SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------
For the fiscal year ended December 31, 1997 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. employer identification number)
9410 Key West Avenue, Rockville, Md. 20850-3338
(address of principal executive offices and zip code )
(301) 309-8504
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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 the 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 number of shares of the registrant's common stock outstanding on February
28, 1998 was 22,361,639.
As of February 28, 1998, the aggregate market value of the common stock held by
non-affiliates of the registrant based on the closing price reported on the
National Association of Securities Dealers Automated Quotations System was
approximately $ 576,000,000.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Annual Report.
*Excludes 8,805,932 shares of common stock deemed to be held by officers and
directors, and stockholders whose ownership exceeds five percent of the shares
outstanding at February 28, 1998. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
<PAGE>
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. The
Company's actual results could differ significantly from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Annual Report on Form 10-K.
GENERAL
Human Genome Sciences, Inc. (the "Company" or "HGS") is engaged in the
research and development of novel, proprietary pharmaceutical and diagnostic
products based on the discovery and understanding of the medical utility of
genes. Using automated, high-throughput gene sequencing technology, the Company
has generated a very large collection of partial human gene sequences, which the
Company believes correspond to most of the expressed genes in the human body,
and now possesses one of the largest proprietary databases of human and
microbial genes. Based on this genomic database, the Company has created a broad
base of product opportunities. The Company's activities have progressed to
focusing primarily on research and development of therapeutic protein product
candidates. In its efforts to identify the most promising product candidates,
the Company uses its advanced proprietary bioinformatics system to analyze
partial gene sequences and identify the genes corresponding to such partial gene
sequences and the proteins encoded by such genes. As of February 28, 1998, the
Company has isolated and characterized several thousand full-length genes and
expressed and purified more than 200 potential therapeutic proteins. The Company
is currently developing two proteins, MPIF-1 and KGF-2, in phase I clinical
studies and evaluating a number of additional therapeutic protein product
candidates in preclinical studies. In addition, the Company is investigating for
development with its collaborators proprietary product opportunities in
diagnostics and small molecule drugs based on human genes, as well as vaccines,
antibiotics, and diagnostics based on genes of microorganisms.
The Company has a two-pronged commercialization strategy:
Product Development and Commercialization. The Company is using its
internal capabilities to research and develop recombinant therapeutic
proteins, which are proteins that can be produced on a large scale and used
as drugs to treat diseases. The Company generally intends to develop
potential products to a late preclinical or early clinical stage and then
to collaborate with pharmaceutical or biotechnology companies for further
development and commercialization. However, the Company may consider
developing certain potential products on its own.
Corporate Collaborations. The Company increases its resources and
capabilities by establishing collaborations with pharmaceutical companies
for the development and commercialization of new products. The Company
believes that these arrangements will enable the Company to focus its
internal resources on a select number of promising product candidates while
still exploiting the broader product opportunities presented by its genomic
database.
The Company has five collaboration partners in the area of therapeutic and
diagnostic products based on its human gene database. The Company's initial
collaboration was formed with SmithKline Beecham Corporation ("SmithKline
Beecham") in May 1993 (as amended, the "SB Collaboration Agreements"). To date,
the Company has received $125 million in payments from SmithKline Beecham and is
further entitled to product development milestone payments and royalty payments.
In June 1995, the Company and SmithKline Beecham entered into a collaboration
agreement with Takeda Chemical Industries, Ltd. ("Takeda"), whereby Takeda was
granted certain rights to develop and commercialize products based on the
Company's and SmithKline Beecham's human gene technology ("Human Gene
Technology") and an option to develop and commercialize for Japan certain
products developed by the Company. In June 1996 the Company entered into a
significant amendment (the "SB Amendment") to the SB Collaboration Agreements
which, among other things, allows the Company to designate six therapeutic
proteins at any one time for exclusive development and commercialization
(subject to certain restrictions and co-development rights of its collaborators)
and permits the Company and SmithKline Beecham to enter into additional
collaboration agreements in the field covered by the SB Collaboration
Agreements. In July 1997, the Company entered into another amendment to the SB
Collaboration Agreement to streamline the procedures for outlicense of
diagnostic products by SmithKline Beecham and to permit the Company to develop
and market diagnostic tests to support its own therapeutic products.
In June and July 1996, the Company and SmithKline Beecham entered into
collaboration agreements (the "Additional Collaboration Partner Agreements")
with Schering Corporation and Schering Plough, Ltd. (collectively, "Schering
Plough"), Synthelabo S.A. ("Synthelabo") and Merck KGaA (collectively, the
"Additional Collaboration Partners"). Under the terms of the Additional
Collaboration Partner Agreements, $87.5 million of license and research payments
is payable to the Company over five years, of which $34.5 million has been
received to date. In
2
<PAGE>
addition, the Additional Collaboration Partner Agreements provide for milestone
and royalty payments with respect to each product developed under these
agreements. In exchange, the Additional Collaboration Partners received certain
rights to research, develop and commercialize therapeutic products based on the
Company's and SmithKline Beecham's Human Gene Technology. Schering Plough and
SmithKline Beecham have been granted the right to develop jointly with the
Company certain of the therapeutic protein product candidates to which the
Company has retained the exclusive development rights.
The Company also has entered into other collaborative agreements in certain
areas where the Company has retained exclusive rights, including: the creation
of bacterial vaccines and immunotherapeutics and antimicrobial agents based on
genes of infectious agents; and corn genomics. Pursuant to the terms of such
collaboration agreements, an aggregate of $29.1 million of license and research
payments is payable to the Company over five years, of which $21.1 million has
been received to date.
The Company also has entered into three gene therapy agreements, one with
Schering Plough as part of the Additional Collaboration Partner Agreements, and
two with early stage gene therapy companies, Vascular Genetics Inc. ("VGI") and
Transgene S.A. ("Transgene"). The Company has received equity in VGI and will
receive equity in Transgene in connection with granting access to certain genes
in its database. In addition, the Company will receive milestone payments and/or
royalties. The Company also has certain co-marketing rights to products
developed under the Transgene agreement.
The Company also formed during its early development a collaboration with
The Institute of Genomic Research ("TIGR"). Under the collaboration agreement,
the Company agreed to provide TIGR with funding totaling $85 million over a
ten-year period ending September 2002. In return, the Company was entitled to
exclusive intellectual property rights to TIGR's research. In June 1997, the
Company and TIGR reached an agreement for the early conclusion of the
collaboration, which relieved the Company of all remaining funding obligations,
totalling approximately $38 million. In exchange, the Company will forego all
intellectual property rights for future work performed at TIGR, but retains all
intellectual property rights for work performed up to June 1997.
The Company vigorously pursues patents to protect its intellectual
property. As of February 28, 1998, the Company has twenty issued U.S. patents
covering full-length genes and has filed U.S. patent applications covering
substantially more than 500 full-length genes and the proteins they encode. The
Company makes patent filings outside the United States as it deems appropriate.
In addition, the Company has filed patent applications on a substantial number
of expressed sequence tags ("ESTs") that represent its large partial gene
sequences, although there is substantial uncertainty as to the patentability of
partial gene sequences.
GENOME SCIENCE
Genome science refers to the characterization of the entire set of genetic
information of any organism, including humans. All cells contain DNA, a complex
material containing all of the genetic information necessary to govern a cell's
biological processes. In humans, approximately 3-5% of DNA consists of segments
called genes. The entire human genome is believed to contain at least 100,000
genes, of which only several thousand were known to have been identified at the
time the Company commenced its operations. Each gene consists of a linear
sequence of nucleotides, the basic structural units of DNA. Sequencing genes
involves determining the order of nucleotides in the gene, which permits
identification of the gene and the protein produced by the gene.
Genes act as the fundamental blueprint for all the physiological attributes
of an individual. Each gene contains the information required to produce
("express") a gene product, generally a protein. Proteins are expressed by a
gene according to a set of genetic instructions encoded in the DNA and are the
principal determinants of an organism's characteristics. A typical cell of
higher animals, such as humans, contains thousands of different proteins
essential to cellular structure, growth and function. The aberrant expression
within a cell by even a single gene can severely alter the cell's normal
function and result in a disease condition.
When a gene is expressed in a cell, the order of different nucleotides in
the gene is copied into RNA in a duplication process called transcription. A
splicing process within the cell then removes the introns, or non-coding gene
segments, from the transcript, thereby creating a messenger RNA ("mRNA"), which
contains only the exons, or coding regions, of the transcribed gene. The mRNA
then directs the production of a protein in a process called translation. The
order of nucleotides in the mRNA determines the protein that is made. By
isolating mRNA from cells, the Company's scientists can analyze primarily the
coding regions of a gene. However, mRNA is unstable and therefore is difficult
to analyze directly. To sequence the mRNA, it is preferable to copy or
transcribe the mRNA back into DNA. This process produces a DNA copy ("cDNA"),
which contains only the exons, or coding regions, of the expressed gene. This
process avoids examination of the majority of human DNA, as approximately 95-97%
of the human genome consists of long stretches of nucleotides which do not code
for protein. By focusing on the mRNA, the Company examines the portion of the
genome which it believes to be the most important, because it is the portion
which makes protein.
Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of most drugs. As a result, the identification of proteins
can
3
<PAGE>
play an important role in the development of drugs and drug screens. Proteins
themselves can also be used as drugs. Two examples of protein drugs on the
market are erythropoietin, which stimulates the production of red blood cells,
and insulin, which regulates sugar metabolism. The identification of genes that
code for proteins that may be missing or defective can enable the development of
therapeutics for genetic diseases. In addition, identification of genes that may
predispose a person to a particular disease may enable the development of
diagnostic tests for the disease.
COMPANY TECHNOLOGY AND RESEARCH
The Human Gene Anatomy Project
The gene discovery activity of the Company has focused on its Human Gene
Anatomy Project. The goal of this project is to identify virtually all human
genes, to catalogue the relative abundance of expressed genes by organ, tissue
and cell of origin and to identify changes in gene expression associated with
the normal processes of development, differentiation and activation, as well as
abnormal changes in gene expression associated with the development of disease.
The Company believes its Human Gene Anatomy Project approach is substantially
different from most others engaged in genomic research, which seek either to
isolate a single copy of each gene, determine the sequence of large regions of
human chromosomes or determine the chromosome location of genes responsible for
inherited genetic diseases. While such approaches will provide information
valuable for the creation of some new gene-based pharmaceutical products, the
Company believes that its Human Gene Anatomy Project provides a much broader
opportunity to discover genes of potential medical use.
The first component of the Human Gene Anatomy Project is the isolation and
preparation of a set of cDNA libraries from most normal human tissues. A library
is comprised of cDNA derived from samples of mRNA expressed in a particular
tissue. The Company's more than 700 libraries reflect the relative abundance of
the various mRNAs expressed in each tissue. The Company isolates and purifies
individual cDNA fragments from each library for sequence analysis to identify
the structure and possible function of genes. The Company sequences a portion of
each cDNA, which the Company believes is often sufficient to identify the
expressed gene and represents the best method for rapid gene discovery.
The Company's gene sequencing efforts now focus principally on comparing
genes expressed in normal, abnormal, and developmental tissues. The Company uses
such information to analyze changes in gene expression associated with
development, differentiation and disease processes, such as tumors of the
prostate, breast, colon and ovary. Additional areas of planned research include
changes in gene expression that occur during the processes of atherosclerosis,
asthma, emphysema, restenosis, osteoporosis, psoriasis, arthritis and a number
of neurological diseases.
Development of Product Opportunities
The Company has created an advanced proprietary bioinformatics system to
facilitate the selection of genes with potential medical utility. Bioinformatics
refers to the use of computers to process, analyze, store and retrieve
biological information. The Company believes it has one of the largest sets of
human gene sequences, and also uses its computer system to access publicly
available gene sequences. The Company's high capacity computer system has been
designed for ease of use by research scientists, who readily access the system
through desktop computers. The Company's data are also available to scientists
at SmithKline Beecham, Takeda, Schering Plough, Synthelabo and Merck KGaA
through bioinformatics systems created by the Company and SmithKline Beecham.
See " -- Collaborative Arrangements."
The Company believes that its proprietary bioinformatics system is an
important asset for the identification and creation of gene-based product
opportunities. The Company's bioinformatics system has several capabilities that
facilitate identification of genes with potential medical utility, including
gene similarity detection, sequence motif identification, sequence assembly and
differential gene expression analysis.
The Company's primary focus has progressed from identification of genes
having potential medical utility to the creation of proprietary product
opportunities. Specifically, the Company is now engaged in the identification
and development of product candidates, including the isolation and
characterization of full-length cDNAs, the purification of proteins encoded by
cDNAs of interest, the creation of cell lines that express specific receptors of
interest, the mapping of genes of interest, the creation of polyclonal and
monoclonal antibodies, the testing of the effects of purified proteins in cell
and tissue-based in vitro assays, the study of the effects of purified proteins
in small laboratory animals, and the initiation of human clinical trials.
As of February 28, 1998, the Company has isolated and fully sequenced
several hundred full-length cDNAs, purified more than 200 potential therapeutic
proteins and mapped more than 250 full-length cDNAs to their chromosomal
locations.
4
<PAGE>
RESEARCH AND DEVELOPMENT
The Company's research and development efforts have been organized into the
following divisions:
Gene Discovery Division. The Gene Discovery Division is responsible for
preparing biological samples, extracting and amplifying DNA, performing
sequencing reactions, managing production information and monitoring sequencing
quality. The division manages the operation of 58 automated sequencing machines
along with a variety of laboratory robots and other instruments. The division
has developed technologies that streamline HGS' efforts to fully sequence genes
of interest in a high-throughput fashion.
Molecular Biology Division. The Company's Molecular Biology Division seeks
to identify and evaluate genes that may be useful for the creation of
therapeutic protein drugs, small molecule drugs, gene therapy, antisense
treatments and diagnostic products. The Molecular Biology Division contains the
Protein Therapeutics group and Exploratory Research group.
The Protein Therapeutics group identifies and evaluates genes which encode
proteins which may be useful as therapeutic protein drugs or for gene therapy or
antisense applications. The Protein Therapeutics group also identifies genes
that may be useful for diagnostic purposes. When comparative analysis indicates
that a gene encodes a potential therapeutic protein, this group isolates the
corresponding full-length cDNA, determines its pattern of tissue expression and
its entire coding sequence.
The Company has commenced a program to identify from its database what it
believes to be full-length cDNAs likely to encode potential therapeutic
proteins. To date, the Company has identified what it believes to be several
thousand secreted proteins. The Company is expressing and evaluating these
proteins and assessing their activity using in vitro and in vivo models covering
different therapeutic areas.
In addition to efforts relating to the identification of potential
therapeutic proteins, the Protein Therapeutics group characterizes genes and
proteins that may serve as targets for small molecule drug discovery,
principally to support the work of the Company's collaborators. The group
isolates full-length cDNAs, performs experiments to determine the tissue and
cell type in which the genes are expressed and determines the complete sequence
of the cDNA corresponding to each candidate gene. The group has identified
several hundred genes which encode proteins that may be targets for small
molecule drug screening. Full-length cDNAs corresponding to many of these genes
have been isolated and fully sequenced, and tissue distribution and chromosomal
location of most of these full-length genes have been determined.
The efforts of the Exploratory Research group are focused on development
and implementation of new technologies useful in the identification of
medically-relevant gene candidates. Responsibilities of this group include new
methodologies for cDNA library construction, chromosome mapping, optimization of
full-length gene cloning and development of new methods for gene analysis. This
group is also currently responsible for efforts in microbiology, including
construction and analysis of microbial genome libraries and selection of
candidate genes which may be useful in vaccine and immunotherapeutic programs.
Microbiology Division. The Microbiology Division is responsible for
development of microbial gene sequence information and biological reagents that
support HGS' and collaboration anti-infective efforts. For the Company's
5
<PAGE>
microbial gene sequencing projects, the division is responsible for preparation
and analysis of the microbial genome database. These efforts include obtaining
biological samples and preparation of the microbial genome libraries. The group
has been involved in the sequencing of several important microbial pathogens,
including Streptococcus pneumoniae, Staphylococcus aureus and Enterococcus
faecalis. The division also supports internal and collaborative efforts focused
on generation of anti-microbial vaccine and immunotherapeutic products.
Bioinformatics Division. The Company's Bioinformatics Division develops
systems for high-volume data capture and analysis to support HGS' research and
collaborative efforts. The division applies advanced sequence data analysis
techniques to identify candidate genes for biological screening and drug
development. Bioinformatics manages database systems for tracking samples and
reagents during experimental procedures and sample storage. The division
supports collaborative relationships with the delivery of software, databases,
training and support. The division also is implementing systems for clinical
trial data management and analysis, preparation of drug applications and process
control of manufacturing operations.
Protein Development Division. The purpose of the Protein Development
Division is to provide proteins in a form suitable for in vitro and in vivo
testing. The Protein Development Division uses bacterial, insect and mammalian
expression systems that have been engineered to express abundant amounts of
proteins. The Company's therapeutic protein production facilities include 15
bioreactors ranging in capacity from 2 to 100 liters. The Protein Development
Division also purifies potential therapeutic proteins, enzymes that may be
useful in the discovery of small molecule drugs and bacterial proteins that may
be useful as vaccine components. This division also oversees the contract
production of cGMP materials by third parties for preclinical qualification and
Phase I clinical studies and the construction and operation of a pilot scale
production and process development facility, which will be leased from the
Maryland Economic Development Corporation ("MEDCO").
Through February 28, 1998, the Company has produced and purified more than
200 novel human proteins in amounts sufficient to test for activity. In some
cases, the Company also provides highly purified proteins to its collaborators
for further analysis.
Cell Biology Division. The Cell Biology Division determines the activities
of purified therapeutic protein candidates on cells in tissue culture. This
division uses over 75 in vitro assays to evaluate biological activities of
therapeutic protein candidates, many of which are used to determine whether such
candidates have biological activities relevant to serious unmet medical needs.
