
efforts to promptly provide the Borrowers with notice of the imposition, or
overtly threatened exercise of, any Regulatory Change set forth in this Section
2.5 of which the Bank has actual knowledge, provided, however, that the failure
by the Bank to so provide such notice will not relieve the Borrowers of any of
their obligations hereunder.
The Bank agrees that it will use reasonable efforts to reduce or
eliminate any claim for compensation pursuant to this Section 2.5, including
designating a different lending office for the Loans, if such designation will
avoid the need for or reduce the amount of any such compensation, PROVIDED that
the Bank will not be obligated to take any actions that would, in the sole
opinion of the Bank, be disadvantageous to the Bank in any material respect (it
being understood that the incurrence of any unreimbursed cost or expense by the
Bank that would not have been incurred but for such action is material).
SECTION 2.6 INVESTMENT ACCOUNT AND CUSTODIAN ACCOUNT.
(a) Prior to the occurrence of a Trigger Event, the Borrowers shall hold at
all times Cash and Cash Equivalents, which are not subject to any Lien or claim
of any Person other than the Bank, in an amount not less than an amount equal to
the then outstanding principal balance due under the Loan plus three (3) months
interest thereon at the then applicable rate provided for herein, in a custodial
account (the "Investment Account") with an institution approved by the Bank
(such institution being referred to herein as the "Custodian"). The initial
Custodian will be Oppenheimer & Co.,
<PAGE> 11
Inc. The amounts held in the Investment Account shall be subject to the
investment control of the Borrowers. The Custodian in respect of the Investment
Account cannot be changed or a new Investment Account opened without the Bank's
prior written approval, which approval shall not be unreasonably withheld. The
Borrowers shall deliver to the Custodian the Irrevocable Instructions and Power
of Attorney in the form of EXHIBIT 2.6 (the "Irrevocable Instructions and Power
of Attorney").
(a) On or before the Closing Date, the Borrowers, for the benefit and on
behalf of the Bank, shall establish and maintain or cause to be established and
maintained in the name of the Borrowers an account (the "Custodian Account")
with Sumitomo Bank of New York Trust Company (the "Bailee") under the Custodian
Agreement and the Collateral Bailment Agreement. Pursuant to the Restricted
Account and Security Agreement by and between the Bank and the Borrowers, the
Borrowers have granted to the Bank a security interest in all of its right,
title and interest in the Custodian Account, all deposits or investments held
therein and all proceeds thereof to secure payment and performance of the
Borrowers' obligations hereunder. On or before the Closing Date, the Borrowers
shall cause to be deposited in the Custodian Account the sum of One Thousand
Dollars ($1,000). So long as the Borrowers are indebted to the Bank hereunder
and until payment in full of the Note and the Borrowers' full and complete
performance of its obligations hereunder, the Custodian Account shall at all
times have a Restricted Account Balance of not less than One Thousand Dollars
($1,000). The terms and conditions of the Restricted Account and Security
Agreement, the Collateral Bailment Agreement, and the Custodian Agreement are
incorporated herein by reference.
SECTION 2.7 CHANGE IN LEGALITY.
(a) In the event that at any time the Bank shall have reasonably determined
(which determination shall be presumed to be correct until the contrary shall
have been established) that by reason of a change in any law or regulation or in
the interpretation thereof by any governmental authority charged with the
interpretation thereof affecting the Bank or the Eurodollar market and
applicable to any Eurodollar Rate Loan Portion, the making or continuation of a
loan at the applicable Reserve Adjusted Eurodollar Rate plus the Applicable
Margin has become unlawful, the Bank shall forthwith give written notice (or
telephonic notice, confirmed as soon as practicable in writing) to the Borrowers
and the obligation of the Bank to make or maintain such Eurodollar Rate Portion
at the applicable Reserve Adjusted Eurodollar Rate plus the Applicable Margin
shall terminate and the Borrowers shall forthwith upon receipt of notice of such
determination prepay such Eurodollar Rate Loan Portion without premium or
penalty (subject to Sections 2.4 and 2.5), together with all interest accrued on
the amount
<PAGE> 12
prepaid to the date of prepayment. A certificate, setting forth (x) each event
which the Bank shall have determined makes the continuation of such Eurodollar
Rate Loan Portion unlawful and (y) any additional amounts payable by the
Borrowers under Sections 2.4 and 2.5 (and the basis therefor and the Bank's
computation thereof) upon prepayment of such Eurodollar Rate Loan Portion, shall
be furnished to the Borrowers by the Bank and shall be presumed correct absent
manifest error.
(a) In the event that the Borrowers are obligated to prepay a Eurodollar
Rate Loan Portion pursuant to clause (a) of this Section 2.7, the Borrowers
shall have the right, upon written notice (or telephonic notice confirmed as
soon as practicable in writing) to the Bank, in lieu of such prepayment, to
elect to convert such Eurodollar Rate Portion to a Prime Rate Loan Portion,
effective on the date on which such prepayment would otherwise be required to
have been made, provided that on the effective date of conversion the Borrowers
also shall pay all interest accrued on the amount converted to the date of
conversion and such additional amounts, if any, payable by the Borrowers under
Section 2.4 and 2.5, as specified in the certificate furnished the Borrowers
pursuant to said clause (a).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each of the Borrowers hereby represents and warrants to the Bank that:
SECTION 3.1 ORGANIZATION. It is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts; it has
the power to own its assets, to transact the business in which it is presently
engaged and in which it proposes to be engaged and is duly qualified and in good
standing in each jurisdiction in which the failure to qualify to do business
would materially adversely affect its financial condition and business
operations.
SECTION 3.2 POWER, AUTHORITY, CONSENTS.
(a) It has the power to execute, deliver and to perform its obligations
under the Loan Documents.
(a) It has the power to borrow hereunder and has taken all necessary action
to authorize the borrowing hereunder on the terms and conditions of this
Agreement.
(a) It has taken all necessary corporate action to authorize the execution,
delivery and performance of the Loan Documents.
(a) No consent or approval of any Person, no waiver of any Lien or right of
distraint or other similar right and no consent, license, approval,
authorization or declaration of any governmental authority, bureau or agency is
or will be required in connection with the execution and delivery of the Loan
Documents by it or the performance by it of its obligations thereunder or the
validity, enforcement or priority of the Loan Documents, or any Lien created and
granted thereunder, except such consents as have been obtained and copies of
which have been delivered to the Bank.
SECTION 3.3 NO VIOLATION OF LAW OR AGREEMENTS. The execution and delivery of
the Loan Documents and the performance by it of its obligations thereunder, will
not violate any provision of law and will not conflict with or result in a
breach of any order, writ, injunction, ordinance, resolution, decree, or other
similar document or instrument of any court or governmental authority, bureau or
agency, domestic or foreign, its charter or bylaws or create (with or without
the giving of notice or lapse of time, or both) a default under or breach of any
agreement, bond, note or indenture to which it is a party, or by which it is
bound or any of its properties or assets is affected, or result in the
imposition of any Lien of any nature whatsoever upon any of the properties or
assets owned by or used in connection with its business.
SECTION 3.4 DUE EXECUTION, VALIDITY, ENFORCEABILITY. This Agreement and each of
the other Loan Documents has been, or upon the execution and delivery thereof,
will be, duly executed and delivered by it, and each constitutes, or, upon the
execution and delivery thereof, will constitute, its valid and legally binding
obligation enforceable in accordance with its terms, except to the extent that
the enforcement thereof may be limited by applicable bankruptcy, moratorium,
insolvency, reorganization, or other similar laws or equitable principles
relating to the enforcement of creditors' rights generally.
SECTION 3.5 JUDGMENTS, ACTIONS, PROCEEDINGS. Except as set forth in Schedule
3.5, there are no outstanding judgments, actions (including, without limitation,
derivative actions), suits or proceedings pending before any court or
governmental authority, bureau or agency, having a claim or amount in
controversy that exceeds $100,000 in any one instance or $500,000 in the
aggregate at any one time with respect to or, to the best of its knowledge,
threatened against or affecting either of the Borrowers.
SECTION 3.6 NO DEFAULTS, COMPLIANCE WITH LAWS. It is not in material default
under any agreement, ordinance, resolution, decree, bond, note, indenture, order
or judgment to which it is a
<PAGE> 13
party or by which it is bound (including, without limitation, any collaborative
agreements), or its charter documents or bylaws, or any other agreement or other
instrument by which any of the properties or assets owned by it or used in the
conduct of its business is affected or evidencing, guaranteeing or relating to
any outstanding indebtedness, liability or obligation for borrowed money or
lease obligations, which default could have a material adverse effect on its
business, operations, financial condition or properties, or on its ability to
perform its obligations under the Loan Documents. It has complied and is in
compliance in all material respects with all applicable federal, state, local
and other laws, ordinances and regulations, including, without limitation, the
statutes, rules and regulations of the Food and Drug Administration and the
Nuclear Regulatory Commission, the non-compliance with which could have a
material adverse effect on its business, operations, financial condition or
properties, or on its ability of to perform its obligations under the Loan
Documents, and it has not received notice and has no knowledge of any violations
or alleged violations by either of the Borrowers of any of the foregoing.
SECTION 3.7 NO MATERIALLY ADVERSE CONTRACTS, ETC. It is not subject to any
charter, corporate or other legal restriction, or any judgment, decree, order,
rule or regulation that has, or is expected in the judgment of its officers to
have a materially adverse effect on its business, assets or financial condition.
It is understood that the preceding sentence shall not apply to government rules
and regulations which affect the Borrowers in the same general manner as they do
other companies similar to Borrowers such as general tax laws and rules
regulating the sale of pharmaceuticals in countries throughout the world. It is
not a party to any contract or agreement that has or is expected, in the
judgment of its officers, to have any materially adverse effect on its business.
SECTION 3.8 FINANCIAL STATEMENTS.
(a) It has furnished to the Bank its most recent audited Financial
Statements and all subsequent unaudited Financial Statements which are available
to the public. Each of the Financial Statements is correct and complete in all
material respects and presents fairly its financial condition, at its date or
for the respective period, and has been prepared in accordance with generally
accepted accounting principles.
(a) It has no material obligation, liability or commitment, direct or
contingent, which is not reflected in the Financial Statements or in any notes
thereto in accordance with generally accepted accounting principles.
