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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: May 30, 1998
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
- ------------------------------------------ --------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK 18,306,839
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$.10 PAR VALUE Outstanding July 10, 1998
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Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
Page
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Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of
August 31, 1997 and May 30, 1998 3
Consolidated Condensed Statements of Operations
for the 39 week period ended May 31, 1997
and May 30, 1998 4
Consolidated Statements of Cash Flows for the
39 week period ended May 31, 1997
and May 30,1998 5
Notes to Consolidated Condensed Financial
Statements for the 39 week period ended
May 31, 1997 and May 30, 1998 6-12
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 13-19
Part II
Other Information:
Other Information 20
Signature 21
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
August 31, May 30,
1997 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,602,698 $11,936,574
Marketable securities 34,814,601 23,475,214
Interest receivable 1,280,611 753,848
Accounts receivable 55,142 34,305
Unbilled costs and fees 140,320 831,952
Note receivable from officer 160,000 0
Prepaid expenses and other current assets 408,240 525,976
----------- -----------
Total current assets 45,461,612 37,557,869
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 11,855,630 14,405,616
Leasehold improvements 1,964,981 7,621,123
Office Equipment and furniture 792,342 1,378,793
Construction-in-progress 1,111,526 271,506
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15,724,479 23,677,038
Less accumulated depreciation
and amortization 5,352,999 7,846,828
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10,371,480 15,830,210
Restricted cash 301,500 301,500
Long-term marketable securities 4,124,798 3,523,878
Note receivable from officer 0 160,000
Other assets 428,989 439,125
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Total assets $60,688,379 $57,812,582
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $1,288,391 $1,120,902
Accrued expenses 2,373,788 3,037,944
Deferred revenue 2,335,695 6,280,642
Current maturities of long-term obligations 3,595,120 5,507,578
----------- -----------
Total current liabilities 9,592,994 15,947,066
Long-term obligations, net of current maturities 7,149,188 9,233,038
Shareholders' equity 43,946,197 32,632,478
----------- -----------
Total liabilities and shareholders' equity $60,688,379 $57,812,582
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
May 31, May 30, May 31, May 30,
1997 1998 1997 1998
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative research, licenses, subscription
fees and royalties $ 2,987,210 $ 4,658,417 $ 9,816,045 $ 12,515,891
Government research 918,999 351,896 4,229,562 815,499
----------- ----------- ----------- ------------
Total revenues 3,906,209 5,010,313 14,045,607 13,331,390
----------- ----------- ----------- ------------
Costs and Expenses:
Research and development 5,977,861 8,090,097 14,483,568 22,561,069
Cost of government research 918,999 351,896 4,229,562 815,499
Selling, general and administrative 997,021 1,178,187 2,587,078 3,313,133
----------- ----------- ----------- ------------
Total costs and expenses 7,893,881 9,620,180 21,300,208 26,689,701
----------- ----------- ----------- ------------
Loss from operations (3,987,672) (4,609,867) (7,254,601) (13,358,311)
Interest income 741,152 552,037 2,270,910 1,881,023
Interest expense (159,066) (307,068) (430,545) (846,055)
----------- ----------- ----------- ------------
Net loss $(3,405,586) $(4,364,898) $(5,414,236) $(12,323,343)
=========== =========== =========== ============
Basic/diluted net loss per common share $ (0.19) $ (0.24) $ (0.31) $ (0.68)
=========== =========== =========== ============
Basic/diluted weighted average number of common
shares outstanding 17,666,731 18,274,085 17,569,640 18,181,749
=========== =========== =========== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Thirty-nine Weeks ended
May 31, May 30,
1997 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (5,414,236) $(12,323,343)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,554,338 2,674,487
Loss on disposal of fixed assets 0 103,821
Deferred compensation 57,683 94,814
Changes in assets and liabilities:
Interest receivable 2,925 526,763
Accounts receivable (561,438) 20,837
Unbilled costs and fees 93,710 (691,632)
Prepaid expenses and other current assets (31,070) (117,736)
Accounts payable (171,485) (167,489)
Accrued expenses 455,468 664,156
Deferred contract revenue 1,896,899 3,944,947
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Total adjustments 3,297,030 7,052,968
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Net cash used in operating activities (2,117,206) (5,270,375)
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Cash Flows from Investing Activities:
Purchases of marketable securities (18,236,804) (28,873,818)
Proceeds from sale of marketable securities 19,174,000 40,814,125
Increase in restricted cash (200,000) 0
Purchases of equipment and leasehold improvements (643,716) (5,317,164)
Increase in other assets (88,189) (10,136)
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Net cash provided by investing activities 5,291 6,613,007
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options 681,265 914,810
Proceeds from long-term obligations 0 4,011,000
Payments on long-term obligations (2,122,960) (2,934,566)
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Net cash provided by (used in) financing activities (1,441,695) 1,991,244
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Net Increase (Decrease) in Cash and Cash Equivalents (3,553,610) 3,333,876
Cash and Cash Equivalents, at beginning of period 10,679,287 8,602,698
------------ ------------
Cash and Cash Equivalents, at end of period $ 7,125,677 $ 11,936,574
============ ============
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 29,142 $ 20,250
============ ============
Interest paid during period $ 430,545 $ 846,055
============ ============
Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital leases $ 4,629,267 $ 2,919,874
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
unaudited consolidated condensed financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of interim period results. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results of operations for the 39 week period ended May 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's Form 10-K which was filed with the Securities and
Exchange Commission on November 28, 1997.
2. REVENUE RECOGNITION
Research and contract revenues are derived from collaborative agreements with
pharmaceutical companies, as well as government grants and contract
arrangements. 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 revenues from collaborative research and development arrangements are
recognized when the milestones are achieved. License fees are recognized as
earned. Unbilled costs and fees represent revenue recognized prior to billing.
Deferred revenue represents cash amounts received prior to revenue recognition.
Subscription fee revenues from the PathoGenome(TM) database are recognized
ratably over the access period of the subscription agreement.
3. NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" which establishes new standards for calculating and
presenting earnings per share. This standard is effective for financial
statements for periods ending after December 15, 1997 with early application not
permitted. These condensed financial statements have been prepared and presented
based on the new standard. Prior period amounts have been restated to conform to
the current year presentation. Basic net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding during the
period. Diluted net loss per share for the periods presented is the same as
basic net loss per share as the inclusion of the potential common stock
equivalents would be antidilutive. At May 30, 1998 and May 31, 1997, the Company
had
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potential common stock of approximately 4,298,000 and 4,593,000, respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At May 30, 1998, 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 holding gains or losses on its marketable securities. Marketable
securities consist of commercial paper and U.S. Government debt securities. The
Company has $301,500 in restricted cash at August 31, 1997 and May 30, 1998 in
connection with certain long-term obligations (See Note 6).
5. 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.
6. 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 May 30, 1998) 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 4).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage.