Examples of such in vitro tests include assays that detect proteins that have an
anti-viral effect, proteins that are capable of prolonging the life of neurons
and of promoting neural cell growth, proteins that have anti-cancer activity and
proteins that affect the growth and differentiation of hematopoietic cells.
High-Throughput Screening Division. The High-Throughput Screening Division
was established in early 1998. This group is responsible for the development and
validation of high-throughput screens to access the activity of the Company's
therapeutic protein candidates. This division is also responsible for generation
of cell-based supernatants that currently represent several thousand individual
genes encoding potential secreted proteins. The High-Throughput Screening group
works closely with the Gene Discovery and Bioinformatics divisions in
development of laboratory information management systems useful for
instrumentation control and analysis of test results.
Pharmacology Division. The Pharmacology Division tests for in vitro and in
vivo activity of therapeutic protein candidates and is also responsible for
safety studies. The division is responsible for preclinical animal testing of
the Company's therapeutic protein product candidates and employs a number of
standard assays for determining biological function. The division has also
developed several specialized assays to test biological function of specific
therapeutic proteins. The Company has recently expanded this division to
increase its efforts to develop therapeutic protein product candidates, and the
Company expects to continue to expand the division as necessary to support
preclinical and clinical development. The Company intends to establish a
clinical management team to manage and oversee clinical trials. The Company
intends to utilize contract research organizations to conduct toxicology,
pathology and clinical trials on the Company's lead therapeutic protein product
candidates.
Medical and Regulatory Affairs Divisions. The Medical and Regulatory
Affairs Divisions manage all activities necessary for the preparation and
submission of regulatory documentation including Investigational New Drug
Applications (INDs), Biologics License Applications, and New Drug Applications.
The divisions are responsible for developing and implementing clinical and
regulatory strategies that will ensure submissions meet U.S. and international
regulatory requirements to initiate clinical trials and obtain marketing
approvals for products developed by the Company.
The Quality Assurance (QA) staff, within Regulatory Affairs, is supporting
the establishment of current good manufacturing practices (GMPs) for HGS' leased
pilot product manufacturing facility. The QA staff provides guidance and assists
in creation and implementation of standard operating procedures (SOPs), assures
GMP training for facility employees, and maintains documentation of these
activities. QA participates in GMP audits of contract vendors.
6
<PAGE>
INDs are currently active for two therapeutic protein product candidates --
MPIF-1 and KGF-2. Leading physicians and investigators have been identified and
consulted for possible new drug indications and for optimizing clinical trial
designs related to investigating prevention of chemotherapy-induced damage to
myeloid precursors, treatment of surgical and dermal wounds, and mucositis.
Clinical investigators have been selected from this group to conduct the
clinical trials sponsored by HGS. The data from these studies will be entered
into an electronic database and analyzed by HGS medical, regulatory, and
statistical staffs. Formal reports of clinical and non-clinical data then will
be submitted to the FDA. If the safety and efficacy of the investigational drug
for the specified indication are demonstrated by clinical trial data, the
Company intends to submit a biologics license or new drug application to the FDA
for marketing approval.
AREAS OF PRODUCT DEVELOPMENT
The Company believes that the genes it identifies have the potential to be
valuable for the development of a wide range of healthcare products in some or
all of the following areas:
Therapeutic Proteins. Therapeutic proteins are recombinant human proteins
that in native or modified form exert medically useful physiologic or
pharmacologic activity. By discovering and isolating genes, the Company may be
able to cause the genes that code for therapeutic proteins to express those
proteins. Therapeutic proteins may be useful for the treatment of diseases,
including inflammatory and autoimmune diseases, neurodegenerative diseases,
cardio-pulmonary diseases and other diseases caused by insufficient or defective
proteins resulting from a missing or defective gene. Therapeutic proteins
currently in clinical use include interferon, insulin, human growth hormone,
DNAse, G-CSF, GM-CSF and erythropoietin.
Currently, the Company is conducting pre-clinical and clinical development
studies on a number of potential therapeutic proteins, including Myeloid
Progenitor Inhibitory Factor-1 (MPIF-1), Keratinocyte Growth Factor-2 (KGF-2),
and Vascular Endothelial Growth Factor -2 (VEGF-2).
MPIF-1. MPIF-1 is a member of the chemokine family. The Company has shown
that MPIF-1 in in vitro and in vivo studies inhibits the differentiation and
growth of bone marrow cells (myeloid progenitor cells) responsible for
maintenance of red and white blood cells. Myeloid progenitor cells are destroyed
by many forms of cancer chemotherapy resulting in severe leukopenia,
thrombocytopenia and anemia. By preventing the growth of myeloid progenitor
cells during aggressive cancer chemotherapy, it may be possible to reduce the
destruction of these cells allowing the more rapid repopulation of red and white
blood cells in the circulation. This, in turn, may reduce the incidence of
serious infection, anemia and coagulation disorders associated with cancer
chemotherapy. An Investigational New Drug application for MPIF-1 was submitted
to the FDA during November of 1997. Clinical trials were initiated in the first
quarter of 1998.
KGF-2. KGF-2 is a member of the Fibroblast Growth Factor superfamily. The
Company has shown in in vivo tests that KGF-2 stimulates the growth of
epithelial cells. The protein has potential for use in the treatment of topical
(skin) ulcers, surgical and other wounds and burns and possibly other conditions
affecting epithelial cells. In addition, KGF-2 may be useful in the treatment of
mucositis (frequently a toxicity of cancer chemotherapy) and/or acute renal
failure. An Investigational New Drug application for KGF-2 was submitted to the
FDA during December of 1997. Clinical trials were initiated in the first quarter
of 1998.
VEGF-2. VEGF-2 is a member of the vascular endothelial/platelet-derived
growth factor superfamily. The Company has shown in in vitro studies that VEGF-2
promotes the growth of certain subsets of vascular endothelial cells. In in vivo
animal models performed in collaboration with Dr. Jeffrey Isner at the St.
Elizabeth's Medical School, VEGF-2 protein and DNA encoding the VEGF-2 gene had
been shown to reduce the severity of ischemia in a rabbit hind limb ischemia
model.
As a result of the SB Amendment, in June 1996, the Company obtained the
right to designate a limited number of therapeutic protein candidates at any one
time for exclusive development and commercialization by the Company, with the
right to add additional proteins as products enter clinical trials, are
outlicensed or dropped. Schering Plough and SmithKline Beecham have certain
co-development rights with respect to these product candidates. Subject to
certain limitations, the Company has the right to substitute new proteins for
proteins (i) that have been licensed to third parties under procedures set forth
in the SB Amendment, (ii) that are the subject of clinical trials or (iii) the
rights to which have been surrendered by the Company. See " -- Collaborative
Arrangements."
All of the Company's therapeutic protein product candidates are in the
early stages of preclinical and clinical testing. Accordingly, the results of
testing to date may not be indicative of results that will be obtained in
further preclinical trials or in clinical trials, as applicable. As further
results of tests are received, the Company may abandon particular projects which
it might otherwise have considered promising. Additionally, there can be no
assurance that clinical trials as to any particular product candidate, if
commenced, will be successful, or that any product can be successfully
commercialized.
7
<PAGE>
Small Molecule Drugs. The Company believes that knowledge of a more
complete set of genes and the proteins they express will enable pharmaceutical
companies to design and screen pharmaceutical products in a more efficient
fashion by providing logical specific targets for discovering drugs. The
discovery of new drugs often involves screening a large family of synthetic and
natural products to determine their impact on proteins expressed by genes.
Increasingly, automated biochemical assays that test the ability of proteins to
bind to and modify the activity of purified proteins are used to test the
efficacy and selectivity (i.e., the ability to affect only the desired protein
targets and not other proteins expressed in the human body) of new drugs. The
undesired binding of a drug to other proteins not detected by a screening assay
can result in toxicity or other undesirable side effects. The Company believes
that the genes it discovers may contribute to screening assays by permitting
more complete sets of target proteins to be assembled for an assay. SmithKline
Beecham is currently using proteins expressed by genes identified by the Company
in a number of screening assays used to identify new drugs.
Diagnostics. The Company also believes that the genetic data obtained by it
could lead to the development of diagnostic tests for diseases. Such diagnostics
would likely be focused on four different applications. First, the comparative
analysis of genes expressed during the progression of tissues from normal to
fully diseased states may permit more accurate staging of diseases, thereby
facilitating the diagnosis and treatment of the disease. Proteins expressed by
"marker" genes associated with a specific disease can be a starting point in the
synthesis of antibodies, the principal components in many diagnostic systems.
Second, the Company's genetic data may enable the development of methods to
determine individual predisposition to disease. Third, tests could be designed
to detect inherited diseases in fetal cells. Fourth, the Company believes that
the genetic data obtained from the sequencing of disease-causing microorganisms
may allow for the rapid determination of the presence and activity of a
particular microorganism in an infected person. The development of diagnostics
based on genes identified by the Company is part of SmithKline Beecham's field
under the SB Diagnostic Amendment.