(a) There has been no material adverse change in its financial position
or operations since the date of the Financial Statement for the fiscal quarter
ending March 1, 1997.
(a) Its fiscal year is the twelve (12) month period ending on August 31
in each year.
SECTION 3.9 TITLE TO PROPERTIES; LEASES. Except as disclosed in the footnotes to
the Financial Statements or on Schedule 3.9, it owns all of the assets reflected
in the most recent balance sheet or acquired since that date (except property
and assets leased, sold or otherwise disposed of in the ordinary course of
business since that date), subject to no rights of others, including any
mortgages, ordinary or capital leases, conditional sales agreements, title
retention agreements, liens or other encumbrances.
SECTION 3.10 PRIORITY OF LIENS. The Liens which have been or will be created and
granted by the Loan Documents upon the execution and delivery thereof
constitute, or will constitute upon such execution and delivery, valid first
priority Liens on the properties and assets covered by the Loan Documents,
subject to no other liens.
SECTION 3.11 PATENTS, COPYRIGHTS, LICENSES, ETC. It owns or has a valid right to
use all patents, copyrights, trademarks, trade names, licenses, franchises, and
rights in respect of the foregoing ("Intellectual Property Rights"), adequate
for the conduct of its business substantially as now conducted without conflict
with any rights of others, and there are no suits or claims for infringement
with respect to the Intellectual Property Rights except as set forth in Schedule
3.11. Schedule 3.11 lists all pending suits or claims for infringement with
respect to Intellectual Property Rights.
SECTION 3.12 TAX RETURNS.
(a) It has filed all federal and state income tax returns and all other tax
returns, reports, and declarations required to be filed by it and has not failed
to pay any taxes, or interest and penalties relating thereto, on or before the
due dates thereof except for returns, taxes, interest or penalties with respect
to which it has duly filed extensions or is contesting the validity thereof by
appropriate legal proceedings diligently conducted in good faith. No audits of
its federal income tax returns are pending.
(a) Except to the extent that reserves therefor are reflected in the
Financial Statements, (i) it has no material federal, state or local tax
liabilities due or to become due for any tax year ended on or prior to the date
of the most recent balance sheet included in the Financial Statements, whether
incurred in respect of or measured by the income of such entity, which are not
properly reflected in such balance sheet, and (ii) it has no material claims
pending or, to its knowledge proposed or threatened against it for past federal,
state or local taxes.
SECTION 3.13 REGULATION U; MARGIN STOCK. No part of the proceeds from the Loan
will be used directly or indirectly for the purpose of purchasing or carrying,
or for payment in full or in part of indebtedness which was incurred for the
purposes of purchasing or carrying, any margin stock as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R.,
Chapter II, Part 221. It does not own margin stock.
SECTION 3.14 FULL DISCLOSURE. Neither the Financial Statements nor any
certificate, opinion, or any other statement made or furnished in writing to
Bank by or on behalf of the Borrower in connection with this Agreement or the
transactions contemplated herein, contains any untrue statement of a material
fact, or omits to state a material fact necessary to make the statements
contained therein or herein, in light of the circumstances under which they were
made, not misleading.
SECTION 3.15 ERISA.
(a) With the exceptions of its 401(K) plans, certain other employee benefit
plans, all as set forth in Schedule 3.15, none of its or any of its Affiliates
has pension or other employee benefit plans which are subject to the provisions
of Title IV of ERISA (any such plans which have been or may hereafter be adopted
or assumed by it are hereinafter referred to individually as a "Plan" and,
collectively, as the "Plans"). In connection with the Plans, it does not have,
or know of any likely event which will give rise to, any direct or contingent
material liabilities of it to the Pension Benefit Guaranty Corporation ("PBGC"),
the Department of Labor or the Internal Revenue Service ("IRS").
(a) Neither it nor any of its Affiliates is a participating employer in any
Plan under which more than one employer makes contributions as described in
Sections 4063 and 4064 of ERISA.
(a) Neither it nor any of its Affiliates is a participating employer in a
multiemployer plan as defined in Section 4001(a) of ERISA, which participation
could give rise to material withdrawal liability on the part of the Borrower, as
the case may be under Subtitle E of Title IV of ERISA.
For purposes of this Agreement, all references to "ERISA" shall be
deemed to refer to the Employee Retirement Income Security
<PAGE> 14
Act of 1974 (including any sections of the Code) as heretofore amended and as it
may hereafter be amended or modified, and all regulations promulgated
thereunder, and all references to the Borrower in this Section 3.15, or in any
other Section of this Agreement relating to ERISA, shall be deemed to refer to
the Borrower and all other entities which are part of a Controlled Group with
respect to the Borrower.
SECTION 3.16 ENVIRONMENTAL COMPLIANCE. Except as set forth in Schedule 3.16, it
has taken all necessary steps to comply with Environmental Laws (as hereinafter
defined) and has determined that:
(a) It is not in violation, or alleged violation, of any judgment, decree,
order, law, license, rule or regulation pertaining to environmental matters,
including without limitation, those arising under the Resource Conservation and
Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal
Clean Air Act, the Toxic Substances Control Act, each as amended as of the date
hereof, or any other federal, state or local statute, regulation, ordinance,
order or decree relating to health, safety or the environment (hereinafter
"Environmental Laws"), which violation would have a material adverse effect on
its business, assets or financial condition;
(a) It has not received notice from any third party including, without
limitation, any federal, state or local governmental authority, (i) that it has
been identified by the United States Environmental Protection Agency ("EPA") as
a potentially responsible party under CERCLA with respect to a site listed on
the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that
any hazardous waste, as defined by 42 U.S.C. ss. 9601(5), any hazardous
substances as defined by 42 U.S.C. ss. 9601(14), any pollutant or contaminant as
defined by 42 U.S.C. ss.9601(33) and any toxic substances, oil or hazardous
materials or other chemicals or substances regulated by any Environmental Laws
("Hazardous Substances") which it has generated, transported or disposed of has
been found at any site at which a federal, state or local agency or other third
party has conducted or has ordered that it conduct a remedial investigation,
removal or other response action pursuant to any Environmental Law; or (iii)
that it is or shall be a named party to any claim, action, cause of action,
complaint, or legal or administrative proceeding (in each case, contingent or
otherwise) arising out of any third party's incurrence of costs, expenses,
losses or damages of any kind whatsoever in connection with the release of
Hazardous Substances;
(a) (i) the properties on which it conducts its business have not been used
for the handling, processing, storage or Disposal of Hazardous Substances except
in accordance with applicable Environmental Laws; (ii) in the course of any
activities conducted by it, no Hazardous Substances have been generated or are
being used on property leased by it on which it conducts its business except in
accordance with applicable Environmental Laws; (iii) there has been no Release
or threatened Release of Hazardous Substances by it on, upon, into or from the
properties on which it operates its business, which Release would have a
material adverse effect on its business; (iv) to the best of its knowledge,
there have been no Releases on, upon, from or into any real property in the
vicinity of any of the properties on which either of Genome or Collaborative
conducts its business, through soil or groundwater contamination, which may have
come to be located on, and which would have a material adverse effect on its
business; and (v) in addition, any Hazardous Substances that have been generated
by it on the properties on which it conducts its business have been transported
off-site only by carriers having an identification number issued by the EPA,
treated or Disposed of only by treatment or disposal facilities maintaining
valid permits as required under applicable Environmental Laws, which
transporters and facilities have been and are, to the best of its knowledge,
operating in compliance with such permits and applicable Environmental Laws; and
(a) none of the properties on which it conducts its business is or is
expected to be in violation of any applicable environmental clean-up
responsibility law or regulation or environmental restrictive transfer law or
regulation, in regard to which failure to comply would have a material adverse
effect on its business, assets or financial condition.
SECTION 3.17 OTHER REGULATIONS. It is not subject to regulation under the
Investment Company Act of 1940, the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Interstate Commerce Act, any state public utilities
code or any federal or state statute or regulations limiting its ability to
incur Indebtedness.
SECTION 3.18 COMPLIANCE WITH SECURITIES LAWS. All offers and sales of its
securities have been made in material compliance with all applicable federal and
state securities laws, including without limitation the Securities Act of 1933
and the Securities Exchange Act of 1934, both as amended.
SECTION 3.19 SOLVENCY. It is solvent and is not the subject of a bankruptcy or
insolvency proceeding.
SECTION 3.20 SUBSIDIARIES OR AFFILIATES. Except for Collaborative being a
wholly-owned subsidiary of Genome and as otherwise set forth on Schedule 3.20,
it does not have any Subsidiary or Affiliate.
SECTION 3.21 PENDING LITIGATION. Except as set forth in Schedule 3.21, there are
no lawsuits or claims pending against it which could have a material adverse
affect on its financial condition or the financial condition of the Borrowers
taken as a whole.
SECTION 3.22 COMPLIANCE WITH INVESTMENT POLICY. It is in compliance with its
"Investment Policy" for investment of Cash and Cash Equivalents (as mandated and
adopted by Genome's and Collaborative's Board of Directors). True and correct
copies of such Investment Policy is attached as Schedule 8.1(j).
SECTION 3.23 NUCLEAR REGULATORY COMPLIANCE. It is in compliance with all rules,
regulations, orders, decrees, findings or other determinations pertaining to
matters regulated, reviewed or overseen by the Nuclear Regulatory Commission.
Upon request by the Bank, it shall furnish reasonable evidence of such
compliance.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT. The
effectiveness of this Agreement and the obligations of the Bank hereunder shall
be subject to the following conditions precedent:
(a) Each of the Borrowers will have executed and delivered to the Bank the
Note, the Collateral Bailment Agreement, the Restricted Account and Security
Agreement, the Irrevocable Instructions and Power of Attorney, the Custodian
Agreement, the Financing Statement and an original counterpart of this
Agreement.