On March 9, 1998, the Company increased the equipment line of credit described
above by $4,300,000 to $10,300,000. The additional borrowings under the
equipment line of credit will be utilized to finance laboratory, computer and
office equipment over the next ten months. Borrowings under the new credit line
are payable in 15 quarterly installments commencing March 31, 1999. All other
terms and conditions remained the same. The Company had $4,300,000 available
under the modified line of credit at May 30, 1998.
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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 5.93% as of May 30, 1998) plus one and a
half percent. The Company is required to maintain certain financial ratios
pertaining to minimum cash balances, debt to net worth and tangible net worth.
At May 30, 1998, the Company had no additional borrowing capacity under this
arrangement, however, approximately $539,000 of the amounts received have not
been utilized to finance the Company's purchases, and is included in cash and
cash equivalents. The Company is required to maintain certain restricted cash
balances, upon the occurrence of certain events, as defined.
The Company has entered into other capital lease arrangements under which it
financed approximately $9,725,000 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 4). 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 May 30, 1998.
7. COLLABORATIVE AGREEMENTS
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 Company's
Staph. aureus genomic database. 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 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 agreed to pay the Company a minimum of
$13.3 million for an up-front payment, 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. On March 4, 1998, Schering-Plough elected to
extend the research program to the full term of the agreement which expires on
March 31, 2000.
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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, Staph. aureus, which 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.
For the 13 week periods ended May 30, 1998 and May 31, 1997, the Company
recorded revenue of $733,000 and $1,024,000, respectively, under this agreement,
which consisted of sponsored research funding.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$2,645,000 under this agreement, which consisted of sponsored research funding
and milestone payments . For the 39 week period ended May 31, 1997, the Company
recorded revenue of $2,774,000 under this agreement, which consisted of
sponsored research funding.
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 the agreement, Schering-Plough has 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 product developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will be approximately $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5
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million represents milestone payments based on achievement of research and
product development milestones.
For the 13 week period ended May 30, 1998, the Company recorded revenue of
$2,212,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 13 week period ended May
31, 1997, the Company recorded revenue of $663,000 under this agreement, which
consisted of sponsored research funding and subcontract activity.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$5,164,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 39 week period ended May
31, 1997, the Company recorded revenue of $3,481,000 under this agreement, which
consisted of sponsored research funding, license fee, expense allowance and
subcontract activity.
In September 1997, the Company entered into its third research collaboration and
license agreement with Schering-Plough to use genomics to discover and develop
new pharmaceutical products for treating fungal infections.
Under the agreement, the Company will employ its bioinformatics, high-throughput
sequencing and functional genomics capabilities to identify and validate genes
and associated proteins as drug discovery targets that can be utilized by
Schering-Plough to develop novel antifungal treatments. 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 payment, 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. Additionally, the
Company entered into a database subscription agreement with Schering-Plough (See
Database Subscriptions).
For the 13 and 39 week periods ended May 30, 1998, the Company recorded revenue
of $613,000 and $1,619,000, respectively, under this agreement, which consisted
of sponsored research funding.
ASTRA 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. pylori
genomic sequence database and exclusive worldwide rights to make, use and sell
products based on the Company's
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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
credited 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 with an option to extend. On June 15, 1998,
subsequent to quarter-end, Astra elected to extend the research program for a
second time which will carry the alliance through at least August 1999.
The Company will also be entitled to receive royalties on Astra's sale of any
products (i) protected by 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.
For the 13 week period ended May 30, 1998, the Company recorded revenue of
$336,000 under this agreement, which consisted of sponsored research funding.
For the 13 week period ended May 31, 1997, the Company recorded revenue of
$775,000 under this agreement, which consisted of sponsored research funding and
a milestone payment.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$1,405,000 under this agreement, which consisted of sponsored research funding
and a milestone payment. For the 39 week period ended May 31, 1997, the Company
recorded revenue of $2,416,000 under this agreement, which consisted of
sponsored research funding and a milestone payment.
8. DATABASE SUBSCRIPTIONS
In May 1997, the Company introduced its proprietary genome sequence database,
PathoGenome(TM) and sold its first subscription to Bayer AG, ("Bayer") providing
Bayer with nonexclusive access to the Company's PathoGenome(TM) database and
associated information relating to microbial organisms. In September 1997, the
Company sold subscriptions to its PathoGenome(TM) database to Bristol-Myers
Squibb and Schering-Plough. In May 1998, the Company sold its fourth
subscription to its PathoGenome(TM) database to Scriptgen Pharmaceuticals, Inc.
("Scriptgen"). The subscription agreements call for the Company to provide each
subscriber with periodic data updates, analysis tools and software support.
Under the agreements, Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen
have agreed to pay annual subscription fees, milestone payments,
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when applicable, 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.
For the 13 and 39 week periods ended May 30, 1998, the Company recognized
subscription fee revenue of $750,000 and $1,668,000, respectively, under these
agreements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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. 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 any. 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 nonexclusive 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.
The Company's primary sources of revenue are collaborative agreements with
pharmaceutical company partners, subscription agreements to the Company's
proprietary genome sequence database, PathoGenomeTM and government research
grants and contracts. As of May 30, 1998, the Company had signed four
collaborative agreements. The Company entered into corporate collaborations with
Astra Hassle AB ("Astra") relating to H. 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, the Company entered into its
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third research collaboration with Schering-Plough to use genomics to discover
and develop new pharmaceutical products for treating fungal infections.
In May 1997, the Company introduced its proprietary genome sequence database,
PathoGenome(TM) and sold its first subscription to Bayer AG ("Bayer"). In
September 1997, the Company sold subscriptions to Bristol-Myers Squibb and
Schering-Plough. In May 1998, the Company sold a subscription to Scriptgen
Pharmaceuticals, Inc ("Scriptgen"). Under the agreements, the subscribers will
receive nonexclusive access to the Company's PathoGenome(TM) database and
associated information relating to microbial organisms.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $56,879,000 at May 30, 1998. 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, 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
THIRTEEN WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998
REVENUE
Total revenues increased 28% from $3,906,000 for the 13 week period ended May
31, 1997 to $5,010,000 for the 13 week period ended May 30, 1998. Collaborative
research, licenses, subscription fees and royalties increased 56% from
$2,987,000 for the 13 week period ended May 31, 1997 to $4,658,000 for the 13
week period ended May 30, 1998. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to an
increase in sponsored research revenue received this year under the Company's
collaboration research agreements with Schering-Plough for treating both asthma
and fungal infections. The increase was also due to subscription fee revenue
earned this year under the Company's license agreements with Bayer,
Bristol-Myers Squibb, Schering-Plough and Scriptgen providing each company with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenome(TM) and associated information relating to microbial organisms.
Government research revenue decreased 62% from $919,000 for the 13 week period
ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 1998. The
decrease in government research revenue was primarily attributable to a shift in
personnel from government research programs to company-sponsored research and
development
14
<PAGE> 15
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.
COST AND EXPENSES
Total cost and expenses increased 22% from $7,894,000 for the 13 week period
ended May 31, 1997 to $9,620,000 for the 13 week period ended May 30, 1998.