Antimicrobial Agents and Vaccines. The Company has retained exclusive
rights to utilize its information and technology to develop antimicrobial agents
and vaccines and, accordingly, is identifying and characterizing genes of
microorganisms, including bacteria, viruses, fungi and multicellular parasites.
The Company anticipates using its automated sequencing techniques to identify
genes expressed by microorganisms and parasites during resting, vegetative and
pathogenic states of infection. The Company believes that genes expressed during
the pathogenic phase of a microorganism may be found to be required for disease.
Each such gene (called a virulence gene) might be a candidate target for a new
antibiotic or vaccine. The Company also believes that knowledge of genes and
proteins expressed by pathogenic organisms may facilitate the development of
gene-based and antibody-based diagnostic assays for infectious diseases.
Analysis of the total genome of a microorganism should provide a complete
picture of all genes encoded by the microorganism. With this information, the
Company believes it may be possible to choose protein candidates that may be
useful as vaccine components or antigens required for the development of
immunotherapeutics. The Company also believes that a high-throughput approach of
gene identification may identify new genes capable of producing antibiotics and
other useful secondary metabolites.
The Company, either alone or in collaboration with TIGR, has completed
sequencing pathogenicity islands of Escherichia coli and the majority of the DNA
comprising the genome of the bacteria of the Staphylococcus aureus,
Streptococcus pneumoniae, Enterococcus faecalis, Helicobacter pylori, Borrelia
burgdorferi, Haemophilus influenzae, Mycoplasma genitalium and Methanococcus
jannaschii. The Company has entered into agreements with MedImmune, Inc.
("MedImmune"), Hoffmann-La Roche Inc. ("Roche") and Pharmacia & Upjohn Company
("Pharmacia") to create vaccines, immunotherapeutic products, and new
anti-infectives and antibiotics based on the genomes of many of these organisms.
See "-- Collaborative Arrangements." Patent applications have been filed by the
Company on these genomes.
Gene Therapy. The Company believes that its gene discovery technology may
identify new genes that can be introduced into the body through the use of gene
therapy techniques. Many diseases result when specific proteins are produced in
inappropriate quantities, in a defective manner, or not at all. Gene therapy is
a novel approach to the treatment of disease in which genes are inserted into a
patient's cells for the purpose of inducing these cells to produce therapeutic
proteins or to replace defective or missing genes. In other applications, the
Company believes that gene therapy may induce cells to secrete proteins that
enhance the immune system's ability to recognize and attack a specific disease.
Gene therapy might also allow localized delivery of proteins that cannot reach
the appropriate site through conventional methods of administration. There are
currently no gene therapy products on the market, although a number are
undergoing clinical trials. The Company has entered into agreements with
Schering Plough, Vascular Genetics Inc., and Transgene S.A., granting them the
right to use of the Company's technologies for gene therapy. See "--
Collaborative Arrangements."
Antisense Drugs. The Company believes that the knowledge of the structure
of genes developed through the use of its sequencing technology may facilitate
the development of antisense drugs. Antisense technology involves the use of
short oligonucleotide sequences, complementary to the gene, that, after binding
to the mRNA encoded by the gene, inhibit the synthesis of the protein encoded by
the gene. If, for example, the target gene expressed a protein involved in rapid
cell growth leading to a particular cancer, then use of the antisense drug could
have the potential of inhibiting the synthesis of the target protein encoded by
the particular gene and lead to restoration of normal growth. Antisense drugs
8
<PAGE>
could also be of potential benefit in diseases where production of excess
protein leads to the disease state. There are currently no antisense drugs
approved for treatment.
COLLABORATIVE ARRANGEMENTS
Agreements with SmithKline Beecham. In May 1993, the Company entered into
the SB Collaboration Agreements pursuant to which SmithKline Beecham was granted
certain exclusive rights to develop and commercialize therapeutic and diagnostic
products within the "SB Field" (as defined below) based on human genes
discovered by the Company. Pursuant to the SB Collaboration Agreements,
SmithKline Beecham has paid to the Company an aggregate of $125 million,
including $55 million which was allocated to the purchase of an aggregate of
1,351,738 shares of common stock.
In June 1996, the SB Collaboration Agreements were substantially amended
(the "SB Amendment"). The SB Amendment allowed the Company and SmithKline
Beecham together to enter into collaboration agreements with additional
pharmaceutical companies ("Additional Collaboration Partners") in the SB Field
(other than diagnostics and animal healthcare in which SmithKline Beecham has
generally retained exclusive rights). The "SB Field" is the field of human and
animal healthcare, other than gene therapy (excluding gene therapy vaccines),
antisense products and the use of genes for synthesizing drugs that were known
at the time the SB Collaboration Agreements were executed. In addition, the SB
Amendment provides that each of the Company and SmithKline Beecham can
independently designate potential therapeutic proteins for its exclusive
development and commercialization (e.g., marketing or outlicensing) provided
that the designating entity is the first among the Company, SmithKline Beecham
and the Additional Collaboration Partners to select the protein and certain
research requirements are met prior to such designation. Under the SB Amendment,
the Company can designate six therapeutic protein candidates for its exclusive
development and commercialization at any one time. Subject to certain
limitations, the Company may substitute additional proteins for any of the six
proteins designated by the Company (i) which have been licensed by the Company
to third parties in accordance with the SB Amendment, (ii) which are the subject
of clinical studies by the Company or (iii) the rights to which have been
surrendered by the Company. SmithKline Beecham's right to select therapeutic
protein candidates during the initial research term of the SB Collaboration
Agreements is not limited. In addition, the SB Amendment provides that each of
the Company and SmithKline Beecham may independently (i) research, develop and
commercialize antibody products directed against antigens derived from the human
genome database created by the Company and (ii) identify and use novel molecular
targets derived from the human genome database created by the Company to
discover and develop small molecule pharmaceutical products, provided that the
Company will not initiate screening of such targets for three years from the
effective date of the SB Amendment and will not use certain targets subject to
agreements with third parties, subject to certain other restrictions. The SB
Amendment restricts the Company from entering into collaborations with third
parties (other than Additional Collaboration Partners and Takeda) in the SB
Field (i) during the initial research term, except with respect to products for
which the Company has exclusive development rights and (ii) during the initial
research term and for a period thereafter with respect to certain products which
are the subject of research plans submitted by SmithKline Beecham or an
Additional Collaboration Partner or Takeda prior to the expiration of the
initial research term.
The SB Amendment provides that SmithKline Beecham and the Company will
share equally in any license fees and product development milestone payments
paid under Additional Collaboration Partner Agreements, and that the Company
will receive all royalties and research support payments under such Additional
Collaboration Partner Agreements. The SB Collaboration Agreements provide for
payments to the Company of royalties on net sales of products based on the
Company's patents or technologies within the SB Field ("SB Products") sold by
SmithKline Beecham (or its licensees) and milestone payments in connection with
the development of SB Products. The Company has an option to co-promote SB
Products sold by SmithKline Beecham, on a country-by-country basis, in the
United States, Canada, Mexico and Europe (subject to certain limitations as to
rights granted to Takeda and other parties). If the Company develops and markets
or outlicenses a product in the SB Field pursuant to its rights under the
agreements with SmithKline Beecham, SmithKline Beecham will generally be
entitled to royalties or to share in milestone payments and license fees
received by the Company from licensees with respect to such products. The
Additional Collaboration Partner Agreement with Schering Plough includes an
option for Schering Plough to co-develop and co-commercialize up to two products
in the SB Field to which the Company has exclusive development and
commercialization rights under the SB Collaboration Agreements. The SB
Collaboration Agreements include an option for SmithKline Beecham to co-develop
and co-commercialize products in the SB Field to which the Company has exclusive
development and commercialization rights under the SB Collaboration Agreements
and for which Schering Plough has not exercised its option to co-develop and
co-commercialize. SmithKline Beecham will also be entitled to royalties on, and
an option to co-promote, products outside the SB Field sold by the Company which
are based on or incorporate patents or information developed by SmithKline
Beecham based on the Human Gene Technology of the Company.
The initial research term under the SB Collaboration Agreements continues
through June 2001. After expiration of the initial research term, the Company
will have all rights to the Company's Human Gene Technology, except that
SmithKline Beecham will retain rights to the Company's Human Gene Technology
pursuant to research plans meeting certain specified criteria submitted prior to
9
<PAGE>
expiration of the initial term, Takeda will retain rights granted to it under a
license agreement prior to expiration of the initial research term and
Additional Collaboration Partners will retain rights granted to them under
Additional Collaboration Partner Agreements. See "-- Other Collaborations in the
SB Field." SmithKline Beecham has the right to extend the research term for up
to five additional years by making certain payments, which would extend the time
for submitting research plans as to therapeutic products other than antibody
products and therapeutic protein products.
The Company has agreed that it will make available 35 gene sequencers and
related personnel and reagents to sequence genes at the direction of a research
committee comprised of representatives of SmithKline Beecham and the Company.