(a) The Bailee will have executed and delivered the Collateral Bailment
Agreement, the Custodian Agreement and the Restricted Account and Security
Agreement;
(a) The initial Custodian will have executed and delivered its consent to
the Irrevocable Instructions and Power of Attorney to the Bank;
(a) The Borrowers shall have deposited, in the aggregate, One Thousand
Dollars ($1,000) into the Custodian Account;
(a) Each of the Borrowers will have otherwise fully complied with all of
the terms and conditions of the Loan Documents;
<PAGE> 15
(a) Each of the Borrowers will have delivered to the Bank the following, in
form and substance acceptable to the Bank:
(i) a copy of its Articles of Organization certified by the Secretary of
the Commonwealth of the Commonwealth of Massachusetts;
(i) a copy of its by-laws certified by its Clerk;
(i) a copy of resolutions of its Board of Directors authorizing its
execution, delivery and performance of this Agreement, the Note, the Loan
Documents and all instruments and documents provided for herein or
therein, certified by its Clerk;
(i) a good standing certificate for each of the Borrowers, dated as of a
date not more than ten (10) days prior to the Closing Date from the
Secretary of the Commonwealth of the Commonwealth of Massachusetts; and
(i) an incumbency certificate with respect to its officers, certified by
its Clerk.
(a) Counsel of each of the Borrowers will have delivered to the Bank its
favorable legal opinion as to the due organization, existence, qualification to
do business, and good standing of each of Genome and Collaborative, the due
authorization, execution and enforceability of this Agreement and the other Loan
Documents, the absence of pending and threatened litigation, the
non-contravention of other documents, instruments, laws, and regulations, and
such other matters as the Bank may require, in form and substance reasonably
satisfactory to the Bank;
(a) The Bank shall have received the Loan Fee with respect to the initial
Disbursement and all other fees and expenses (including, without limitation,
Bank's legal fees and expenses incurred in the negotiation and preparation of
the Loan Documents and any other fees and expenses of the Bank for UCC searches
or filing fees) required to be paid to Bank on or before the Closing Date;
(a) All representations and warranties of the Borrowers contained herein
are true and correct as of the Closing Date and each of Genome and Collaborative
will have executed and delivered to Bank such certificates with respect thereto
as Bank may require;
(a) There shall have occurred no materially adverse change in the financial
condition, business or prospects of either Genome or
<PAGE> 16
Collaborative between the date of the most recent Financial Statements of
them provided to the Bank and the Closing Date;
(a) Each of Genome and Collaborative shall have provided the Bank or has
caused to be provided to the Bank by the Custodian a current list of investments
held in the Custodian Account and which is in form satisfactory to the Bank.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as the Borrowers are indebted to the Bank hereunder, and until
payment in full of the Note and full and complete performance of all of its
other obligations arising hereunder (except for the Borrowers' obligations under
Section 5.7 or Section 9.1 to indemnify the Bank under certain circumstances
following the payment of the Note), each of the Borrowers shall in all material
respects:
SECTION 5.1 BOOKS AND RECORDS. Keep proper books of record and account in a
manner reasonably satisfactory to the Bank in which full true and correct
entries shall be made of all dealings or transactions in relation to its
business and activities.
SECTION 5.2 INSPECTIONS AND AUDITS. Permit the Bank to make or cause to be made
reasonable inspections and audits of any of its books, records and papers and to
make extracts therefrom and copies thereof at all such reasonable times and as
often as the Bank may reasonably require, provided, however, that certain areas
of the Borrowers' facilities may be restricted for reasons of health and safety
and the Bank will not be permitted access to such restricted areas.
SECTION 5.3 PERFORM OBLIGATIONS. Pay and discharge all of its obligations and
liabilities including, without limitation, all taxes, assessments and
governmental charges upon its income and properties, when due, unless and to the
extent only that such obligations, liabilities, taxes, assessments and
governmental charges are contested in good faith and by appropriate proceedings
and that, to the extent required by generally accepted accounting principles
then in effect, proper and adequate book reserves relating thereto are
established by the Borrowers, and provided that the Bank is reasonably satisfied
that the Accounts are not in danger of being the subject of a Lien (except to
the extent permitted by Section 7.1) or sold, forfeited or lost as a result
thereof and the Borrowers have provided such security or other assurances as
Bank reasonably requests.
<PAGE> 17
SECTION 5.4 FEES AND EXPENSES. Pay upon written request by Bank: (i) up to
$15,000 towards the costs and expenses (including, without limitation, legal
fees, filing fees and UCC search fees, but excluding any Commitment Fee, Loan
Fee or other fee payable to the Bank for this Loan) of the Bank in connection
with the preparation, execution and delivery of this Agreement and the other
Loan Documents; (ii) all costs and expenses of the Bank in enforcing the
Borrowers' (or either of them) performance of and compliance with all agreements
and conditions contained in the Loan Documents on its part to be performed or
complied with or in connection with the negotiation, preparation and execution
and delivery of any amendment, modification or supplement of or to, or any
consent or waiver under, any such document (or any such instrument which is
proposed but not executed and delivered) or relating to any claim or action
threatened, made or brought against the Bank arising out of or relating to any
extent to the Loan Documents, or the transactions contemplated hereby or
thereby; (iii) all costs and expenses (including, without limitation, reasonable
fees and disbursements of counsel) suffered or incurred by the Bank in
connection with the enforcement or the payment of the Note or any other sum due
to it under any of the other Loan Documents or any of its other rights hereunder
or thereunder; and (iv) any and all costs and expenses (which, prior to the
occurrence of an Event of Default, shall not exceed $1,500 per calendar year)
incurred by Bank in conducting lien searches, UCC searches or other due
diligence investigations which the Bank determines are necessary to monitor the
Borrowers' performance hereunder and which are incurred after the Closing Date.
SECTION 5.5 MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS. Preserve and maintain
its corporate existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business except for
transfers (including, without limitation, transfers in the form of paid-up
licenses) for reasonably equivalent value in the normal course of its business.
The Borrowers shall comply in all material respects with all applicable laws,
rules, regulations, orders, writs, decrees and judgments and its charter and
bylaws, and with the material terms of all mortgages, indentures, leases,
contracts and other agreements and instruments binding upon them. The Borrowers
will continue to engage in business of the same general type as now conducted by
them.
SECTION 5.6 INSURANCE. Maintain with financially sound and reputable insurers
insurance with respect to its properties and business against such liabilities,
casualties and contingencies and of such types and in such amounts as shall be
customary for businesses engaged in similar activities in similar geographic
areas. Without limiting the foregoing, the Borrowers will (i) keep
<PAGE> 18
all of its physical property insured against fire and extended coverage risks in
amounts and with deductibles equal to those generally maintained by businesses
engaged in similar activities in similar geographic areas, (ii) maintain all
such workers' compensation or similar insurance as may be required by law, and
(iii) maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, general public liability insurance against claims for bodily injury,
death or property damage occurring on, in or about the Borrowers' properties,
and business interruption insurance. SCHEDULE 5.6 lists insurance of each of
Genome and Collaborative currently in effect. The Borrowers shall furnish to the
Bank, from time to time upon the Bank's request, certificates or other evidence
satisfactory to the Bank of compliance with the foregoing. At such time as it
would be customary for a business engaged in similar activities as Genome or
Collaborative to obtain product liability or other insurance not currently
maintained by Genome or Collaborative or specified herein, Genome and/or
Collaborative, as the case may be, shall obtain and maintain such insurance in
accordance with the provisions of this Section.
SECTION 5.7 CERTAIN TAXES.
(a) If, under any law in effect on the date hereof, or under any law
subsequently enacted, it is determined that any U.S. federal, state or local tax
is payable in respect of the issuance of the Note, or in connection with the
filing or recording of any assignments, mortgages, financing statements, or
other documents (whether measured by the amount of indebtedness secured or
otherwise) as contemplated by this Agreement, then the Borrowers shall pay any
such tax and all interest and penalties thereon, if any, and shall indemnify the
Bank against and save it harmless from any loss or damage resulting from or
arising out of the nonpayment or delay in payment of any such tax.
(a) If any such tax or taxes shall be assessed or levied against the Bank
or any other holder of the Note, the Bank, or such other holder, as the case may
be, may notify the Borrowers and make immediate payment thereof, together with
interest or penalties in connection therewith, and will thereupon be entitled to
and shall receive immediate reimbursement therefor from the Borrowers.
(a) Notwithstanding any other provision contained in this Agreement, the
covenants and agreements of the Borrowers in this Section 5.7 will survive for
four years following the payment of the Note and the termination of this
Agreement.
SECTION 5.8 USE OF PROCEEDS. Use the proceeds of all Disbursements made by the
Bank hereunder only for the purpose
<PAGE> 19
specified in Section 2.2 -- "Use of Proceeds." Neither Genome nor Collaborative
will use any of the proceeds of such Loans, directly or indirectly, for the
purpose of purchasing or carrying any margin stock or for the purpose of
purchasing or carrying or trading in any securities under such circumstances as
to involve Genome, Collaborative or the Bank in a violation of Regulation G, T,
U or X issued by the Federal Reserve Board.
SECTION 5.9 FURTHER ASSURANCES WITH RESPECT TO ACCOUNTS. Promptly supply the
Bank with such information concerning the Investment Account as the Bank may
reasonably request from time to time hereafter, including, without limitation,
Account statements which shall be delivered not less frequently than quarterly
(or more frequently if required pursuant to Section 6.4), which Account
statements will summarize the value of deposits and investments in the Accounts.
SECTION 5.10 FINANCIAL COVENANTS. The Borrowers on a consolidated basis shall at
all times maintain:
(i) A maximum ratio of Total Debt to Net Worth, as calculated on a
quarterly basis, of 0.50:1;
(i) A minimum Current Ratio, as calculated on a quarterly basis, of
1.50:1;
(i) A minimum Adjusted Net Cash Level equal to the then outstanding
principal balance due under the Note plus Twenty Million Dollars
($20,000,000);
(i) A minimum Net Cash Level equal to the then outstanding principal
balance due under the Note plus three (3) months interest thereon at the
applicable rate provided for herein;
(i) A minimum Net Worth of Twenty Million Dollars ($20,000,000); and
(i) Cash and Cash Equivalents, which are not subject to any Lien or claim
of any Person other than the Bank, on hand in the Investment Account equal
to at least the sum of the then outstanding principal balance of the Loan
plus three (3) months interest thereon at the then applicable rate
provided for herein.
The failure of the Borrowers to maintain any of the covenants set forth in this
Section 5.10(i)-(v) and/or the occurrence of an Event of Default under
Section 8.1 of this Agreement shall be a "Trigger Event."