Research and development expenses, which include company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators, increased 35% from $5,978,000 for the 13 week period
ended May 31, 1997 to $8,090,000 for the 13 week period ended May 30, 1998. The
increase in research and development expenses 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 cost of government research decreased 62% from $919,000 for the 13 week
period ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 1998.
The decrease in cost of government research was primarily attributable to the
decrease in government research revenues.
Selling, general and administrative expenses increased 18% from $997,000 for the
13 week period ended May 31, 1997 to $1,178,000 for the 13 week period ended May
30, 1998. The increase in selling, general and administrative expenses was
primarily due to increases in payroll and related expenses as a result of hiring
additional administrative personnel.
INTEREST INCOME AND EXPENSE
Interest income decreased 26% from $741,000 for the 13 week period ended May 31,
1997 to $552,000 for the 13 week period ended May 30, 1998 reflecting a decrease
in funds available for investment.
Interest expense increased 93% from $159,000 for the 13 week period ended May
31, 1997 to $307,000 for the 13 week period ended May 30, 1998. The increase in
interest expense was attributable to increases in the Company's average
outstanding balance under its long-term obligations.
15
<PAGE> 16
THIRTY-NINE WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998
REVENUE
Total revenues decreased 5% from $14,046,000 for the 39 week period ended May
31, 1997 to $13,331,000 for the 39 week period ended May 30, 1998. Collaborative
research, licenses, subscription fees and royalties increased 28% from
$9,816,000 for the 39 week period ended May 31, 1997 to $12,516,000 for the 39
week period ended May 30, 1998. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to higher
milestone payments and sponsored research revenues received this year under the
Company's collaboration research agreements with Schering-Plough for treating
both asthma and fungal infections. The increase was also due to subscription fee
revenue earned this year under the Company's license agreements with Bayer,
Bristol-Myers Squibb, Schering-Plough and Scriptgen providing each company with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenomeTM and associated information relating to microbial organisms.
Government research revenue decreased 81% from $4,230,000 for the 39 week period
ended May 31, 1997 to $816,000 for the 39 week period ended May 30, 1998. The
decrease in government research revenue 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).
COST AND EXPENSES
Total cost and expenses increased 25% from $21,300,000 for the 39 week period
ended May 31, 1997 to $26,690,000 for the 39 week period ended May 30, 1998.
Research and development expenses, which include company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators, increased 56% from $14,484,000 for the 39 week period
ended May 31, 1997 to $22,561,000 for the 39 week period ended May 30, 1998. The
increase in research and development expenses 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 cost of government research decreased 81% from $4,230,000 for the 39 week
period ended May 31, 1997 to $815,000 for the 39 week period ended May 30, 1998.
The decrease in cost of government research was primarily attributable to the
decrease in government research revenues.
16
<PAGE> 17
Selling, general and administrative expenses increased 28% from $2,587,000 for
the 39 week period ended May 31, 1997 to $3,313,000 for the 39 week period ended
May 30, 1998. The increase in selling, general and administrative expenses was
primarily due to increases in payroll and related expenses as a result of hiring
additional administrative personnel.
INTEREST INCOME AND EXPENSE
Interest income decreased 17% from $2,271,000 for the 39 week period ended May
31, 1997 to $1,881,000 for the 39 week period ended May 30, 1998 reflecting a
decrease in funds available for investment.
Interest expense increased 96% from $431,000 for the 39 week period ended May
31, 1997 to $846,000 for the 39 week period ended May 30, 1998. The increase in
interest expense for was attributable to increases in the Company's average
outstanding balance under its long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been revenue
from collaborative research agreements, revenue from subscription agreements,
revenue from government research grants and contracts, 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 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.
As of May 30, 1998, the Company had cash, cash equivalents, restricted cash and
long and short-term marketable securities of approximately $39,237,000. 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. On March 9,
1998, the Company amended one of the finance arrangements to increase the
facility by $4,300,000 in order to finance certain laboratory, computer and
office equipment. Borrowings are payable in 15 quarterly installments commencing
March 31, 1999. All other terms and conditions remained the same. The Company
had $4,300,000 available under these arrangements for future borrowings at May
30, 1998. The Company also received a $6,000,000 advance to finance office and
laboratory renovations at its Beaver Street facility of which approximately
$539,000 had not been expended at May 30, 1998.
17
<PAGE> 18
For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's
operating activities used cash of approximately $2,117,000 and $5,270,000,
respectively, primarily to fund operating losses.
For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's
investing activities provided cash of approximately $5,000 and $6,613,000,
respectively, from the sale of marketable securities, partially offset by
purchases of marketable securities, and property and equipment.
Financing activities used cash of approximately $1,443,000 for the 39 week
period ended May 31, 1997 primarily for payments of capital lease obligations,
partially offset by proceeds from the exercise of stock options. Financing
activities provided cash of approximately $1,991,000 for the 39 week period
ended May 30, 1998 primarily from proceeds from long-term obligations and
exercise of stock options, net of payments of long-term obligations.
Capital expenditures totaled $2,781,000 for the 39 week period ended May 30,
1998 consisting of laboratory, computer and office equipment. The Company
estimates that it will acquire an additional $1,200,000 in capital equipment in
fiscal 1998 consisting of primarily computer and laboratory equipment which it
intends to finance under existing financing arrangements. Additionally, the
Company is in the process of consolidating its operations at its Beaver Street
facility at an estimated cost of $6,852,000 which consists of office and
laboratory renovations. As of May 30, 1998, the Company had incurred
approximately $6,303,000 of capital improvements consisting of $847,000 during
fiscal 1997 and $5,456,000 during the 39 week period ended May 30,1998. The
Company plans to spend an additional $549,000 on this renovation project and
expects the renovations to be completed by September 30, 1998. The Company plans
to utilize existing capital lease financing arrangements to finance
substantially all of these capital improvements.
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.
18
<PAGE> 19
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 10Q 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, described more fully in the Company's
Annual Report on Forms 10-K for the year ended August 31, 1997, filed with the
Securities and Exchange Commission.
19
<PAGE> 20
PART II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
10.43 Credit modification agreement between the Company and Fleet
National Bank, dated March 9, 1998. (26)
(26) Filed within.
b) REPORTS ON FORM 8-K
None.
20
<PAGE> 21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Fenel M. Eloi
---------------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: July 10, 1998
21
<PAGE> 1
Exhibit 10.43
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement ("this Agreement") is made as of March
9, 1998 between Genome Therapeutics Corp., a Massachusetts corporation (the
"Borrower"), and Fleet National Bank (the "Bank"). For good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Bank act and agree as follows:
1. Reference is made to: (i) that certain letter agreement dated
February 28, 1997 (the "Letter Agreement") between the Borrower and the Bank;
(ii) that certain $6,000,000 face principal amount term promissory note dated
February 28, 1997 (the "1997 Term Note") made by the Borrower and payable to the
order of the Bank; (iii) that certain Security Agreement (Equipment) dated
February 28, 1997 (the "Equipment Security Agreement") given by the Borrower to
the Bank; and (iv) that certain $4,300,000 face principal amount term promissory
note of even date herewith (the "1998 Term Note") made by the Borrower and
payable to the order of the Bank. The Letter Agreement, the Equipment Security
Agreement, the 1997 Term Note and the 1998 Term Note are hereinafter
collectively referred to as the "Financing Documents".