In July 1997, the SB Collaboration Agreements were further amended with
respect to the field of human diagnostic products (the "SB Diagnostic
Amendment"). The SB Diagnostic Amendment streamlined the procedures for
outlicense by SmithKline Beecham of diagnostic products based on HGS technology
and specified a royalty on diagnostic products sold by SmithKline Beecham or its
licensees. The agreement also permits HGS to develop and market diagnostic tests
that support its own therapeutic products, if SmithKline Beecham is not already
developing and marketing such a diagnostic test. The agreement provides for an
initial research term that continues through June 2001, and may be extended by
SmithKline Beecham for up to five additional years by making certain payments
and provided that the SB Amendment agreement is also extended for a commensurate
period of time.
Other Collaboration Agreements in the SB Field. In June and July 1996, the
Company and SmithKline Beecham entered into the Additional Collaboration Partner
Agreements with Schering Plough, Synthelabo, and Merck KGaA. Each of the
Additional Collaboration Partner Agreements provides the Additional
Collaboration Partner the rights and licenses to access and use the Company's
Human Gene Technology, as well as biological information developed by the
Company and SmithKline Beecham prior to, and in the case of the Company, after
the effective date of such Agreement, to discover, develop and commercialize
products based upon or derived from such Human Gene Technology in the SB Field
(other than diagnostics and animal healthcare). Each Additional Collaboration
Partner may also designate, and receive exclusive license rights under the
Company and SmithKline Beecham patents and technology to, potential therapeutic
protein products for its exclusive development and commercialization, subject,
in certain cases, to certain restrictions as to the number of therapeutic
protein candidates that can be claimed, and subject to achievement of certain
research requirements prior to such designation. Each of the Additional
Collaboration Partners is obligated to pay license fees, research payments, and
milestone payments in connection with development of products under the
agreement and royalties. Each of the Additional Collaboration Partner Agreements
is for an initial research term expiring in June 2001. Each Additional
Collaboration Partner has the right to extend the term for up to five additional
years by making certain payments. The Company cannot enter into additional
agreements similar to the Additional Collaboration Partner Agreements without
the consent of SmithKline Beecham, Takeda and certain of the Additional
Collaboration Partners.
The Company will be entitled to one-half of all license fees and milestone
payments and to all royalties due from each Additional Collaboration Partner. In
addition, each Additional Collaboration Partner will make research payments
directly to the Company for the duration of the initial research term which
continues through June 2001. Aggregate license fees and research payments due
under the New Collaborative Partner Agreements are $140 million during the
initial research term, of which the Company will be entitled to $87.5 million,
payable in equal installments over a five-year period. $34.5 million has been
received by the Company as of February 28, 1998.
The Additional Collaboration Partner Agreement with Schering Plough
includes an option for Schering Plough to co-develop and co-commercialize up to
two of the Company's products in the SB Field to which the Company has exclusive
development and commercialization rights under the SB Collaborative Agreements.
SmithKline Beecham and Takeda entered into a License Agreement (the "Takeda
License Agreement") relating to the development and sale of products in the SB
Field based upon rights licensed from the Company. The Company will be entitled
to all royalty payments and one-half of the milestone payments due from Takeda
to SmithKline Beecham under the Takeda License Agreement on sales of products
developed by Takeda under the agreement. In addition, at the same time that
SmithKline Beecham and Takeda entered into the Takeda License Agreement, Takeda
and the Company entered into an Option and License Agreement pursuant to which
Takeda was granted an exclusive option to license rights under the Company's
patents and technology in the field of human healthcare (other than gene
therapy, antisense and diagnostics) to make and sell a limited number (equal to
the number of collaboration partners other than SmithKline Beecham and Takeda
with which the Company enters into collaboration agreements in the SB Field) of
products in Japan. In consideration of the grant of the option, Takeda paid the
Company $5 million and agreed to pay to the Company royalties based on the sale
of Takeda products covered by the Option and License Agreement and certain
milestone payments. The option period terminates three years following
expiration of the initial research term under the SB Collaboration Agreements.
Collaboration Agreements Outside of the SB Field. The Company has entered
into collaboration agreements with respect to the development of products based
on the Company's gene discovery research outside of the SB Field. These
collaboration agreements, which generally provide for milestone payments and
royalties and in most cases up front license fees and/or research payments,
include the following:
10
<PAGE>
A Collaboration and License Agreement with MedImmune, entered into in July
1995 and amended in March and December 1997, with respect to the
development of drugs based upon certain infectious agents sequenced by the
Company or TIGR or as to which the Company has licensed the rights.
Programs under the agreement with MedImmune include the creation of
vaccines and immunotherapeutics for non-encapsulated Haemophilus
influenzae, Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori
and Borrelia burgdorferi;
A Research Collaboration Agreement with Pioneer Hi-Bred International, Inc.
("Pioneer"), entered into in January 1996 under which Pioneer was granted
certain rights in the field of corn genomics;
A License Agreement with Roche, entered into in March 1996, under which the
Company is responsible for sequencing and assembling the genome of
Streptococcus pneumoniae, a bacterial pathogen responsible for severe
respiratory and other infections and under which Roche received a
non-exclusive license to use this information to identify potential new
anti-infectives and antibiotics; a similar agreement was entered into in
1997 with respect to the genome of Enterococcus faecalis, a bacterial
pathogen which is a major component of hospital-acquired infections;
A Collaboration and License Agreement with Schering Plough relating to the
field of human gene therapy (including gene therapy vaccines to the extent
the Company has the right to do so), under which Schering Plough was
granted (i) a non-exclusive license to use the Company's Human Gene
Technology to conduct research and (ii) an option to obtain an exclusive
license to specific genes in the field of gene therapy;
An agreement entered into in October 1996 with Pharmacia whereby the
Company granted to Pharmacia (i) a nonexclusive license to conduct research
and to make, use and sell products based on genes of Staphylococcus aureus
and the pathogenicity islands of Escherichia coli sequenced by the Company,
(ii) the right to obtain an exclusive license to certain products and (iii)
the right to negotiate to obtain an exclusive license as to certain
microbial genomes as to which the Company desires to grant an exclusive
license;
An agreement entered into in November 1996 with OraVax Merieux Co.
("OraVax"), with respect to an exclusive license granted by MedImmune and
the Company with respect to use of the Company's and MedImmune's technology
for a Helicobacter pylori vaccine;
An agreement entered into in November 1997 with a newly formed company,
Vascular Genetics Inc., whereby the Company granted to Vascular Genetics
(i) an exclusive license in the field of gene therapy for the Company's
vascular endothelial growth factor 2 (VEGF-2) gene, and (ii) an option for
up to two additional genes for use as gene therapy drugs to treat vascular
disease; in return the Company received 19.9 percent of Vascular Genetics'
equity and warrants for the purchase of an additional 5.1 percent interest;
other initial investors included St. Elizabeth's Medical Center of Boston,
Inc., CATO Holding Company, and Jeffrey M. Isner, M.D.; and
A Collaboration and License Agreement with Transgene S.A., entered into in
February 1998, relating to the field of human gene therapy (including gene
therapy vaccines to the extent the Company has the right to do so), under
which Transgene was granted the right to license exclusively up to 10
genes; the Company obtained a 10 percent interest in Transgene's equity and
certain co-development and co-marketing rights; the agreement is
conditional on Transgene's completion of an initial public offering of a
specified size and value.
As of February 28, 1998, the Company had entered into approximately 276
material transfer agreements with 135 academic institutions covering
approximately 1,354 gene sequences, cDNAs and proteins. The Company is
continuing to negotiate additional material transfer and license agreements. The
purpose of these agreements is to expand research and development relating to
the Company's gene information by providing academic researchers with
proprietary gene sequence information and related materials which enable them to
explore the biological activity and potential medical utility of newly
discovered human genes. Most of these material transfer agreements grant to the
Company a license, with established royalty rates, to any invention resulting
from the use of gene sequence information or related materials provided by the
Company. A relatively small number of the material transfer agreements signed by
the Company provide for an option to license any invention resulting from the
use of the Company's gene sequencing information. The Company has not signed a
material transfer agreement with an academic institution which does not provide
for a license or option to exclusive rights for inventions resulting from use of
the Company's information. In addition, TIGR, SmithKline Beecham and Takeda have
also entered into material transfer agreements with academic institutions. The
Company is also entitled to rights with respect to inventions resulting from use
of sequence information and related materials under such arrangements.
Agreements with TIGR. In October 1992 the Company entered into a Research
Services Agreement and an Intellectual Property Agreement with TIGR, a
not-for-profit research institute. TIGR initially performed most of the gene
sequencing and made the sequences available to the Company. The Company
subsequently developed its own gene sequencing capability.
Pursuant to these agreements, a Lease Funding Agreement entered into in
March 1993 and a subsequent agreement entered into in April 1993, the Company
had committed to provide an aggregate of approximately $85 million to TIGR over
a ten-year period, ending September 2002, of which $70 million consists of a
research grant and equipment funding for TIGR's scientific research relating to
determining human genes and their functions and uses. Through December 31, 1997,
11
<PAGE>
the Company had paid approximately $48 million pursuant to these agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Under the Research Services Agreement and the Intellectual Property
Agreement, TIGR was obligated to disclose to the Company all significant
developments relating to information or inventions discovered at TIGR, and the
Company owned (on a royalty-free basis) all of TIGR's interest in inventions and
patent rights arising out of TIGR's research during the term of the agreement
(including rights arising from research funded by third parties, except for
research funded by certain governmental and not-for-profit organizations as to
which the Company has been granted a royalty-bearing, worldwide, perpetual,
exclusive license, subject to a non-exclusive royalty-free license retained by
such organization).