<PAGE> 20
SECTION 5.11 DEPOSITS INTO CUSTODIAN ACCOUNT. Upon the occurrence of a Trigger
Event, the Borrowers will make, or, through the Custodian pursuant to the
Irrevocable Instructions and Power of Attorney cause to be made, payments or
deposits to the Custodian Account such that after giving effect to such payments
or deposits the Restricted Account Balance equals or exceeds the Required
Restricted Account Balance. At the time of each such payment, the Borrowers will
submit to the Bank a statement setting forth the market values of marketable
securities and the Restricted Account Balance as of the date of deposit (after
giving effect to any deposits made on or before such day).
ARTICLE VI
DELIVERY OF FINANCIAL REPORTS,
DOCUMENTS AND OTHER INFORMATION
So long as the Borrowers are indebted to the Bank hereunder and until
payment in full of the Note and full and complete performance of all of their
other obligations arising hereunder, the Borrowers shall deliver to the Bank:
SECTION 6.1 ANNUAL FINANCIAL STATEMENTS. Annually, as soon as available, but in
any event within ninety (90) days after the last day of the fiscal year, (i) the
balance sheet of the Borrowers as of such last day of the fiscal year and
statements of operations, stockholders' equity and cash flows, for such fiscal
year, on a consolidated basis, prepared in accordance with generally accepted
accounting principles consistently applied, in reasonable detail, audited and
opined on by Arthur Anderson LLP or by another firm of independent public
accountants reasonably satisfactory to the Bank (which audit opinion shall
contain no qualification unsatisfactory to the Bank), to present fairly the
financial position and the results of operations of the Borrowers as of the end
of such fiscal year and to have been prepared in accordance with generally
accepted accounting principles and (ii) calculations, certified by the chief
financial officer of each of the Borrowers, demonstrating compliance with the
financial covenants set forth in Section 5.10.
SECTION 6.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available, but in any
event within forty-five (45) days after the end of each fiscal quarter ended on
the last day of each November, February and May, (i) balance sheets for the
Borrowers as of the last day of each such quarter and statements of operations,
and cash flows, for such quarter, all in reasonable detail and on a consolidated
basis and (ii) calculations demonstrating compliance with the financial
covenants set forth in Section 5.10. Each such statement shall be certified on
behalf of the Borrowers by each of
<PAGE> 21
the Borrowers' controller or chief financial officer as fairly presenting the
financial position and the results of operations of the Borrowers as of the end
of such fiscal quarter and as having been prepared in accordance with generally
accepted accounting principles consistently applied (subject to normal
adjustments).
SECTION 6.3 10Q AND 10K FILINGS. At the time its Form 10-Q is released to the
public (which in all events shall be within forty-five (45) days after the end
of the fiscal quarters ended November, February and May or, if later, the date
of the filing of the Form 10-Q with the Securities and Exchange Commission), a
copy of each Form 10-Q; and, each year at the time its Form 10K is released to
the public (which in all events shall be within one hundred twenty (120) days
after the end of the Borrowers' fiscal year), a copy of its Annual Report to
Stockholders along with its Form 10K.
SECTION 6.4 CASH AND COVENANT REPORTS. The following reports, statements or
certificates: (i) at the same time as it delivers the Financial Statements
required under the provisions of Sections 6.1 -- "Annual Financial Statements"
and 6.2 -- "Quarterly Financial Statements", a report as to the calculations
with respect to, and compliance with, the financial covenants set forth in
Section 5.10(i) through 5.10(iv); (ii) within twenty (20) days of the end of
each calendar quarter, a compliance statement, certified by the Chief Financial
Officer of the Borrowers, listing (A) the Borrowers' Adjusted Net Cash Level at
the end of such calendar quarter and the domicile of such cash and investments
and of the Committed R&D Funds for the next 24 months and (B) the cash balances
and Cash Equivalent Balances of the Investment Account as of the end of such
calendar quarter, provided that during any period when the Borrower's Adjusted
Net Cash Level is less than an amount equal to Twenty-Five Million Dollars
($25,000,000) minus the difference between Six Million Dollars ($6,000,000) and
the then outstanding principal balance due under the Loan (i.e. the amount of
principal repayment made under the Loan), the Borrowers shall submit to the
Bank, (i) within twenty (20) days of the end of each calendar month, a
compliance statement indicating the Borrower's actual Adjusted Net Cash Level
and the amount of Committed R&D Funds for the next 24 months and (ii) within ten
(10) days of the end of each calendar month, a cash summary listing all of the
Borrower's cash balances and Cash Equivalent Balances as of month end wherever
domiciled, accompanied by confirming statements of the custodians of such cash
balances and Cash Equivalent Balances; and (iii) within sixty (60) days after
the end of any fiscal year of Borrowers, an annual operating budget for the next
twelve months, shown on at least a quarterly basis and projecting the Adjusted
Net Cash Level for such period in form consistent with the calculation described
in Section 5.10(iii).
<PAGE> 22
SECTION 6.5 OTHER INFORMATION. Promptly after a written request therefor, such
other financial data or information evidencing compliance with the requirements
of this Agreement and the other Loan Documents as the Bank may reasonably
request from time to time.
SECTION 6.6 NO DEFAULT CERTIFICATE. At the same time as it delivers the
Financial Statements required under the provisions of Sections 6.1 -- "Annual
Financial Statements" and 6.2 -- "Quarterly Financial Statements," a certificate
of each of the Borrowers signed on their behalf by an Authorized Signatory or
their controller, to the effect that, to the best of their knowledge, no Trigger
Event hereunder has occurred and is continuing or, if such cannot be so
certified, specifying in reasonable detail the exceptions, if any, to such
statement.
SECTION 6.7 NOTICES.
(a) DEFAULTS. As soon as possible and in any event within seven (7) days
after either of the Borrowers has knowledge of the occurrence or existence of a
Trigger Event or any event which with the giving of notice or passage of time or
both, would constitute either an Event of Default or Trigger Event, the
statement of the Borrowers setting forth details of such Trigger Event or event
and the action which the Borrowers propose to take with respect thereto.
(a) LITIGATION AND JUDGMENTS. Promptly after obtaining knowledge thereof,
written notification of any litigation or legal proceedings instituted against
either of the Borrowers, regardless of the subject matter thereof, having claims
or amounts in controversy of more than $1,000,000 in any one instance or
$2,000,000 in the aggregate at any one time.
(a) ENVIRONMENTAL EVENTS. Promptly after obtaining knowledge or receipt
thereof, written notice of any of the following which has the potential to
materially adversely affect the assets, liabilities, financial condition or
operations of either of the Borrowers: (i) any violation of any Environmental
Laws regarding the Borrowers' operations; (ii) any potential or known Release,
or threat of Release, of any Hazardous Substances at, from or into the
Borrowers' place of business which the Borrowers report in writing or is
reportable in writing (or for which any written report supplemental to any oral
report is made) to any federal, state, or local environmental agency; (iii) any
notice of violation of any Environmental Laws or of any release or threatened
release of Hazardous Substances, including a notice or claim of liability or
potential responsibility from any third party (including without limitation any
federal, state or local governmental officials) and including notice of any
formal inquiry, proceeding, demand,
<PAGE> 23
investigation or other action with regard to the Borrowers' business operation;
or (iv) any expense or loss that has been identified by such governmental
authority in connection with the assessment, containment, removal or remediation
of any Hazardous Substances with respect to which the Borrowers may be liable.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Borrowers are indebted to the Bank hereunder, and until
payment in full of the Note and full and complete performance of all of their
other obligations arising hereunder (except for the Borrowers' obligations under
Sections 5.7 or Section 9.1 to indemnify the Bank under certain circumstances
following the payment of the Note), neither of the Borrowers shall do, or permit
to be done, any of the following:
SECTION 7.1 LIENS. Without the Bank's consent, create or assume or permit to
exist, any Lien upon or with respect to any of its assets, or assign or
otherwise convey any right to receive income except:
(a) Liens in favor of the Bank;
(a) Liens for taxes, assessments or governmental charges or levies on the
Borrowers' property if the same shall not at the time be delinquent or
thereafter can be paid without interest or penalty or are being contested in
good faith and by appropriate proceedings which serve as a matter of law to stay
the enforcement thereof and as to which adequate reserves have been made;
(a) Liens imposed by law, such as carrier's, warehousemen's and mechanic's
liens and other similar Liens arising in the ordinary course of business for
sums not yet due or which are being contested in good faith and by appropriate
proceedings which serve as a matter of law to stay the enforcement thereof and
as to which adequate reserves have been made;
(a) Liens arising out of pledgor deposits under workers' compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(a) Permitted Purchase Money Liens (including, without limitation, Liens
arising in connection with equipment leases);
(a) Rights of other parties under technology licenses from the Borrowers
granted in connection with the development,
<PAGE> 24
manufacture or marketing of pharmaceutical or other products, or otherwise in
the ordinary course of business;
(a) Rights of the United States government in certain technology, the
development of which is or was funded in whole or in part by the United States
government; and
(a) Security deposits under the Borrowers' leased premises.
SECTION 7.2 CHANGES IN BUSINESS; MERGER OR CONSOLIDATION; DISPOSITION OF ASSETS.
Without the Bank's consent:
(a) Consolidate with, merge into or convey or transfer its properties
substantially as an entirety to, any Person, except that the Borrowers may
participate in any merger in which either of the Borrowers is the surviving
entity so long as after giving effect to such merger the Borrowers remain in
compliance with all covenants and conditions of this Agreement.
(a) Make any material change in the nature of its business, or in the nature
of its operations, or liquidate or dissolve itself (or suffer any liquidation or
dissolution).
(a) Effect any disposition of all or any material portion of its assets
(whether in one or more transactions) except that (i) the Borrowers may dispose
of obsolete or worn out equipment, (ii) the Borrowers may replace equipment with
upgraded equipment and may thereafter dispose of the equipment so upgraded and
replaced, (iii) the Borrowers may engage in research and development
transactions (each, an "R&D Transaction") involving the licensing of their
rights in certain technology to other persons and the licensing back of such
rights to them, provided that after giving effect to each such R&D Transaction,
the Borrowers remain in compliance with all covenants and conditions of this
Agreement; and (iv) dispose of other assets in the ordinary course of their
business provided that they receive equivalent value on such disposition of
assets.