2. The Letter Agreement is hereby amended, effective as of the
date hereof:
a. By deleting from clause (i) of Section 1.1 of the Letter
Agreement the words "(the `Term Note')" and by substituting in their stead the
following:
"(the `1997 Term Note')"
b. By deleting the word "and" appearing at the end of clause (i)
of Section 1.1 of the Loan Agreement and by substituting a comma in its stead.
c. By deleting the period at the end of Section 1.1 of the Letter
Agreement and by substituting in its stead the following:
", and (iii) that certain $4,300,000 face principal amount
term note (the `1998 Term Note') dated March 9, 1998 made by
the Borrower and payable to the order of the Bank."
d. By deleting in its entirety the caption of Section 1.2 of the
Letter Agreement and by substituting in its stead the following:
"1997 TERM LOANS; 1997 TERM NOTE."
e. By deleting from the first sentence of Section 1.2 of the
Letter Agreement the words "(the `Term Loans')" and by substituting in their
stead the following:
"(the `1997 Term Loans')"
<PAGE> 2
f. By modifying Sections 1.2, 1.3, 1.4 and 1.5 of the Letter
Agreement so that: (i) all references therein to the "Term Note" will be deemed
to refer to the 1997 Term Note, and (ii) all references therein to "Term Loans"
or to any "Term Loan" will be deemed to refer to any one or more of the 1997
Term Loans (the definition of "1997 Term Loans" having been inserted by
paragraph e above). Further, all references in Sections 1.4 and 1.5 of the
Letter Agreement to any "COF Loan" will be deemed to refer to a 1997 Term Loan
which is a COF Loan, all references in said Sections to any "LIBOR Loan" will be
deemed to refer to a 1997 Term Loan which is a LIBOR Loan, and all references in
said Sections to a "Floating Rate Loan" will be deemed to refer to a 1997 Term
Loan which is a Floating Rate Loan.
g. By deleting in its entirety the caption to Section 1.3 of the
Letter Agreement and by substituting in its stead the following:
"PRINCIPAL REPAYMENT OF 1997 TERM LOANS."
h. By inserting at the end of the fourth sentence of Section 1.3
of the Letter Agreement immediately after the words "the date of payment", the
following:
"and the payment, if any, due under Section 1.7"
i. By deleting in its entirety the caption to Section 1.4 of the
Letter Agreement and by substituting in its stead the following:
"INTEREST RATE FOR 1997 TERM LOANS."
j. By deleting from the first sentence of Section 1.4 of the
Letter Agreement the words "(the `Floating Rate')".
k. By deleting from the third sentence of the first paragraph of
Section 1.4 of the Letter Agreement the words "(a `Fixed Rate Borrowing
Notice')" and by substituting in their stead the following:
"(hereinafter, in this Section 1.4, a `Fixed Rate Borrowing
Notice')"
l. By deleting from the second sentence of the second paragraph
of Section 1.4 of the Letter Agreement the words "(the `Fixed Rate Period')" and
by substituting in their stead the following:
"(hereinafter, in this Section 1.4, a `Fixed Rate Period')"
m. By inserting into the twelfth sentence of the second paragraph
of Section 1.4 of the Letter Agreement, immediately after the words "Floating
Rate", the following:
"applicable to the 1997 Term Loans"
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<PAGE> 3
n. By deleting in its entirety the fifth sentence of Section 1.5
of the Letter Agreement and by substituting in its stead the following:
"Interest on any 1997 Term Loans which are Floating Rate Loans
will be payable at the applicable Floating Rate (being that
rate described in the first sentence of Section 1.4)."
o. By inserting into the Letter Agreement, immediately after
Section 1.5 thereof, the following:
"1.5A. 1998 TERM LOANS; 1998 TERM NOTE. In addition to the
foregoing, the Bank may make one or more loans (the `1998 Term
Loans') to the Borrower in an aggregate amount up to
$4,300,000. A 1998 Term Loan shall be made, no more than once
per month (except that more than one 1998 Term Loan may be
made in any month provided that each additional 1998 Term Loan
in any one month is an amount of at least $500,000), in order
to finance costs of Qualifying Equipment acquired by the
Borrower within the 120 days preceding the request for such
1998 Term Loan, each such 1998 Term Loan to be in such amount
as may be requested by the Borrower; provided that (i) no 1998
Term Loan will be made after March 25, 1999; (ii) the
aggregate original principal amounts of all 1998 Term Loans
will not exceed $4,300,000; and (iii) no 1998 Term Loan will
be in an amount more than 100% of the Invoice Value of the
Qualifying Equipment with respect to which such 1998 Term Loan
is made. As used herein the `Invoice Value' of equipment
supporting any 1998 Term Loan means invoiced actual costs of
the tangible property constituting the items of Qualifying
Equipment with respect to which such 1998 Term Loan is made
(excluding taxes, shipping, prepackaged software, installation
charges, training fees and other `soft costs'; except that
software needed to operate purchased equipment (not including
`shrink-wrapped' software) may be included within Qualifying
Equipment up to an aggregate dollar amount of $250,000). Prior
to the making of each 1998 Term Loan, and as a precondition
thereto, the Borrower will provide the Bank with: (i) invoices
supporting the costs of the relevant Qualifying Equipment;
(ii) such evidence as the Bank may reasonably require showing
that the Qualifying Equipment has been delivered to and
installed at the Borrower's Waltham, MA premises, has become
fully operational, has been paid for by the Borrower and is
owned by the Borrower free of all liens and interests of any
other Person (other than the security interest of the Bank
pursuant to the Security Agreement); (iii) Uniform Commercial
Code financing statements reflecting the relevant
-3-
<PAGE> 4
Qualifying Equipment with respect to which such 1998 Term Loan
is being made and an appropriate supplement to the Security
Agreement adding the relevant Qualifying Equipment to the
description of Collateral; and (iv) evidence satisfactory to
the Bank that the Qualifying Equipment is fully insured
against casualty loss, with insurance naming the Bank as
secured party and first loss payee. The 1998 Term Loans will
be evidenced by the 1998 Term Note. Interest on the 1998 Term
Loans shall be payable at the times and at the rate provided
for in the 1998 Term Note. Overdue principal of any 1998 Term
Loan and, to the extent permitted by law, overdue interest
shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) four (4%) percent
per annum plus (ii) the per annum rate otherwise payable under
the 1998 Term Note (but in no event in excess of the maximum
rate from time to time permitted by then applicable law),
compounded monthly and payable on demand. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made,
on a schedule attached to the 1998 Term Note or on the books
of the Bank, at or following the time of making each 1998 Term
Loan and of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate
unpaid principal balance of the 1998 Term Loans. The amount so
noted shall constitute presumptive evidence as to the amount
owed by the Borrower with respect to principal of the 1998
Term Loans. Failure of the Bank to make any such notation
shall not, however, affect any obligation of the Borrower or
any right of the Bank hereunder or under the 1998 Term Note.