In June 1997, the Company and TIGR agreed to an early conclusion of the
relationship between the two companies. Accordingly, the parties terminated the
prior agreements and entered into a new agreement whereby HGS ceased all future
payments to TIGR in return for relinquishing rights to future work done by TIGR.
The Company retained rights to inventions and patents arising out of TIGR's
research prior to June 1997. TIGR agreed not to enter into commercial agreements
for four years on selected therapeutic proteins and associated diagnostic tests
in development by HGS, and further agreed to share with HGS any proceeds from
all commercial arrangements relating to other human therapeutic proteins
completed prior to June 1999. In exchange for this limited non-compete
agreement, HGS granted to TIGR and its non-commercial collaborators a research
license for its prior work. The new agreement also eliminated certain
restrictions that prevented TIGR from publishing sequence information. This
agreement relieved HGS of a funding obligation of more than $38 million over the
remaining life of the original agreement.
The Company currently has a sequencing and analysis capacity greater than
that of TIGR. The Company believes that, while it benefited from the initial
TIGR agreement, termination of the agreement with TIGR will have no material
impact on its capacity to sequence and analyze human genes.
The Human cDNA Database Agreement. In July 1994, the Company, TIGR and
SmithKline Beecham reached an agreement to contribute a number of partial cDNA
sequences to a database (the "Human cDNA Database") that is accessible to
academic scientists and researchers at non-profit institutions that sign access
agreements. To date, approximately 160,000 human cDNAs resulting from the
collaboration between the Company and TIGR have been contributed to the Human
cDNA Database, including 50,000 cDNAs sequenced by the Company. The Human cDNA
Database Agreement provides that the Human cDNA Database is not available to
persons or entities engaged in commercial activities. In October 1996, TIGR
notified SmithKline Beecham and the Company of its decision to terminate the
Human cDNA Database Agreement according to its terms, such termination to be
effective in April 1997. Upon termination in April 1997, all Company sequences
were removed from the database and the remaining TIGR sequences were made
publicly available without restriction.
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success is dependent in part on its ability to
obtain patent protection on genes discovered by it. The Company applies for
patent protection for genes identified by partial sequencing and, subsequently,
for those genes which it fully sequences. However, there is substantial
uncertainty as to the patentability of genes based on partial sequences. Even if
patent protection is afforded for such sequences, it may not provide effective
marketing exclusivity. The Company's business might be enhanced by obtaining
patent protection based on partial gene sequences, but the Company does not
believe that its commercial success will be materially dependent on its ability
to do so. The Company has isolated and obtained full-length sequence information
for many of the genes that the Company or its collaborators intend to develop
further and has filed, and continues to file, for patent protection based on
such full-length sequences. However, the Company does not expect to isolate and
fully sequence a significant portion of the partial gene sequences it discovers.
See "-- Company Technology and Research."
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. There is a substantial backlog
of biotechnology patent applications at the PTO, and no clear policy has emerged
regarding the breadth of claims covered in biotechnology patents. There have
been, and continue to be, intensive discussions on the scope of patent
protection for both gene fragments and full-length genes. There have also been
proposals for review of the appropriateness of patents on genes and gene
fragments. 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 biotechnology patent
situation outside the United States is even more uncertain and is currently
undergoing review and revision in many countries.
As of February 28, 1998, the Company had filed United States patent
applications with respect to substantially more than 500 full-length human genes
and their corresponding proteins. The Company has also filed U.S. patent
applications with respect to all or portions of the genomes of eight infectious
microorganisms and one non-infectious microorganism. As of February 28, 1998,
the Company has twenty issued U.S. patents covering full-length human genes.
There can be no assurance that the remaining applications covering full-length
genes and their corresponding proteins will result in the issuance of any
12
<PAGE>
patents. For example, the disclosures in these applications may not be
sufficient to meet the statutory requirements for patentability in all cases.
Additionally, in view of the substantial number of genes that may be covered by
the Company's patent applications, the Company cannot predict what issues may
arise in connection with the Company's patent applications or the timing of the
grant of patents with respect to genes covered by such patent applications.
Moreover, in certain instances, the Company will be dependent upon its
collaborators to file and prosecute patent applications.
The Company also has filed United States patent applications claiming more
than 200,000 partial human gene sequences. These applications seek to protect
partial human and non-human gene sequences, the full-length gene sequences that
include the partial sequences, as well as products derived therefrom and uses
therefor. These applications identify possible biological functions for some of
the genes based in part on a comparison to genes included in public databases,
but do not contain any laboratory or clinical data with respect to such
biological functions. There are certain court decisions indicating that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full length sequence. In view of these court decisions, as
well as the uncertain position of the PTO, the Company believes that there is
significant risk that patents will not issue based on patent disclosures limited
to partial gene sequences. Finally, even if patents issue on the basis of
partial gene sequences, there is uncertainty as to the commercial meaningfulness
of the protection that might be provided by any such patents.
Publication of information concerning genes prior to the time the Company
applies for patent protection based on the full-length gene could adversely
affect the Company's ability to obtain patent protection with respect to genes
identified by it. Washington University has identified genes through partial
sequencing pursuant to funding provided by Merck & Co., and has deposited the
partial sequences identified in a public database. In January 1997, TIGR, in
collaboration with the National Center for Biological Information (NCBI),
disclosed full-length DNA sequences (which are reportedly in excess of 35,000
sequences) assembled from partial gene sequences (ESTs) available in publicly
accessible databases or sequenced at TIGR. Such disclosures might limit the
scope of claims or make unpatentable subsequent patent applications filed by the
Company on full-length genes. Moreover, the termination of the Human cDNA
Database Agreement in April 1997 and the termination of the prior agreements
between the Company and TIGR in June 1997 eliminated limitations on the
publication of TIGR sequences as of those dates. While the Company believes that
the previous limitations on publication of sequences have generally been
sufficient to permit the Company to apply for patent protection on genes in
which it is interested in pursuing further research, there can be no assurance
that such publication has not and will not affect the Company's ability to
obtain patent protection for some genes in which it may have an interest, which,
in the case of genes of commercial significance, could have a material adverse
effect on the Company. See "-- Collaborative Agreements -- Agreements with TIGR
and -- The Human cDNA Database Agreement."
In addition, 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 those of the Company. Moreover, the number of
patent applications covering genes and proteins expressed by genes has been
increasing, and is expected to continue to increase, as a result of the increase
in the number of entities conducting genomic research. See "-- Competition." The
Company has been notified that there may be patent applications filed by others
which cover genes for which the Company has filed patent applications. The
priority of competing patent claims would be decided in an interference
proceeding before the PTO. No assurance can be given that any such patent
application of third parties 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.
Accordingly, there can be no assurance that patents issued and any
additional patents, if issued, will provide commercially meaningful protection
against competitors. There can also be no assurance that any patent issued to
the Company will provide it with competitive advantages, or will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products which could result in an interference
proceeding in the PTO. Others may be able to design around issued patents or
develop products providing similar effect to products being developed by the
Company based on genes or proteins expressed by genes which are not covered by
patents issued to the Company. In addition, others may discover uses for genes
or proteins other than those uses covered in the Company's patent applications,
and these other uses may be separately patentable. In such case, the holder of a
use patent covering an invention as to which the Company has a composition of
matter patent claim could exclude the Company from selling a product for a use
covered by such use patent.
The Company's potential products may conflict with patents that have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued and other companies engage in the
business of discovering genes through the use of high speed sequencers, the risk
increases that the Company's potential products may give rise to claims that
they infringe the patents of others. Such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin clinical
testing, manufacturing and marketing of the affected products. If any such
actions are successful, in addition to any potential liability for damages, the
Company could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms. The Company believes
that there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights. If the Company becomes involved
13
<PAGE>
in such litigation, it could consume a substantial portion of the Company's
resources.
In addition, a small percentage of sequences covered by the Company's
patent filings were identified pursuant to research funded by grants from the
United States Department of Energy ("DOE"). The DOE has a statutory right under
certain circumstances (including inaction on the part of the holder of the
patent rights to achieve practical application of the invention or a need to
alleviate public health or safety concerns not reasonably satisfied by the
holder of the patent rights) to grant to other parties licenses under the
patents which may be granted based on research funded by the DOE.
The enactment of the legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to United States patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of seventeen years from the date of grant. The new term of United States
patents will commence on the date of issuance and terminate twenty years from
the earliest effective filing date of the application. Because the time from
filing to issuance of patent applications is often more than three years, a
twenty-year period from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position.
The Company also relies on trade secret protection for its confidential and
proprietary information. The Company believes it has developed proprietary
procedures for making cDNA libraries and sequencing and analyzing genes. The
Company has not sought patent protection for these procedures. Additionally, the
Company has developed a substantial database concerning genes identified by it.