SECTION 7.3 CHANGE OF OFFICE ADDRESS. Except upon five (5) days' prior written
notice to the Bank, change the address of their principal office or place of
business or the place where they maintain their records with respect to the
Accounts.
SECTION 7.4 VIOLATION OF AGREEMENT. Take any action the effect of which would
constitute a breach or violation of any provision of this Agreement.
ARTICLE VIII
EVENTS OF DEFAULT
<PAGE> 25
SECTION 8.1 EVENTS OF DEFAULT. If any one or more of the following events
("Event of Default") shall occur and be continuing, the entire unpaid balance of
the principal of and interest on the Note and all other obligations and
Indebtedness of the Borrowers to the Bank arising hereunder and under the other
Loan Documents will, in the case of any Event of Default of the types referred
to in subparagraph (e) hereinbelow, immediately become due and payable without
notice and in the case of any other Event of Default, will immediately become
due and payable upon written notice to that effect given to the Borrowers by the
Bank, without presentment or demand for payment, notice of non-payment, protest
or further notice or demand of any kind, all of which are expressly waived by
the Borrowers. Upon an Event of Default, the Bank shall have the rights and
remedies provided for herein and in the other Loan Documents and under
applicable law and in equity, and the rights and remedies provided for herein
shall be cumulative and in addition to the rights and remedies provided for
therein. Each of the following shall constitute an Event of Default:
(a) Failure by the Borrowers to make any payment when due of any amount
payable under the Loan Documents, which failure is not cured within five (5)
days of the occurrence thereof.
(a) Failure by the Borrowers to make any mandatory payments under any
borrowing agreement (other than the Loan Documents) to which either is a party
within any applicable grace period provided in such agreement or any other
default by either of the Borrowers under any such borrowing agreement and the
failure of them to cure such default within any applicable grace period, but in
any event not later than thirty (30) days after such default, provided that no
Event of Default will be deemed to have occurred under this paragraph (b) with
respect to any indebtedness under any borrowing agreement if payment of such
indebtedness, after notice thereof having been given to the Bank, is being
contested by the Borrowers in good faith and by appropriate proceedings and such
contest operates to prevent the other party to such agreement from exercising
its remedies against the Borrowers or any of their properties and the amount in
dispute is in the aggregate less than $100,000.
(a) Failure by the Borrowers to perform or observe any material term,
condition or covenant of this Agreement or of any of the Loan Documents (other
than the financial covenants set forth in Section 5.10 which shall constitute a
Trigger Event instead) which failure (other than a failure which by its nature
is not capable of cure and other than a failure to perform or observe any term,
condition or covenant referred to or set forth in Subparagraphs
<PAGE> 26
(a), (b) and (c) hereinabove) is not cured within thirty (30) days of the
occurrence thereof.
(a) Any representation or warranty made in writing to the Bank in any of
the Loan Documents or in connection with the making of the Loan or a
certificate, statement or report made or delivered in compliance with this
Agreement, will have been false or misleading in any material respect when made
or delivered.
(a) Either of the Borrowers makes an assignment for the benefit of
creditors, files a petition for bankruptcy, petitions or applies to any tribunal
for the appointment of a receiver, custodian, or any trustee for it or a
substantial part of its assets, or commences any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or there will have been filed any such petition or application, or any
such proceeding has been commenced against it, which remains undismissed for a
period of sixty (60) days or more; or any order for relief is entered in any
such proceeding; or either of the Borrowers by any act or omission indicates its
consent to, approval of or acquiescence in any such petition, application or
proceeding or the appointment of a custodian, receiver or any trustee for it or
any substantial part of any of its properties; or either of Genome or
Collaborative suffers any custodianship, receivership or trusteeship to continue
undischarged for a period of sixty (60) days or more.
(a) Any single judgment of $1,000,000 or more or a combination of unsecured
judgments aggregating $2,000,000 or more against Genome and/or Collaborative
remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a
period of thirty (30) days or more.
(a) Any Loan Document ceases to be in full force and effect in all material
respects for any reason (other than due to the payment in full of all amounts
secured or evidenced thereby or due to discharge in writing by the Bank).
(a) After the occurrence of a Trigger Event under Section 5.10, the failure
of the Borrowers and/or the Custodian to make the requisite transfer to the
Custodian Account as provided in Section 5.11 such that, not later than
5:00 P.M. in New York, New York on the first Business Day following the
occurrence of the Trigger Event, the Restricted Account Balance equals or
exceeds the Required Restricted Account Balance.
(a) After the occurrence of a Trigger Event under Section 5.10, the failure
of either of the Borrowers to execute and deliver, or cause to be executed and
delivered, any additional
<PAGE> 27
documents requested by the Bank in connection with the transfer by the Borrowers
and/or Custodian to the Custodian Account as provided in Section 5.11 (including
without limitation any additional documents requested by the Bank in order to
further implement or perfect the pledge of assets held in the Custodian Account
and any additional opinion of the Borrowers' counsel on such matters the Bank
may require, in a form and substance satisfactory to Bank).
(a) Failure by either of the Borrowers to comply with or make a material
change to its "Investment Policy" described in Section 3.22 hereof without the
Bank's prior written approval, which approval shall not be unreasonably
withheld. A copy of each Borrowers' Investment Policy is attached hereto as
SCHEDULE 8.1.(J).
(a) After the occurrence of a Trigger Event and the initial transfer to the
Custodian Account as provided in Section 5.11, the failure of the Borrowers
and/or the Custodian to make, within one Business Day following the request of
the Bank, such additional transfers to the Custodian Account as may be
necessary, from time to time, to increase the Restricted Account Balance so that
it equals the Required Restricted Account Balance.
(a) The failure by the Borrowers, at any time, to maintain a Adjusted Net
Cash Level equal to an amount equal to the sum of: (i) Fifteen Million Dollars
($15,000,000) plus (ii) the then outstanding principal balance due under the
Note.
(a) The failure by the Borrowers, at any time, to maintain a Net Cash Level
equal to an amount equal to the outstanding principal balance due under the Note
plus three (3) months interest thereon at the then applicable rate provided for
herein.
ARTICLE IX
MISCELLANEOUS PROVISIONS
SECTION 9.1 INDEMNITY; ADDITIONAL FEES. The Borrowers shall indemnify Bank
against, and hold it harmless from, any loss, liabilities, damages, claims, and
reasonable costs and expenses (including attorneys' fees and disbursements)
suffered or incurred by the Bank arising out of, resulting from or in any manner
connected with, the Loan Documents, or any transaction related hereto or
thereto, except any such loss arising solely from the Bank's own gross
negligence or willful misconduct. The provisions of this Section 9.1 will
survive for a period of three (3) years following the repayment of the Note and
the termination of this Agreement.
<PAGE> 28
SECTION 9.2 SURVIVAL OF AGREEMENTS AND REPRESENTATIONS. All agreements,
representations and warranties made herein will survive the delivery of the Loan
Documents and shall be in full force and effect during the term of this
Agreement.
SECTION 9.3 MODIFICATIONS, CONSENTS AND WAIVERS. No modification, amendment or
waiver of or with respect to any provision of the Loan Documents, nor consent to
any departure by a party from any of the terms or conditions thereof shall in
any event be effective unless it is in writing and signed by the party against
whom such modification, amendment, waiver or consent is sought to be enforced.
Any such waiver or consent will be effective only in the specific instance and
for the purpose for which given. No consent to or demand on the Borrowers in any
case will, of itself, entitle it to any other or further notice or demand in
similar or other circumstances.
SECTION 9.4 ENTIRE AGREEMENT. This Agreement and the other Loan Documents embody
the entire agreement and understanding between the Bank and the Borrowers and
supersede all prior agreements and understandings relating to the subject matter
hereof.
SECTION 9.5 REMEDIES CUMULATIVE. Each and every right granted to the Bank
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, is cumulative and may be exercised
from time to time. No failure on the part of the Bank or the holder of the Note
to exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor will any single or partial exercise of any right preclude any other
or future exercise thereof or the exercise of any other right.
SECTION 9.6 FURTHER ASSURANCES. At any time and from time to time, upon the
request of the Bank, the Borrowers shall execute, deliver and acknowledge or
cause to be executed, delivered and acknowledged such further documents and
instruments and do such other acts and things as the Bank may reasonably request
to fully effect the purposes of the Loan Documents and any other agreements,
instruments and documents delivered pursuant hereto or in connection with the
Loan.
SECTION 9.7 NOTICES. All notices, requests, reports and other communications
pursuant to this Agreement must be in writing, either by letter (delivered by
hand or commercial delivery service or sent by certified mail, return receipt
requested, except for routine reports which may be by ordinary first class mail)
or facsimile or telecopier, addressed as follows:
<PAGE> 29
If to Genome or Collaborative:
Genome Therapeutics Corp. or
Collaborative Securities Corp.
100 Beaver Street
Waltham, MA 02154
Attn: Mr. Fenel M. Eloi, Treasurer and CFO
Telephone: (617)
Facsimile: (617)
If to Borrower's counsel:
Ropes & Gray
One International Place
Boston, MA 02110
Attn: David A. McKay, Esq.
Telephone: (617) 951-7000
Facsimile: (617) 951-7050
If to Bank:
The Sumitomo Bank, Limited
One Post Office Square, Suite 3820 Boston, MA 02109
Attn: Daniel G. Eastman, Vice President
Telephone: (617) 451-3200
Facsimile: (617) 423-4884
and
The Sumitomo Bank, Limited
233 S. Wacker Drive, Suite 5400
Chicago, IL 60606
Attn: Stan Marciniak, Vice President
Telephone: (312) 993-6210
Facsimile: (312) 876-1993
If to Bank's Counsel:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: Paul P. Daley, Esq.
Telephone: (617) 526-6000
Facsimile: (617) 526-5000
Any notice, request or communication hereunder will be deemed to have been given
(i) on the day on which it is delivered by hand to such party at its address
specified above, (ii) if sent by mail, on the third (3rd) Business Day following
the day it was deposited in the mail, postage prepaid, or (iii) if sent by
telecopy, when
<PAGE> 30
transmitted addressed as aforesaid on a Business Day during normal business
hours and receipt is confirmed, on such Business Day. Any party may change the
person or address to whom or which notices are to be given hereunder, by notice
duly given hereunder, provided, however, that any such notice will be deemed to
have been given hereunder only when actually received by the party to which it
is addressed.