1.5B. PRINCIPAL REPAYMENTS OF 1998 TERM LOANS. The Borrower
shall repay principal of the 1998 Term Loans in 16 equal
consecutive quarterly installments, commencing on March 31,
1999 and continuing on the last Business Day of each calendar
quarter thereafter. Each such quarterly installment of
principal shall be in an amount equal to 1/16th of the
aggregate principal amounts of all 1998 Term Loans outstanding
at the close of business on March 25, 1999. In any event, the
then outstanding principal balance of each 1998 Term Loan and
all interest then accrued but unpaid thereon shall be due and
payable in full on December 31, 2002. The Borrower may repay,
at any time or from time to time, without premium or penalty,
the whole or any portion of any 1998 Term Loan; provided that
each such principal prepayment shall be accompanied by a
payment of all interest under the 1998 Term Note accrued but
unpaid to the date of payment and the payment, if any, due
under Section 1.7. Any partial prepayment of principal of the
1998 Term Loans will be applied to installments of principal
of the
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<PAGE> 5
1998 Term Loans thereafter coming due, being applied in
inverse order of normal maturity. Amounts repaid or prepaid
with respect to the 1998 Term Loans are not available for
reborrowing.
1.5C. INTEREST RATE. Except as otherwise provided below in
this ss.1.5C, interest on the 1998 Term Loans will be payable
at a fluctuating rate per annum which shall at all times be
equal to the Prime Rate as in effect from time to time (but in
no event in excess of the maximum rate permitted by then
applicable law), with a change in such rate of interest to
become effective on each day when a change in the Prime Rate
becomes effective. Subject to the conditions set forth herein,
the Borrower may elect that all or any portion of any 1998
Term Loan to be made under ss.1.5A will be made as a LIBOR
Loan, that all or any portion of any 1998 Term Loan which is a
Floating Rate Loan (but not any COF Loan) will be converted to
a LIBOR Loan and/or that any 1998 Term Loan which is a LIBOR
Loan will be continued at the expiration of the Interest
Period applicable thereto as a new LIBOR Loan. Such election
shall be made by the Borrower giving to the Bank a written or
telephonic notice received by the Bank within the time period
and containing the information described in the next following
sentence (hereinafter, in this ss.1.5C, a "Fixed Rate
Borrowing Notice"). The Fixed Rate Borrowing Notice must be
received by the Bank no later than 10:00 a.m. (Boston time) on
that day which is two Business Days prior to the date of the
proposed borrowing, conversion or continuation, as the case
may be, and must specify the amount of the LIBOR Loan
requested (which shall be $500,000 or an integral multiple
thereof), must identify the particular 1998 Term Loan or Loans
so to be made, converted or continued, as the case may be, and
must specify the proposed commencement date of the relevant
Interest Period. Notwithstanding anything provided elsewhere
in this letter agreement, the Borrower may not elect to have
any installment of a 1998 Term Loan included in a LIBOR Loan
if the Interest Period applicable thereto would continue after
the due date of such installment. Any Fixed Rate Borrowing
Notice shall, upon receipt by the Bank, become irrevocable and
binding on the Borrower, and the Borrower shall, upon demand
and receipt of a Bank Certificate with respect thereto,
forthwith indemnify the Bank against any loss or expense
incurred by the Bank as a result of any failure by the
Borrower to obtain or maintain any requested 1998 Term Loan
which is a LIBOR Loan, including, without limitation, any loss
or expense incurred by reason of the liquidation or
redeployment of deposits or other funds acquired by the Bank
to fund or maintain such LIBOR Loan. At the expiration of each
Interest Period applicable to a 1998 Term Loan which is a
LIBOR
-5-
<PAGE> 6
Loan, the principal amount of such 1998 Term Loan which is a
LIBOR Loan may be continued as a new LIBOR Loan to the extent
and on the terms and conditions contained in this letter
agreement by delivery to the Bank of a new Fixed Rate
Borrowing Notice conforming to the requirements set forth
above in this ss.1.5C (and any 1998 Term Loan which is a LIBOR
Loan not repaid and not so continued as a new LIBOR Loan will
be deemed (subject to the provisions of the next following
paragraph) to have been converted into a Floating Rate Loan).
Notwithstanding any other provision of this letter agreement,
the Bank need not make any 1998 Term Loan as a LIBOR Loan or
allow any conversion of a 1998 Term Loan which is a Floating
Rate Loan to a LIBOR Loan at any time when there exists any
Default or Event of Default.
On each of March 31, 1998, June 30, 1998, September 30, 1998,
December 31, 1998 and March 25, 1999, the Borrower may convert
to a COF Loan all (but not less than all) of the 1998 Term
Loans then outstanding and not already subject to a COF
Interest Rate; however, notwithstanding the foregoing, no more
than four (4) 1998 Terms Loans which are COF Loans may be
outstanding at one time. If the Borrower desires such
conversion to a COF Loan, it will notify the Bank of same not
less than two Business Days prior to the proposed conversion
and will request that the Bank offer with respect to such 1998
Term Loans a rate of interest which shall be fixed (subject to
adjustment as provided in this letter agreement) for the
period commencing on the date of such conversion and ending on
the final maturity date applicable to such 1998 Term Loans
(hereinafter, in this ss.1.5C, a "Fixed Rate Period").
Following such request for a fixed rate, the Bank will
endeavor to offer a proposed COF Interest Rate at a rate
determined as provided below and under conditions determined
by the Bank in its sole discretion. The Borrower may elect to
accept such offer in the manner and within the time period
specified in such offer. Any such election shall be
irrevocable on the part of the Borrower. Upon such election,
the interest rate payable with respect to the outstanding 1998
Term Loans shall be fixed (subject to adjustment as provided
in this letter agreement) for the Fixed Rate Period and at the
rate communicated by the Bank as its proposed COF Interest
Rate. Any proposed COF Interest Rate offered under this
Section will be a rate per annum equal to the sum of (i) 1.75%
per annum PLUS (ii) the COF Rate for the applicable Fixed Rate
Period (expressed as a per annum rate); provided, however,
that the COF Interest Rate shall in no event exceed the
maximum rate permitted by applicable law. The COF Rate shall
be determined by the Bank in its discretion for the purposes
of any proposed COF Interest Rate offered under this
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<PAGE> 7
Section. The Bank may base the COF Rate for the purpose of
computing the proposed COF Interest Rate on any (or any
combination of) recognized sources of available funding for
transactions of this type, including, but not limited to, the
interbank market, the domestic and European certificate of
deposit market and sales of commercial paper. The COF Rate for
purposes of this computation shall in any event include
adjustments for the costs of maintaining reserves, insurance
(including, without limitation, assessments by the FDIC),
taxes, hedging and other costs which may be incurred by the
Bank with respect to the applicable source or sources of
funding, all as determined by the Bank in its discretion. The
source or sources of funding utilized for the computation of
the proposed rate shall be selected by the Bank at its sole
discretion for offering to the Borrower, and the Borrower
shall not have any claim against the Bank with respect to
computation of any proposed COF Interest Rate. If the Borrower
is dissatisfied with any proposed COF Interest Rate, the
Borrower's sole remedy with respect thereto shall be not to
accept such proposed COF Interest Rate within the applicable
time period, and thus to cause interest on the 1998 Term Loans
to be payable at the Floating Rate applicable to the 1998 Term
Loans (subject to the Borrower's ability set forth elsewhere
herein to obtain LIBOR Loans). Notwithstanding the foregoing
provisions hereof, the Bank need not offer a proposed COF
Interest Rate for any period of time with respect to which the
Bank, in its sole discretion, determines that there are no
recognized sources of funding available to it for such time
period or principal amount or that the cost of funds with
respect thereto would be unreasonably high or if there then
exists any Default or Event of Default. Further, the Borrower
may not convert into a COF Loan any 1998 Term Loan which is a
LIBOR Loan prior to the end of the Interest Period applicable
to such LIBOR Loan.