The Company has taken security measures to protect its data and continues to
explore ways to further enhance the security for its data. However, trade
secrets are difficult to protect. While the Company has entered into
confidentiality agreements with employees and academic collaborators who are
provided data or materials under material transfer agreements, there can be no
assurance that such data or material will not be disclosed, 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.
In addition, certain trade secrets important to the Company's business have been
developed by, or are in the possession of, TIGR, including information
concerning sequencing procedures. Although TIGR also enters into confidentiality
agreements with its employees, there is an additional risk that such trade
secrets cannot be meaningfully protected.
COMPETITION
There is a finite number of genes in the human genome, and the Company
believes that the great majority of such genes have been identified by the
Company or others conducting genomic research and that virtually all will be
identified within several years. While the Company's goal has been to identify,
establish the utility of and ultimately patent as many genes as rapidly as
possible, the Company continues to face substantial competition in these efforts
both from entities using high-throughput gene sequencers to discover genes, as
well as from entities using more traditional methods to discover genes related
to particular diseases. Research to identify genes is also being conducted by
various institutes and United States and foreign government-financed entities,
including British, French, German and Japanese efforts, as well as numerous
smaller laboratories associated with universities or other not-for-profit
entities. In addition, a number of pharmaceutical and biotechnology companies
and government-financed programs are engaged or have announced the intention to
engage in areas of human genome research similar to or competitive with the
Company's focus on gene discovery, and other companies are likely to enter the
field.
The gene sequencing machines used by the Company are commercially available
and are currently being utilized by many other companies, in some cases for
business purposes competitive with those of the Company. In addition, a number
of other companies have announced plans to engage in gene discovery and could
acquire similar machines and develop procedures for automated sequencing of
genes. Although the Company believes that its large scale, automated processes
and lead time provide it with a competitive advantage, any one of these
companies or other entities may discover and establish a patent position in one
or more genes that the Company has identified and might have designated or
considered designating as a product candidate. 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
treatment for diseases that may be caused by, or related to, genes identified by
the Company.
The Company faces significant competition in its product development and
commercialization efforts, including competition from pharmaceutical and
biotechnology firms, including the Company's collaborators, many of which have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. In
particular, although the Company believes that there are significant product
development opportunities for both it and its collaborators based on the
Company's gene database, competition exists among the Company and its
collaborators to develop and commercialize products. In addition, the Company's
competitors may succeed in developing products earlier than the Company,
obtaining approvals from the United States Food & Drug Administration (the
"FDA") or other regulatory agencies for such products more rapidly than the
14
<PAGE>
Company, or developing products that are more effective than those proposed to
be developed by the Company. Similarly, while the Company through royalties and
co-payment arrangements will share any success of its collaborators in
identifying and commercializing products, they face similar competition from
other competitors who may succeed in developing products more quickly, or
developing products that are more effective, than those developed by such
collaborators. Certain of these competitors may be further advanced than the
Company in developing potential products that may compete with potential
products of the Company. There can be no assurance that research and development
by others will not render the products that the Company or its collaborators may
seek to develop obsolete or uneconomical or result in treatments, cures or
diagnostics superior to any therapy or diagnostic developed by the Company or
its collaborators, or that any therapy or diagnostic developed by the Company or
its collaborators will be preferred to any existing or newly developed
technologies.The Company expects that competition in this field will intensify.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products. New drugs are subject to regulation
under the Federal Food, Drug, and Cosmetic Act, and biological products, in
addition to being subject to certain provisions of that Act, are regulated under
the Public Health Service Act. The Company believes that the pharmaceutical
products developed by it or its collaborators will be regulated either as
biological products or as new drugs. Both statutes and the regulations
promulgated thereunder govern, among other things, the testing, manufacturing,
distribution, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research ("CBER") is responsible
for the regulation of biologics, and the Center for Drug Evaluation and Research
("CDER") is responsible for the regulation of new drugs.
In addition, any gene therapy products (which is one of the areas in which
the Company may develop products) developed by the Company will require
regulatory approvals prior to clinical trials and additional regulatory
approvals prior to commercialization. New human gene therapy products are
subject to extensive regulation by the FDA (CBER) and comparable agencies in
other countries. Currently, each clinical protocol is reviewed by the FDA and,
in some instances, the NIH, on a case-by-case basis. The FDA and the NIH have
published a "Points to Consider" guidance documents, with respect to the
development and submission of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct preclinical 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 ("IND") application, which the FDA must review before
human clinical trials of an investigational drug can start. The IND application
includes a detailed description of the initial clinical investigation to be
undertaken.
Preclinical studies can take several years to complete, and there is no
assurance that an IND based on such studies will ever become effective so as to
permit clinical testing to begin. A 30-day waiting period after the receipt of
each IND is required by the FDA prior to the commencement of initial clinical
testing. If the FDA has not commented on or questioned the IND within this
30-day period, initial clinical studies may begin, although companies often
obtain affirmative FDA approval before beginning such studies. If the FDA has
comments or questions, it places the studies on clinical hold and the questions
must be answered to the satisfaction of the FDA before the initial clinical
testing may begin.
In order to commercialize pharmaceutical products, the Company or its
collaborator must sponsor and file an IND and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety and efficacy and,
for a biologic product, the potency, which are necessary to obtain FDA approval
of any such products. For Company or collaborator-sponsored INDs, the Company or
its collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the IND. Clinical trials are normally done in three
phases, although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary effectiveness of the drug, involve fewer than
100 subjects, and may take from six months to over a year. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug and
demonstrate its safety and effectiveness. Clinical trials generally take two to
five years, but may take longer, to complete. Recent regulations promulgated by
the FDA may shorten the time periods and reduce the number of patients required
to be tested in the case of certain life-threatening diseases which lack
available alternative treatments.
The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension, or termination of clinical
trials if an unwarranted risk is presented to patients. If the FDA imposes a
15
<PAGE>
clinical hold, clinical trials may not recommence without prior FDA
authorization and then only under terms authorized by the FDA. The IND process
can thus result in substantial delay and expense. Human gene therapy products
(which is one of the areas in which the Company is seeking to develop products)
are a new category of therapeutics. Because this is a relatively new and
expanding area of novel therapeutic interventions, there can be no assurance as
to the length of the clinical trial period, the number of patients the FDA will
require to be enrolled in the clinical trials in order to establish the safety,
efficacy and potency of human gene therapy products, or that the clinical data
generated in these studies will be acceptable to the FDA to support marketing
approval.
After completion of clinical trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
CBER will require the submission and approval, depending on the type of
biologic, of either a Biologic License Application or, in some cases, a Product
License Application and an Establishment License Application before commercial
marketing of the biologic. If the product is classified as a new drug, the
Company must file a New Drug Application ("NDA") with CDER and receive approval
before commercial marketing of the drug. The NDA or BLA must include results of
product development, preclinical studies and clinical trials. The testing and
approval processes require substantial time and effort and there can be no
assurance that the FDA will accept the NDA or BLA for filing and, even if filed,
that any approval will be granted on a timely basis, if at all. In the past,
NDAs and BLAs submitted to the FDA have taken, on average, two to five years to
receive approval. If questions arise during the FDA review process, approval can
take more than five years. Notwithstanding the submission of relevant data, the
FDA may ultimately decide that the NDA or BLA does not satisfy its regulatory
criteria for approval and require additional clinical studies. Even if FDA
regulatory approvals 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, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness.
If a developer obtains designation by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases (generally, a disease or condition that
affects populations of fewer than 200,000 individuals in the United States),
including many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations. Essentially, this means that no other company can market
the same orphan drug for the use approved by the FDA for seven years after the
approval.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation and marketing
approval will remain in effect in the future.
Rigorous and extensive FDA regulation of pharmaceutical products continues
after approval, particularly with respect to manufacturing, which must be done
in compliance with cGMP, reporting of adverse effects, and advertising,
promotion, and marketing.
The Company currently is conducting clinical development activities with
respect to MPIF-1 and KGF-2. The Company is conducting preclinical trials with
respect to other proteins and expects to continue to conduct preclinical and
clinical studies with respect to additional potential products, as permitted
under its collaboration agreements. Accordingly, the Company is beginning to
incur significant expenses with respect to its preclinical and clinical
development activities. There can be no assurance that the preclinical or
clinical trials will lead to the successful development of any products for the
Company, and as further studies are conducted, the Company may choose to abandon
particular projects which it might have previously considered promising.
Regulation of Diagnostics. Some of the diagnostic products developed by the
Company or its collaborators are likely to be regulated by the FDA as medical
devices rather than drugs. 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 its collaborators would be automatically
classified as a Class III device, requiring premarket approval, and would remain
in Class III and require premarket approval unless the device were reclassified
into Class II or Class I by the FDA or the sponsor could demonstrate to the FDA,
in the required pre-market notification procedure, that the device was
substantially equivalent to a legally marketed existing device that has been
classified in Class I or Class II or to a legally marketed Class III device for
which premarket approval is not required. Following submission of a premarket
notification, a company may not market the device for clinical use until an
order is issued by the FDA finding the device to be substantially equivalent.