SECTION 9.8 CONSTRUCTION; GOVERNING LAW.
(a) The headings used in this Agreement and the table of contents are for
convenience only and will not be deemed to constitute a part hereof. All uses
herein of the masculine gender or of singular or plural terms will be deemed to
include uses of the feminine or neuter gender or plural or singular terms, as
the context may require. All references herein (including the definitions set
out in APPENDIX A hereto) to any agreements shall be to such agreement as
amended or modified to the date of reference. All references to a particular
entity shall include a reference to such entity's successors and permitted
assigns. The words "herein," "hereof" and "hereunder" refer to this Agreement as
a whole and not to any particular section or subsection of this Agreement.
"Including" means "including, without limitation".
(a) THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REFERENCE
TO ITS CONFLICT OF LAWS RULES.
SECTION 9.9 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, ANY LOAN DOCUMENT OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF
THE BORROWERS OR THE BANK. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK
PROVIDING THE LOAN DESCRIBED HEREIN.
SECTION 9.10 JURISDICTION.
(a) Each of the Borrowers and the Bank hereby irrevocably and
unconditionally submits, for itself and its property, to service of process
(directly or on an agent) in Massachusetts to the nonexclusive jurisdiction of
any Massachusetts state court or Federal court of the United States of America
in each case sitting in Boston, and any appellate court handling an appeal from
any thereof, in any action or proceeding arising out of or relating to this
Agreement or any other Loan Agreement, or for recognition or enforcement of any
judgment, and each of the Borrowers and the Bank hereby irrevocably and
unconditionally agree that all claims in respect of any such action or
proceeding may be heard and determined in such Massachusetts state or, to the
extent permitted
<PAGE> 31
by law, in such Federal court. Each of the Borrowers and the Bank agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that a party
may otherwise have to bring any action or proceeding relating to this Agreement
or any other Loan Agreement against any other party or its respective properties
in the court of any jurisdiction.
(a) Each of the Borrowers and the Bank hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement in
any such Massachusetts state or Federal court. Each of the Borrowers and the
Bank hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.
SECTION 9.11 RELATIONSHIP OF THE BORROWERS AND THE BANK. The Borrowers and the
Bank agree that nothing contained in this Agreement or any other document
executed in connection with the Loan is intended or shall be construed to
establish the Borrowers and the Bank as joint venturers or partners; and the
Borrowers hereby indemnify and agree to hold the Bank, its officers, directors,
agents and employees harmless from any and all damages resulting from such a
construction of the relationship of the parties hereto, except any such damage
arising solely from the Bank's own gross negligence or willful misconduct.
SECTION 9.12 SEVERABILITY. The provisions of this Agreement are severable, and
if any clause or provision hereof shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or unenforceability
will affect only such clause or provision, or part thereof, in such jurisdiction
and will not in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision in this Agreement in any
jurisdiction. Each of the covenants, agreements and conditions contained in this
Agreement is independent and compliance by the Borrowers with any of them will
not excuse noncompliance by the Borrowers with any other.
SECTION 9.13 BINDING EFFECT; ASSIGNMENT.
(a) This Agreement will be binding upon and inure to the benefit of the
Borrowers and their successors and assigns as permitted herein and to the
benefit of Bank and its successors and assigns.
<PAGE> 32
(a) The rights and obligations of the Borrowers under this Agreement may
not be assigned or delegated without the prior written consent of the Bank, and
any purported assignment or delegation without such consent shall be void.
(a) Bank, without the consent of the Borrowers, may at any time assign or
grant participations to any other Person in all or part of its rights and
obligations under the Loan Documents; PROVIDED, HOWEVER, that no such assignment
or participation may be made or shall be effective unless the Bank shall have
delivered prior notice thereof to the Borrowers of the proposed effective date
and amount of such assignment or participation and the identity of the proposed
assignee or participant. The Bank shall be the agent of all such assignees and
participants for the purpose of the receipt and delivery of funds and notices
under the Loan Documents unless the Borrowers otherwise consent (which consent
will not unreasonably be withheld).
SECTION 9.14 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed an original, but all of which will constitute one and
the same document.
SECTION 9.15 JOINT AND SEVERAL OBLIGATIONS. The obligations of the Borrowers
hereunder shall be joint and several.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COLLABORATIVE SECURITIES CORP. GENOME THERAPEUTICS CORP.
By: ____________________________ By: ____________________________
Title: _________________________ Title: _________________________
THE SUMITOMO BANK, LIMITED
By: ____________________________
Title: _________________________
By: ____________________________
Title: _________________________
<PAGE> 33
APPENDIX A TO LOAN AGREEMENT -- DEFINITIONS
The following words shall have the meanings specified below in the
Section of the Agreement referred to below.
"ACCOUNTS" -- the Investment Account and the Custodian Account.
"ACTUAL CASH BURN" -- the amount of the actual reduction in the
Borrowers' Cash and Cash Equivalents (including short-term and long-term
investments) as calculated as of the last day of each calendar quarter for the
period commencing with the first day of such quarter and ending on the last day
of such calendar quarter and as determined by the Bank, in its sole discretion,
based upon the financial reports delivered to Bank by Borrowers pursuant to
Article VI (including without limitation the reports provided pursuant to
Section 6.4).
"ADJUSTED NET CASH LEVEL" -- the aggregate amount of the market value
of Cash and Cash Equivalents plus, to the extent not otherwise included, the
aggregate amount of Committed R&D Funds, less otherwise restricted cash and
amounts which may be restricted in the future pursuant to existing or future
agreements between the Borrowers (or either of them) and third parties.
"ADVANCE TERMINATION DATE" -- June 30, 1998.
"AFFILIATE" -- as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean possession
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise). The term "Affiliate" shall not
include any Person who controls another Person solely by virtue of such Person's
position as a corporate officer or director of such other Person.
"AGREEMENT" -- is defined in the Preamble.
"APPLICABLE MARGIN" -- for any Eurodollar Rate Loan portion shall be
one and one-half percent (1.5%).
"AUTHORIZED SIGNATORY" -- with respect to a corporation, any officer of
such corporation.
"BAILEE" -- is defined in Subsection 2.6(b).
<PAGE> 34
"BANK" -- is defined in the Preamble.
"BORROWER" -- is either Genome or Collaborative.
"BORROWERS" -- is defined in the Preamble.
"BUSINESS DAY" -- a day when commercial banks in both Boston,
Massachusetts and Chicago, Illinois and, in the case of setting the Reserve
Adjusted Eurodollar Rate, London, England, are open for business with respect to
transactions of the kind contemplated in this Agreement.
"CERCLA" -- is defined in Subsection 3.16(a).
"CASH AND CASH EQUIVALENTS" -- liquid investments, consisting of cash
and cash equivalents and other investments in investment grade securities, that
are classified on the Borrower's consolidated balance sheet as current,
noncurrent, long-term or restricted.
"CASH EQUIVALENT BALANCES" -- the aggregate amount of the lower of cost
or market value of Cash Equivalents, as reported in the Financial Statements.
"CLOSING DATE" -- July __, 1997.
"CODE" -- the Internal Revenue Code of 1986, as amended.
"COLLABORATIVE" -- Collaborative Securities Corp., a Massachusetts
corporation.
"COLLATERAL BAILMENT AGREEMENT" -- the Collateral Bailment Agreement of
even date herewith by and between the Bank and Sumitomo Bank of New York Trust
Company.
"COMMITTED R&D FUNDS" -- the aggregate amount of funds due to or
receivable by the Borrowers from a Person pursuant to a collaboration or similar
agreement with respect to research and development in the biotechnology field,
provided (i) such funds are due and payable pursuant to a written agreement, a
copy of which has been provided the Bank, within the twenty-four (24) months
following the date of determination, (ii) no amounts due to the Borrowers under
such agreement have remained unpaid for more than 45 days beyond their due date,
(iii) such Person has annual sales of at least $500,000,000 and a net worth of
at least $50,000,000 and is not the subject of any proceeding of the type
described in Section 8.1(e) hereof (with such Person being substituted for the
Borrowers), and (iv) the payment of such funds are not subject to any
contingency, such as the attainment of any milestones, other than solely the
passage of time.
<PAGE> 35
"CONTROLLED GROUP" -- all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414(b), 414(c) or 414(m) of the Code and Section 4001(a)(2) of ERISA.
"CURRENT RATIO" -- the ratio of total current assets to total current
liabilities.
"CUSTODIAN ACCOUNT" -- is defined in Subsection 2.6(b).
"CUSTODIAN" -- is defined in Subsection 2.6(a).
"CUSTODIAN AGREEMENT" -- Custodian Agreement of even date herewith by
and between the Borrower and Sumitomo Bank of New York Trust Company.
"DEFAULT RATE" -- is defined in Subsection 2.3(c).
"DISBURSEMENT" -- a disbursement of available proceeds of the Loan.
"DISPOSAL," "DISPOSE(d)" -- as specified in RCRA and in the regulations
promulgated thereunder.
"ELECTION NOTICE" -- is defined in Subsection 2.1(c).
"EPA" -- is defined in Subsection 3.16(b).
"ENVIRONMENTAL LAWS" -- is defined in Subsection 3.16(b).
"ERISA" -- is defined in Section 3.15.
"EUROCURRENCY RESERVE PERCENTAGE" -- with respect to each Interest
Period, a percentage (expressed as a decimal) equal to the percentage (if any)
in effect two Business Days prior to the first day of such Interest Period, as
prescribed by the F.R.S. Board, for determining reserve requirements applicable
to "Eurocurrency liabilities" pursuant to Regulation D or any other then
applicable regulation of the F.R.S. Board which prescribes reserve requirements
applicable to "Eurocurrency liabilities," as presently defined in said
Regulation D. For purposes of this definition, Eurodollar Rate Loan Portions
hereunder shall be deemed to be "Eurocurrency liabilities" as defined in said
Regulation D.
"EURODOLLAR RATE LOAN PORTION -- any portion of the Loan, which the
Borrowers have notified the Bank (in accordance with the provisions of Section
2.1) is to bear interest at the Reserve
<PAGE> 36
Adjusted Eurodollar Rate plus the Applicable Margin for the applicable Interest
Period.