Any request for a 1998 Term Loan which is a Fixed Rate Loan
and any election to convert all or any portion of the 1998
Term Loans to a Fixed Rate Loan may be made on behalf of the
Borrower only by a duly authorized officer; provided, however,
that the Bank may conclusively rely upon any written or
facsimile communication received from any individual whom the
Bank believes in good faith to be such a duly authorized
officer.
1.5D. INTEREST PAYMENTS. The Borrower will pay interest on the
principal amount of the 1998 Term Loans outstanding from time
to time, from the date hereof until payment of the 1998 Term
Loans and the 1998 Term Note in full and the termination of
this letter agreement. Interest on each 1998 Term Loan which
is a Floating
-7-
<PAGE> 8
Rate Loan or a COF Loan will be payable monthly in arrears on
the first day of each month. Interest on each 1998 Term Loan
which is a LIBOR Loan will be paid in arrears on the
applicable Interest Payment Date. In any event, interest shall
also be paid on the date of payment of the 1998 Term Loans in
full. Interest on each 1998 Term Loan which is a Floating Rate
Loan shall be payable at the Floating Rate applicable to the
1998 Term Loans. The rate of interest payable on any 1998 Term
Loan which is a LIBOR Loan will be the Eurodollar Interest
Rate applicable thereto. Interest on any 1998 Term Loan which
is a COF Loan will be payable at the COF Interest Rate
applicable thereto. In any event, overdue principal of any
1998 Term Loan and, to the extent permitted by law, overdue
interest on any 1998 Term Loan shall bear interest at a rate
per annum which at all times shall be equal to the sum of (i)
four (4%) percent per annum PLUS (ii) the rate otherwise
applicable to such overdue principal (or to the principal
amount as to which such interest is overdue) under the 1998
Term Note, payable on demand. All interest payable hereunder
and/or under the 1998 Term Note will be calculated on the
basis of a 360-day year for the actual number of days elapsed.
p. By deleting from Section 1.7 of the Letter Agreement the words
"the Term Note" and by substituting in their stead the following:
"any Term Note"
q. By deleting from Section 1.8 of the Letter Agreement the words
"the Term Note" (in each place where same appears) and by substituting in their
stead (in each such place) the following:
"any Term Note"
r. By deleting from the second and third paragraphs of Section
1.10 the words "the Term Note" (in each place where same appears) and by
substituting in their stead (in each such place) the following:
"any Term Note"
s. By deleting from the third sentence of the third paragraph of
Section 1.10 of the Letter Agreement, the words "75 State Street, Boston, MA
02109" and by substituting in their stead the following:
"One Federal Street, Boston, MA 02110"
-8-
<PAGE> 9
t. By deleting from clause (i) of Section 4.1 of the Letter
Agreement the words "the Term Note" and by substituting in their stead the
following:
"any Term Note"
u. By deleting from clause (a) of Section 5.1 of the Letter
Agreement the words "the Term Note" and by substituting in their stead the
following:
"any Term Note"
v. By deleting from clause (a) of Section 5.2 of the Letter
Agreement the words "of the Term Note" and by substituting in their stead the
following:
"of each Term Note"
w. By inserting into clause (b) of Section 5.2 of the Letter
Agreement, immediately after the words "arrangements for", the following:
"any"
x. By deleting from clause (c) of Section 5.2 of the Letter
Agreement the words "under the Term Note" and by substituting in their stead the
following:
"under the 1997 Term Note, under the 1998 Term Note"
y. By deleting from Section 6.1 of the Letter Agreement, in each
of the four places where same appear, the words "the Term Note" and by
substituting in their stead the following:
"any Term Note"
z. By deleting from Section 6.3 of the Letter Agreement the words
"and the Term Note" and by substituting in their stead the following:
", the 1997 Term Note and the 1998 Term Note"
aa. By deleting from Section 6.4 of the Letter Agreement the words
"75 State Street, Boston, MA 02109" and by substituting in their stead the
following:
"One Federal Street, Boston, MA 02110"
bb. By deleting from the third sentence of Section 6.5 of the
Letter Agreement the words "the Term Loans and/or the Term Note" and by
substituting in their stead the following:
"the 1997 Term Loans, the 1998 Term Loans, the 1997 Term Note
and/or the 1998 Term Note"
-9-
<PAGE> 10
cc. By deleting from the first sentence of Section 6.6 of the
Letter Agreement the words "and/or the Term Note" and by substituting in their
stead the following:
"the 1997 Term Note and/or the 1998 Term Note"
dd. By inserting into Section 7.1 of the Letter Agreement,
immediately before the definition of "Bank Certificate", the following:
"`Applicable Eurodollar Margin' - For all 1997 Term Loans, the
Applicable Eurodollar Margin is 2.0. For all 1998 Term Loans,
the Applicable Eurodollar Margin is 1.75."
ee. By deleting from the first sentence of the definition of "Bank
Certificate" appearing in Section 7.1 of the Letter Agreement the words ss.1.4,
ss.1.7, ss.1.8 or ss.6.1" and by substituting in their stead the following:
"ss.1.4, ss.1.5C, ss.1.7, ss.1.8 or ss.6.1"
ff. By inserting into each of the definitions of "COF Interest
Rate" and "COF Rate" appearing in Section 7.1 of the Letter Agreement,
immediately after the reference "ss.1.4", the following:
"`or the second sentence of ss.1.5C, as applicable"
gg. By deleting the words "Term Loans" from the definition of "COF
Interest Rate" appearing in Section 7.1 of the Letter Agreement and by
substituting in their stead the following:
"`1997 Term Loans and 1998 Term Loans"
hh. By deleting from the definition of "Eurodollar Interest Rate"
appearing in Section 7.1 of the Letter Agreement the number "2.0" and by
substituting in its stead the following:
"the Applicable Eurodollar Margin"
ii. By deleting in its entirety the definition of "Floating Rate"
appearing in Section 7.1 of the Letter Agreement and by substituting in its
stead the following:
"`Floating Rate' - With respect to the 1997 Term Loans, the
fluctuating rate per annum described in the first sentence of ss.1.4; and with
respect to the 1998 Term Loans, the fluctuating rate per annum described in the
first sentence of ss.1.5C."
-10-
<PAGE> 11
jj. By deleting from the definition of "Loan Documents" appearing
in Section 7.1 of the Letter Agreement the words "the Term Note" and by
substituting in their stead the following:
"the 1997 Term Note, the 1998 Term Note"
kk. By inserting into Section 7.1 of the Letter Agreement,
immediately after the definition of "Net Quick Assets", the following:
"`1997 Term Loan' - As defined in ss.1.2.
`1998 Term Loan' - As defined in ss.1.5A.
`1997 Term Note' - As defined in ss.1.1.
`1998 Term Note' - As defined in ss.1.1."
ll. By deleting in its entirety the definition of "Prime Rate"
appearing in Section 7.1 of the Letter Agreement and by substituting in its
stead the following:
"`Prime Rate' - The variable rate of interest per annum
designated by the Bank from time to time as its prime rate, it
being understood that such rate is merely a reference rate and
does not necessarily represent the lowest or best rate being
charged to any customer."
mm. By inserting into the parenthetical contained in the first
sentence of the definition of "Qualifying Equipment" appearing in Section 7.1 of
the Letter Agreement, immediately after the words "prepackaged software", the
following:
", it being agreed, however, that the Borrower may include
within Qualifying Equipment, as to the 1998 Term Loans only,
costs of software (not including `shrink-wrapped' software)
needed to operate purchased equipment up to an aggregate
dollar amount of $250,000"
nn. By deleting from the definition of "Qualifying Equipment"
appearing in Section 7.1 of the Letter Agreement the words "after October 1,
1996" and by substituting in their stead the following:
"after October 1, 1996, with respect to 1997 Term Loans, and
after October 1, 1997, with respect to 1998 Term Loans,"
oo. By inserting into Section 7.1 of the Letter Agreement,
immediately after the definition of "Tangible Net Worth", the following:
-11-
<PAGE> 12
"`Term Loans' - Collectively, the 1997 Term Loans and the 1998
Term Loans.
`Term Notes' - Collectively, the 1997 Term Note and the 1998
Term Note."
3. The Security Agreement is hereby amended, effective as of the
date hereof:
a. By deleting in its entirety the second WHEREAS clause of the
Security Agreement and by substituting in its stead the following:
"WHEREAS, the Term Loans are evidenced by the Debtor's
$6,000,000 face principal amount promissory note dated
February 28, 1997 (the `1997 Term Note') payable to the order
of the Secured Party and by the Debtor's $4,300,000 face
principal amount promissory note of even date herewith (the
`1998 Term Note'); and"
b. By deleting the words "the Term Note" in the definition of
"Loan Documents" in Section 1 of the Security Agreement and by substituting in
their stead the following:
"the 1997 Term Note, the 1998 Term Note"
c. By deleting the words "the Term Note" in the third paragraph
of Section 8(c) of the Security Agreement and by substituting in their stead the
following:
"the Term Notes"
d. By adding to Exhibit A to the Security Agreement (without
deleting anything heretofore appearing on such exhibit) the equipment described
in Exhibit A attached to this Agreement. As a result of the foregoing, each of
the items listed on Exhibit A to the Agreement will be deemed to be included in
the "Collateral" (as defined in the Security Agreement). The Borrower will
execute and deliver all such UCC-1 financing statements as the Bank may
reasonably request in order to perfect its security interest in all of the
Collateral.
4. The Bank and the Borrower acknowledge that the "Term Loans"
described in the 1997 Term Note are the 1997 Term Loans and that the first
sentence of the seventeenth grammatical paragraph of the text of the 1997 Note
is deemed amended to read as follows:
"This note is the 1997 Term Note referred to in the Letter
Agreement."
5. Wherever in any Financing Document, or in any certificate or
opinion to be delivered in connection therewith, reference is made to a "letter
agreement" or to the "Letter Agreement", from and after the date hereof same
will be deemed to refer to the Letter Agreement, as hereby amended. Whenever in
any Financing Document, or in any certificate or opinion to be delivered in
connection therewith, reference is made to a "Security Agreement",
-12-
<PAGE> 13
from and after the date hereof same will be deemed to refer to the Security
Agreement, as hereby amended.
6. Simultaneously with the execution and delivery of this
Agreement, the Borrower is executing and delivering to the Bank the 1998 Term
Note. The 1998 Term Note is a $4,300,000 face amount promissory note of the
Borrower, substantially in the form of Exhibit 1 hereto.
7. In consideration of the amendments set forth above and the
establishment of the loan facilities described above, the Borrower is paying to
the Bank at the date of this Agreement a $10,000 facility fee. This facility fee
is non-refundable and is not to be reduced by nor applied against any interest,
fees, charges or other amounts now or thereafter paid or payable by the Borrower
under or in connection with the Letter Agreement and/or any promissory note now
or hereafter issued under the Letter Agreement.
8. In order to induce the Bank to enter into this Agreement, the
Borrower further represents and warrants as follows:
a. The execution, delivery and performance of this Agreement and
the 1998 Term Note have been duly authorized by the Borrower by all necessary
corporate and other action, will not require the consent of any third party and
will not conflict with, violate the provisions of, or cause a default or
constitute an event which, with the passage of time or the giving of notice or
both, could cause a default on the part of the Borrower under its charter
documents or by-laws or under any contract, agreement, law, rule, order,
ordinance, franchise, instrument or other document, or result in the imposition
of any lien or encumbrance (except in favor of the Bank) on any property or
assets of the Borrower.
b. The Borrower has duly executed and delivered each of this
Agreement and the 1998 Term Note.
c. Each of this Agreement and the 1998 Term Note is the legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its respective terms.
d. The statements, representations and warranties made in the
Letter Agreement and/or in the Security Agreement continue to be correct as of
the date hereof; except as amended, updated and/or supplemented by the attached
Supplemental Disclosure Schedule.
e. The covenants and agreements of the Borrower contained in the
Letter Agreement and/or in the Security Agreement have been complied with on and
as of the date hereof.
f. No event which constitutes or which, with notice or lapse of
time, or both, could constitute, an Event of Default (as defined in the Letter
Agreement) has occurred and is continuing.
-13-
<PAGE> 14
g. No material adverse change has occurred in the financial
condition of the Borrower from that disclosed in the annual consolidated
financial statements of the Borrower as at December 31, 1996, heretofore
furnished to the Bank.
9. Except as expressly affected hereby, the Letter Agreement and
each of the other Financing Documents remains in full force and effect as
heretofore.