"EURODOLLAR RATE" -- for any Eurodollar Rate Loan Portion, with respect
to the applicable Interest Period relating to such Eurodollar Rate Loan Portion,
the rate per annum (rounded up to the next whole multiple of 1/16 of 1%) equal
to the rate at which United States dollar deposits are offered to the Bank in
the London interbank Eurodollar market as of approximately 11:00 a.m., London,
England time, on the second Business Day prior to the first day of such Interest
Period for delivery in immediately available funds on the first day of such
Interest Period for the number of days in such Interest Period and in an amount
equal to the amount of the Eurodollar Rate Loan Portion.
"EVENT OF DEFAULT" -- is defined in Section 8.1.
"FINANCIAL STATEMENTS"
(a) the audited consolidated balance sheet and consolidated
statements of operations, shareholders' equity and cash flows of
Borrowers for the fiscal year then ended, together with the unqualified
opinion of the independent public accountants preparing such
statements; and
(b) the quarterly unaudited consolidated balance sheet and
unaudited consolidated statements of operations, and cash flows for
Borrowers for the fiscal quarters ended November, February and May,
certified as to accuracy by the Chief Financial Officer or controller
of each Borrower, provided, however, that such quarterly unaudited
financial statements may not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
"FINANCING STATEMENT" -- a financing statement or statements on form
UCC-1, signed by the Borrowers and describing the property in which the Bank has
a security interest under the Restricted Account and Security Agreement, all in
form and substance suitable for filing as a financing statement under Article 9
of the Uniform Commercial Code as enacted in Massachusetts and/or New York.
"GENOME" -- Genome Therapeutics Corp., a Massachusetts corporation.
"HAZARDOUS SUBSTANCES" -- is defined in Subsection 3.16(b).
"INDEBTEDNESS" -- with respect to any Person, all:
<PAGE> 37
(a) all indebtedness, liabilities or other obligations of such
Person for borrowed money or for the deferred purchase price of
property or services (excluding trade accounts payable and accrued
obligations incurred in the ordinary course of business) and any other
liabilities, which in accordance with generally accepted accounting
principles would be included in determining total liabilities as shown
on the liability side of a balance sheet of such Person at the date as
of which such Indebtedness is to be determined, excluding all operating
lease obligations, as determined in accordance with generally accepted
accounting principles consistently applied and any other contingent
liabilities of such Person;
(b) all indebtedness, liabilities or obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations
so evidenced incurred in connection with the acquisition of property,
assets or businesses;
(c) all reimbursement and other obligations of such Person in
respect of letters of credit and bankers acceptance and all net
obligations in respect of interest rate swaps, caps, floors and
collars, currency swaps, and other similar financial products;
(d) all indebtedness created or arising under any conditional
sale or other title retention agreement with respect to property
acquired by such Person;
(e) all obligations under leases which shall have been or should
be, in accordance with GAAP, recorded as capital leases; and
(f) all indebtedness of another Person of the types referred to
in clauses (a) through (e) guaranteed directly or indirectly in any
manner by the Person for whom Indebtedness is being determined, or in
effect guaranteed directly or indirectly by such Person through an
agreement to purchase or acquire such indebtedness, to advance or
supply funds for the payment or purchase of such indebtedness or
otherwise assure a creditor against loss, or secured by any Lien upon
or in property owned by the Person for whom Indebtedness is being
determined, whether or not such Person has assumed or become liable for
the payment of such indebtedness of such other Person.
"INTELLECTUAL PROPERTY RIGHTS" -- is defined in Section 3.11.
"INTEREST DIFFERENTIAL" -- with respect to any prepayment of a
Eurodollar Rate Loan Portion on a day other than an Interest Payment Date
falling at the end of the applicable Interest Period,
<PAGE> 38
the sum of: (a) the per annum interest rate payable with respect to such
Eurodollar Rate Loan Portion as of the date of the prepayment MINUS (b) what the
Reserve Adjusted Eurodollar Rate plus the Applicable Margin would have been on,
or as near as practicable to, the date of the prepayment for a Eurodollar Rate
Loan Portion for a period commencing on such date and ending on the last day of
the applicable Interest Period. The determination of the Interest Differential
by the Bank shall be conclusive in the absence of manifest error.
"INTEREST PAYMENT DATE" -- with respect to any Loan Portion, the
earlier to occur of (a) the last Business Day of each calendar month occurring
within an Interest Period; or (b) the last day of each applicable Interest
Period; or (c) the date that the Loan Portion is due by either the occurrence of
Maturity Date or an Event of Default having occurred and the maturity of the
Loan having been accelerated pursuant to the terms of the Loan Documents.
"INTEREST PERIOD" -- as to any Eurodollar Rate Loan Portion, the period
commencing on the date of the initial funding of such Eurodollar Rate Loan
Portion or the last day of the immediately preceding Interest Period for any
Eurodollar Rate Loan Portion that is to be continued as a Eurodollar Rate Loan
Portion and ending, with respect to such Eurodollar Rate Loan Portion, on the
numerically corresponding day (or if there is no numerically corresponding day,
on the last day), in the calendar month that is one, two, three, six or, if
available, twelve months thereafter, in each case as the Borrower may elect in
the Election Notice; provided however, that (a) no Interest Period with respect
to any Eurodollar Rate Loan Portion shall end later than the Maturity Date, (b)
if an Interest Period would end on a day that it is not a Business Day, such
Interest Period shall be extended to the next succeeding Business Day unless
such next succeeding day would fall in the next calendar month, in which case,
such Interest Period shall end on the immediately preceding Business Day, and
(c) interest shall accrue from and including the first day of an Interest Period
to but excluding the last Business Day of such Interest Period.
"INTEREST RESERVE" -- on any date of determination means an amount
equal to the interest that would accrue in three months on an amount equal to
the principal balance of the Loan outstanding on such date of determination.
"INVESTMENT ACCOUNT" -- is defined in Subsection 2.6(a).
"IRREVOCABLE INSTRUCTIONS AND POWER OF ATTORNEY" -- is defined in
Subsection 2.6(b).
<PAGE> 39
"IRS" -- is defined in Subsection 3.15(a).
"LIEN" -- any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement and any
lease in the nature of a security interest or lien).
"LOAN" -- is defined in Section 2.1.
"LOAN DOCUMENTS" -- this Agreement, the Note, the Restricted Account
and Security Agreement, the Collateral Bailment Agreement, the Irrevocable
Instructions and Power of Attorney, the Custodian Agreement, and all other
documents executed and delivered in connection herewith or therewith, including
all amendments, modifications and supplements of or all such documents.
"LOAN FEE" -- is defined in Subsection 2.3(d).
"LOAN PORTION" -- as the circumstances or context warrants, the portion
of the Loan which is a Eurodollar Rate Loan Portion, or Prime Rate Loan Portion.
"MATURITY DATE" -- May 31, 2002.
"NET CASH LEVEL" -- the aggregate amount of the market value of Cash
and Cash Equivalents, less otherwise restricted cash and amounts which may be
restricted in the future pursuant to existing or future agreements between the
Borrowers (or either of them) and third parties.
"NET WORTH" -- an amount equal to the Total Assets minus Total Debt.
"NOTE" -- is defined in Section 2.1.
"PBGC" -- is defined in Subsection 3.15(a).
"PERMITTED PURCHASE MONEY LIENS" -- purchase money security interests
in personal property acquired after the date hereof to secure purchase money
Indebtedness, to the extent that the amount of money borrowed does not exceed
the value of the personal property purchased, and the security interest granted
does not extend beyond the personal property purchased.
"PERSON" -- an individual, a corporation, a partnership, a joint
venture, a trust or unincorporated organization, a joint stock company or other
similar organization, a government or any political subdivision thereof, a
court, or any other legal entity, whether acting in an individual, fiduciary or
other capacity.
<PAGE> 40
"PLAN(S)" -- is defined in Subsection 3.15(a) hereof.
"PRIME RATE" -- the higher of (i) the interest rate which the Bank
announces from time to time as its floating prime rate in the United States and
(ii) the federal funds rate announced from time to time plus one-half percent
(0.5%).
"PRIME RATE LOAN PORTION" -- any portion of the Loan which bears
interest at the Prime Rate as provided in Section 2.1 or 2.7.
"RCRA" -- is defined in Subsection 3.16(a).
"R&D TRANSACTION" -- is defined in Subsection 7.2(c).
"REGULATORY CHANGE" -- any change after the date of this Agreement in
United States federal, state or local laws or regulations or the adoption or
making after such date of any interpretations, directives or requests applying
to a class of banks including the Bank of or under any United States federal,
state, or local laws or regulations (whether or not having the force of law) by
any court or governmental or monetary authority charged with the interpretation
or administration thereof.
"RELEASE" -- as specified in CERCLA.
"REPORTING PERIOD" -- a fiscal quarter of the Borrowers.
"REQUIRED RESTRICTED ACCOUNT BALANCE" -- on and after a Trigger Event
has occurred, the sum of the Borrower's then outstanding principal balance of
the Loan PLUS the Interest Reserve.
"RESERVE ADJUSTED EURODOLLAR RATE" -- with respect to any Eurodollar
Rate Loan Portion for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined pursuant to the following
formula:
Reserve Adjusted = EURODOLLAR RATE
---------------- -------------------------------------
Eurodollar Rate 1 - Eurocurrency Reserve Percentage
"RESTRICTED ACCOUNT AND SECURITY AGREEMENT" -- the Restricted Account
and Security Agreement of even date herewith by and between the Bank and the
Borrowers.
"RESTRICTED ACCOUNT BALANCE" -- the sum of all Cash and Cash
Equivalents and any other investments on deposit in the Custodian Account, the
amount of such Cash Equivalents or investments to be calculated at the lower of
cost or market value.
<PAGE> 41
"SARA" -- is defined in Subsection 3.16(a).
"SUBSIDIARY" -- any person of which a Borrower owns directly or
indirectly: (i) sufficient capital stock to enable it to elect at least a
majority of the board of directors or similar managing body of such person, or
(ii) capital stock with rights under the charter documents of such Person to
elect a director or similar managing official with the power to veto material
business decisions and organizational changes.
"TAXES" -- is defined in Subsection 2.5(a).
"TOTAL ASSETS" -- total assets as determined in accordance with
generally accepted accounting principles, consistently applied; provided,
however, that Total Assets shall be reduced by the amount (if any) of intangible
assets (other than intangible assets consisting of patent and trademark costs as
shown on the Company's Financial Statements and determined in accordance with,
and consistent with, both generally accepted accounting principals consistently
applied and the Company's accounting practices prior to the date hereof.
"TOTAL DEBT" -- the aggregate amount of the Borrowers' Indebtedness.
"TRIGGER EVENT" -- is defined in Section 5.10.
"UCC" -- the Uniform Commercial Code in effect from time to time in the
relevant jurisdiction.
<PAGE> 42
NOTE
$6,000,000.00 Boston, Massachusetts
July 31, 1997
FOR VALUE RECEIVED, GENOME THERAPEUTICS CORP., a Massachusetts
corporation and its wholly owned subsidiary, Collaborative Securities Corp., a
Massachusetts corporation (together "Borrower"), hereby jointly and severally
promise to pay to the order of The Sumitomo Bank, Limited, a Japanese banking
corporation ("Bank"), without counterclaim, offset or deduction, the principal
sum of SIX MILLION DOLLARS ($6,000,000) or, if less, the aggregate unpaid
principal amount of all Disbursements (as defined in the Loan Agreement), in
accordance with the terms of the Loan Agreement (referred to below) and to pay
interest on the outstanding principal balance at the interest rates and at such
times as provided in the Loan Agreement and elected by Borrower and calculated
in accordance with the terms of Loan Agreement. This Note is the Note referred
to in the Loan Agreement, of even date herewith, between Borrower and Bank, and
is subject to all of the terms and conditions of the Loan Agreement (which are
incorporated herein by reference), including the rights of prepayment and the
rights of acceleration of maturity. Terms used herein have the meanings assigned
to those terms in the Loan Agreement, unless otherwise defined herein.
Interest on the unpaid principal balance hereunder shall be paid
commencing on the Closing Date and shall be paid monthly in arrears on the first
Business Day of each full calendar month hereafter until the Maturity Date
(defined below) at which time all unpaid interest shall be due and payable. The
unpaid principal balance hereunder shall be paid in forty-eight (48) equal
consecutive monthly installments of principal (each installment being in an
amount sufficient to amortize the outstanding principal balance of the Loan over
a period of forty-eight (48) months), payable on the first Business Day of each
calendar month commencing with the first payment due on July 1, 1998 and
continuing until May 31, 2002 (the "Maturity Date"), on which date Borrower
shall make a final payment in an amount equal to all of the then unpaid
principal of the Loan and all unpaid interest thereon, provided, however, that
repayment of any or all of the outstanding principal balance hereunder and all
accrued and unpaid interest thereon may be accelerated by Bank as hereinafter
provided upon the occurrence of any failure to make any payment required under
this Note and/or any Event of Default under the Loan Agreement. Any installment
of interest only or of
<PAGE> 43
principal and interest paid more than five (5) days late or any other amount
payable hereunder which is not paid when due will bear (and Borrower shall pay)
interest (to the extent permitted by law) from such due date until such unpaid
amount has been paid in full (whether before or after judgment) at a rate per
annum equal to the Default Rate.
Borrower hereby authorizes Bank to record on schedule(s) annexed to
this Note (a) the date and amount of each portion of the Loan which constitutes
a Eurodollar Rate Loan Portion or Prime Rate Loan Portion; (b) the term of the
Interest Period for the Eurodollar Rate Loan Portion; (c) the interest rate or
rates for each Eurodollar Rate Loan Portion or Prime Rate Loan Portion and the
effective date(s) of all changes in such rates; (d) the date and amount of each
interest only payment on each Eurodollar Rate Loan Portion or Prime Rate Loan
Portion; and (e) the date and amount of each principal and interest payment on
each Eurodollar Rate Loan Portion or Prime Rate Loan Portion and of each
prepayment of principal made by Borrower, and Borrower agrees that all such
notations shall constitute PRIMA FACIE evidence of the matters noted. Bank's
failure to record such information shall not reduce or affect the obligations of
Borrower hereunder or under the Loan Agreement.
Upon the occurrence of any failure to make a payment required under
this Note and/or any Event of Default under the Loan Agreement, Bank, at its
option and without further notice, demand, or presentment for payment to
Borrower, may declare immediately due and payable the unpaid principal balance
and interest accrued thereon together with all other sums owed by Borrower under
this Note and the Loan Documents (including, but not limited to attorneys' fees
as provided below), anything in this Note and the Loan Documents to the contrary
notwithstanding. Notwithstanding the foregoing, under certain circumstances as
provided in the Loan Agreement or under applicable law, the unpaid principal
balance and interest accrued thereon together with all other sums owed by
Borrower under this Note and the Loan Documents (including, but not limited to,
attorneys fees as provided below) shall automatically become due and payable.
Payment of such sums may be enforced and recovered in whole or in part at any
time by one or more of the remedies provided to Bank in this Note or the Loan
Documents. All amounts so accelerated under this Note or the Loan Documents, or
all such amounts that become due and payable on the Maturity Date but remain
unpaid, shall in each case (without need for further notice) bear interest from
the date of such acceleration or the Maturity Date, as applicable, until the
date such amounts are paid in full at a rate per annum equal to the Default
Rate.
<PAGE> 44
Borrower shall make all payments hereunder in lawful money of the
United States and in immediately available funds to Bank's account by means of a
wire transfer addressed as follows: The Sumitomo Bank, Limited, Chicago Bank,
ABA 071001850, through the Federal Reserve Bank of Chicago, Reference: Genome
Therapeutics Corp. The computation of interest hereunder shall be on the basis
of a 360 day year, for actual days elapsed.
All agreements between Borrower and Bank, whether now existing or
hereafter arising, are hereby limited so that in no event shall the interest
charged hereunder or under the Loan Agreement or any other charges hereunder or
under the Loan Agreement which may at any time be deemed to be interest or
agreed to be paid to Bank exceed the maximum amount permissible under applicable
law. Bank shall be entitled to amortize, prorate and spread throughout the full
term of this Note all interest paid or payable so that the interest paid does
not exceed the maximum amount permitted by law. In the event that the total
liability for payments of interest and payments in the nature of interest,
including without limitation, all charges, fees or other sums which may at any
time be deemed to be interest, shall for any reason whatsoever, result in an
effective rate of interest that for any interest payment period exceeds the
amount which Bank may lawfully collect, then the interest rate shall
automatically be reduced to the maximum rate permitted by law and all sums in
excess of those lawfully collectible as interest for the period in question
shall, without further notice to any party hereto, be applied as a premium-free
reduction of the principal balance, provided, however, that Bank may, at any
time, and from time to time, elect, by notice in writing to Borrower, to waive,
reduce or limit the collection of any sums (or refund to Borrower any sums
collected) in excess of those lawfully collectible as interest rather than
accept such sums as prepayment of the principal balance.
Borrower shall pay all reasonable fees, costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the preparation and negotiation
of this Note and the Loan Documents and in the enforcement or attempt to enforce
any of Borrower's obligations hereunder not performed when due, whether or not
any legal action is actually filed, litigated or prosecuted to judgment of
award. This Note shall be governed by, construed and interpreted in accordance
with the laws of the Commonwealth of Massachusetts.
Time is of the essence in the performance of the obligations evidenced
by this Note. In the event that Borrower defaults under this Note, or an Event
of Default occurs under the Loan Agreement, Bank shall have all of the rights
and remedies provided for in any of the Loan Documents or at law or in equity.
<PAGE> 45
The remedies of Bank shall be cumulative and may be exercised from time to time.
No failure on the part of Bank or the holder of the Note to exercise, and no
delay in exercising, any right shall operate as a waiver thereof, nor will any
single or partial exercise of any right preclude any other or future exercise
thereof or the exercise of any other right. Borrower hereby waives diligence,
presentment for payment, demand, notice of demand, notice of non-payment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note, except such notices as are required under the terms of
any of the Loan Documents.
If this Note is destroyed, lost or stolen, Borrower shall deliver a new
note to Bank on the same terms and conditions as this Note, with all appropriate
schedules annexed thereto, in substitution of the prior Note. Bank shall furnish
to Borrower reasonable evidence that the Note was destroyed, lost or stolen, and
any security or indemnity that may be reasonably required by Borrower in
connection with the replacement of the Note.
<PAGE> 46
Executed as an instrument under seal as of the day and date referred to
above.
GENOME THERAPEUTICS CORP.
_____________________________ By: ____________________________
Attest
Name: __________________________
Title:__________________________
COLLABORATIVE SECURITIES CORP.
_____________________________ By: ____________________________
Attest
Name: __________________________
Title:__________________________
<PAGE> 1
EXHIBIT 11.1
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING
PRIMARY NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding during the
year.................................................... 12,287,918 15,530,639 17,617,614
Weighted average common stock equivalents outstanding
during the year......................................... 673,816 2,599,155 --
---------- ---------- ----------
12,961,734 18,129,794 17,617,614
========== ========== ==========
</TABLE>
CALCULATION OF SHARES USED IN DETERMINING
FULLY DILUTED NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding during the
year.................................................... 12,287,918 15,530,639 17,617,614
Weighted average common stock equivalents outstanding
during the year......................................... 748,823 2,599,155 --
---------- ---------- ----------
13,036,741 18,129,794 17,617,614
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Form S-8 Registration Statements No. 2-77846, No. 2-81123, No. 2-95446, No.
33-12633, No. 33-27885, No. 33-45432, No. 0-10824, No. 03-361191, No. 333-30617
and No. 333-15935.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,603
<SECURITIES> 38,939
<RECEIVABLES> 55
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,462
<PP&E> 15,724
<DEPRECIATION> 5,353
<TOTAL-ASSETS> 60,688
<CURRENT-LIABILITIES> 9,593
<BONDS> 0
0
0
<COMMON> 1,778
<OTHER-SE> 42,168
<TOTAL-LIABILITY-AND-EQUITY> 60,688
<SALES> 0
<TOTAL-REVENUES> 19,619
<CGS> 0
<TOTAL-COSTS> 30,211
<OTHER-EXPENSES> 79
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 631
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,302)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> 0
</TABLE>