10. Nothing contained herein will be deemed to constitute a waiver
or a release of any provision of any of the Financing Documents. Nothing
contained herein will in any event be deemed to constitute an agreement to give
a waiver or release or to agree to any amendment or modification of any
provision of any of the Financing Documents on any other or future occasion.
-14-
<PAGE> 15
Executed, as an instrument under seal, as of the day and year first
above written.
GENOME THERAPEUTICS CORP.
By: /s/ Fenel M. Eloi
----------------------------------
Name: Fenel M. Eloi
Title: Senior VP, Treasurer, CFO
Accepted and agreed:
FLEET NATIONAL BANK
By: /s/ Kimberly A. Martone
-------------------------------
Name: Kimberly A. Martone
Title: Vice President
-15-
<PAGE> 16
SUPPLEMENTAL DISCLOSURE SCHEDULE
[To be provided by Borrower]
<PAGE> 17
PROMISSORY NOTE
$4,300,000.00 Boston, Massachusetts
March 9, 1998
FOR VALUE RECEIVED, the undersigned Genome Therapeutics Corp., a
Massachusetts corporation (the "Borrower") hereby promises to pay to the order
of FLEET NATIONAL BANK (the "Bank") the principal amount of Four Million Three
Hundred Thousand and 00/100 ($4,300,000.00) Dollars or such portion thereof as
may be advanced by the Bank pursuant to ss.1.5A of that certain letter agreement
dated as of February 28, 1997 between the Bank and the Borrower, as amended (as
so amended, the "Letter Agreement") and remains outstanding from time to time
hereunder ("Principal"), with interest, at the rate provided in the Letter
Agreement, on the daily balance of all unpaid Principal, from the date hereof
until payment in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times be equal to
the Prime Rate, as in effect from time to time (but in no event in excess of the
maximum rate permitted by then applicable law), with a change in the aforesaid
rate of interest to become effective on the same day on which any change in the
Prime Rate is effective; provided, however, that (A) if a Eurodollar Interest
Rate (as defined in the Letter Agreement) shall have become applicable to all or
any portion of the outstanding Principal for any Interest Period (as defined in
the Letter Agreement), then interest on such Principal or portion thereof shall
accrue at said applicable Eurodollar Interest Rate for such Interest Period and
shall be payable on the Interest Payment Date (as defined in the Letter
Agreement) applicable to such Interest Period, and (B) if a COF Interest Rate
(as defined in the Letter Agreement) shall have become applicable to all or any
portion of the outstanding Principal, then interest on such Principal or portion
thereof shall accrue at said COF Interest Rate and shall be paid on the first
day of each month. Overdue Principal and, to the extent permitted by law,
overdue interest shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) four (4%) percent per annum PLUS (ii)
the per annum rate otherwise payable under this note with respect to the
Principal which is overdue (or as to which such interest is overdue) (but in no
event in excess of the maximum rate permitted by then applicable law),
compounded monthly and payable on demand. As used herein, "Prime Rate" means the
variable rate of interest per annum designated by the Bank from time to time as
its prime rate, it being understood that such rate is merely a reference rate
and does not necessarily represent the lowest or best rate being charged to any
customer. If the entire amount of any required Principal and/or interest is not
paid within ten (10) days after the same is due, the Borrower shall pay to the
Bank a late fee equal to five percent (5%) of the required payment, provided
that such late fee shall be reduced to three percent (3%) of any required
<PAGE> 18
Principal and interest that is not paid within fifteen (15) days of the date it
is due if this note is secured by a mortgage on an owner-occupied residence of
1-4 units.
Principal of this note shall be repaid by the Borrower to the Bank in
15 equal consecutive quarterly installments (each in an amount equal to 1/16th
of the aggregate principal amount of 1998 Term Loans (as defined in the Letter
Agreement) outstanding at the close of business on March 25, 1999), such
installments to commence March 31, 1999 to continue thereafter on the last
Business Day of each calendar quarter through and including September 30, 2002,
plus a 16th and final payment due and payable on December 31, 2002, in an amount
equal to all then remaining Principal of the 1998 Term Loans and all interest
accrued but unpaid thereon.
The Borrower may at any time and from time to time prepay all or any
portion of any 1998 Term Loan (as defined in the Letter Agreement), but, as to
Fixed Rate Loans (as defined in the Letter Agreement), only at the times and in
the manner, and (under certain circumstances) with the additional payments,
provided for in the Letter Agreement. Any prepayment of Principal, in whole or
in part, will be without premium or penalty (but, in the case of Fixed Rate
Loans, may require payment of additional amounts, as provided for in the Letter
Agreement). Each Principal prepayment shall be accompanied by payment of all
interest on the prepaid amount accrued but unpaid to the date of payment. Any
partial prepayment of Principal will be applied against Principal installments
in inverse order of normal maturity.
Payments of both Principal and interest shall be made, in lawful
currency of the United States in immediately available funds, at the office of
the Bank located at One Federal Street, Boston, Massachusetts 02110, or at such
other address as the Bank may from time to time designate.
The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making any 1998 Term Loan and of receiving any
payment of Principal, an appropriate notation reflecting such transaction
(including date, amount and maturity) and the then aggregate unpaid balance of
Principal. Failure of the Bank to make any such notation shall not, however,
affect any obligation of the Borrower hereunder or under the Letter Agreement.
The unpaid Principal amount of this note, as recorded by the Bank from time to
time on such schedule or on such books, shall constitute presumptive evidence of
the aggregate unpaid principal amount of the 1998 Term Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid
-2-
<PAGE> 19
by the Bank in enforcing this note and any collateral or security therefor, all
whether or not litigation is commenced.
This note is the 1998 Term Note referred to in the Letter Agreement.
This note is subject to prepayment as set forth in the Letter Agreement. This
note is secured by, and is entitled to the benefit of, the Security Agreement
(as defined in the Letter Agreement). The maturity of this note may be
accelerated upon the occurrence of an Event of Default, as provided in the
Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE THE 1998 TERM LOANS AS CONTEMPLATED IN THE
LETTER AGREEMENT.
-3-
<PAGE> 20
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL GENOME THERAPEUTICS CORP.
ATTEST:
/s/ David Chapin By: /s/ Fenel M. Eloi
- ---------------------------- --------------------------------
Clerk: Ropes & Gray Name: Fenel M. Eloi
Title: Senior VP, Treasurer, CFO
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000356830
<NAME> GENOME THERAPEUTICS CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,937
<SECURITIES> 23,475
<RECEIVABLES> 866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,558
<PP&E> 23,677
<DEPRECIATION> 7,847
<TOTAL-ASSETS> 57,813
<CURRENT-LIABILITIES> 15,947
<BONDS> 0
0
0
<COMMON> 1,828
<OTHER-SE> 30,804
<TOTAL-LIABILITY-AND-EQUITY> 57,813
<SALES> 0
<TOTAL-REVENUES> 13,331
<CGS> 0
<TOTAL-COSTS> 26,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 846
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,323)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