The FDA has no specific time limit by which it must respond to a premarket
notification. If the Company or its collaborators were unable to demonstrate
such substantial equivalence to the FDA's satisfaction, it would be required to
undertake the costly and time-consuming process, comparable to that for new
drugs, of conducting preclinical studies and conducting clinical tests, filing a
pre-market approval ("PMA") application, and obtaining FDA approval.
16
<PAGE>
If the Company or its collaborators can demonstrate substantial equivalence
to a Class I product, the "general controls" of the Food, Drug, and Cosmetic Act
- -- chiefly adulteration, misbranding, and "good manufacturing practice"
requirements -- will apply. If substantial equivalence to a Class II device can
be shown, the general controls plus "special controls" -- such as performance
standards, guidelines for safety and effective, and post-market surveillance --
will apply. If substantial equivalence to a Class III device (for which
premarket approval is not required) can be shown, the general controls plus any
applicable special controls will apply, and the product will require premarket
approval once the FDA requires such approval for the device to which substantial
equivalence was shown and other devices of the same generic type. While
demonstrating substantial equivalence to a Class I, Class II or Class III
product (for which premarket approval is not required) is not ordinarily as
costly or time-consuming as the premarket approval process for Class III
devices, it can in some cases also involve conducting clinical tests to
demonstrate that any differences between the new device and devices already on
the market do not affect safety or effectiveness.
In January 1997, the NIH-Department of Energy Task Force on Genetic Testing
issued proposed recommendations including increased monitoring of genetic
disorders, and tracking of people with positive and negative test results, by
CDC; establishment (under the Clinical Laboratory Improvement Amendments of
1988) of national program for the accreditation of laboratories performing
genetic testing, based on quality assurance, proficiency testing, and on-site
inspections; and additional regulation by the FDA. The Task Force's proposed
recommendations, if adopted and implemented, would significantly increase
federal regulation of genetic tests, whether provided as a product or service,
beginning with their manufacture and continuing through their marketing and use.
Marketed devices are subject to pervasive and continuing regulatory
oversight by the FDA, including record-keeping requirements and reporting of
adverse experiences with the use of the device. The Federal Food, Drug and
Cosmetic Act requires that medical devices be manufactured in accordance with
the FDA's cGMP regulation. This regulation requires, among other things, that
(i) the manufacturing process be regulated, controlled and documented by the use
of written procedures, and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. The regulation also requires investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are subject to FDA inspection
on a periodic basis to monitor compliance with GMP requirements. If violations
of the applicable regulations are noted during FDA inspections of manufacturing
facilities, the FDA can prohibit further manufacturing, distribution and sale of
the devices until the violations are cured. On October 7, 1996, the FDA
published a revision of its GMP requirements, incorporating them into a new
regulation called the quality system ("QS") regulation. The QS regulation
requires, among other things, pre-production design controls, purchasing
controls, and maintenance of service records. The QS regulation is effective
June 1, 1997, except that the FDA has stated that as long as manufacturers are
taking reasonable steps to come into compliance with the design control
requirements, the FDA will not initiate action (including enforcement cases)
based on a failure to comply with these requirements before June 1, 1998. Once
in effect, the QS regulation is expected to increase the cost of complying with
the cGMP requirements and related requirements. Other applicable requirements
include the FDA's medical device (manufacturer) reporting regulation, which
requires that the device manufacturer provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of its marketed
devices, as well as product malfunctions that would likely cause or contribute
to a death or serious injury if the malfunction were to recur.
Labeling, advertising and promotional activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting or marketing products for unapproved uses.
Other. In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act and the Toxic Substances Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continued compliance therewith will not have a material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed by state or federal regulators and
agencies or whether existing laws and regulations will not adversely affect it
in the future.
SOURCES OF SUPPLY
The Company currently relies on a single supplier, Applied Biosystems, a
division of Perkin-Elmer Corporation, to provide all of its gene sequencing
machines and certain reagents required in connection with the gene sequencing
process. The Company has not experienced problems in obtaining either gene
sequencing machines or reagents in a timely manner. While other gene sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. The Company has
17
<PAGE>
entered into certain agreements with Perkin-Elmer Corporation that (i) provide
for an established pricing structure with respect to the Company's purchases of
selected reagents, although such pricing is subject to change if the Company
does not meet certain minimum purchase requirements, and (ii) in the case of one
enzyme, provide that the Company will purchase and Perkin-Elmer Corporation will
sell a stated quantity at a fixed price. The Company orders these reagents by
submitting purchase orders at the time of purchase. No assurance can be given
that either the gene sequencing machines or the reagents will remain available
in commercial quantities at costs that are not economically prohibitive. Should
the Company be unable to obtain additional machines or an adequate supply of
reagents or other ingredients at commercially reasonable rates, its ability to
continue to identify genes through gene sequencing in accordance with its
current business plan would be adversely affected.
The Company has contracted for the manufacture of therapeutic proteins for
preclinical testing and clinical development from a single supplier. The Company
will be dependent on this company for its supply of therapeutic proteins until
it is able to produce therapeutic proteins at its own facility currently under
construction (see Item 2: Properties). Any failure or delay in supplying
therapeutic proteins could affect the timing of preclinical tests and clinical
trials and could delay submission of products for regulatory approval.
MANUFACTURING AND MARKETING
The Company has developed in-house capabilities for the production and
purification of recombinant proteins for use in its research activities, but
does not currently have any manufacturing facilities capable of supplying
materials suitable for clinical trials or for commercial sale or any experience
in manufacturing materials suitable for clinical trials or for commercial sale.
Currently, the Company relies on a third party for production of certain of its
therapeutic proteins for use in pre-clinical and early clinical development. The
Company will depend on such third party to comply with current good
manufacturing practices ("cGMPs") and other regulatory requirements and to
deliver materials on a timely basis, however there can be no assurance that such
party will perform. Any failures by the third party may delay clinical trial
development or the submission of products for regulatory approval, or otherwise
impair the Company's competitive position, which could have a materially adverse
effect on the Company's business.
During 1997, the Company designed and the Maryland Economic Development
Corporation ("MEDCO") began construction of a process development and production
facility for the preparation of clinical trial quantities of its therapeutic
proteins in compliance with cGMP requirements. The facility will comprise
approximately 80,000 square feet and is located in the Johns Hopkins Belward
Research Campus near the Company's offices and research laboratories.
Construction is expected to be completed in December 1998. After construction,
the facility must be validated and inspected by the FDA to determine compliance
with cGMP requirements. The facility has been designed to allow for the
production and purification of multiple recombinant proteins. The Company
intends to use the facility for production of preclinical and clinical supplies
of its therapeutic proteins and for process development and scale-up. A delay in
completion and/or validation of the facility could adversely affect the cost and
timing of clinical trials and could delay submission of products for regulatory
approval. The Company has entered into a long term lease arrangement with MEDCO
for the facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity."
The Company's long range plan is to establish additional manufacturing
capabilities to allow it to meet its full commercial manufacturing requirements.
However, the Company may contract with third party manufacturers or may develop
products with partners and take advantage of the partner's manufacturing
capabilities. There can be no assurance that the Company will be able to
successfully establish manufacturing capabilities and manufacture its products
economically or in compliance with cGMPs and other regulatory requirements.
The Company generally expects to rely on its collaborators or on third
parties with whom the Company may contract to market any products. In either
case, the Company will be dependent on such third parties for marketing.
However, in the future, the Company may co-promote or retain U.S. marketing
rights to certain of its products. Significant additional expenditures and
management resources will be required to develop an external sales force and
implement its marketing strategy if the Company decides to market products
directly. There can be no assurance that the Company's collaborators or other
third parties will be successful in marketing products, or that the Company will
be able to establish a successful marketing force.
EMPLOYEES
As of February 28, 1998, the Company had 353 full-time employees, of whom
301 were in research and development, including 63 scientists holding doctorate
degrees. The Company anticipates hiring approximately 100 additional employees
during the next twelve months. The additional staff is expected to include
additional research and development staff, pilot plant personnel, and medical
and regulatory affairs staff. None of the Company's employees is covered by
collective bargaining agreements and management considers its relations with its
employees to be good.
18
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases approximately 169,000 square feet of
laboratory and office space in six buildings in Rockville, Maryland. This
includes approximately 120,000 square feet of laboratory space and approximately
49,000 square feet of administrative office space. In addition, the Company has
entered into a long term lease for a process development and manufacturing
facility. Construction recently began on the 80,000 square foot facility which
is being built to the Company's specifications on a site near the Company's
headquarters and research and development laboratories. When completed, the
facility will be used to produce clinical trial quantities of its lead product
candidates.
The Company considers that its properties are generally in good condition,
are well maintained and are generally suitable and adequate to carry on the
Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER'S MATTERS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol HGSI. The Company's common stock began trading on December 2,
1993. The following table presents the quarterly high and low sales price as
quoted by NASDAQ.
1997 HIGH LOW
-------------- -------- ---------
First Quarter $ 48 $ 32 1/2
Second Quarter 39 1/4 30 3/4
Third Quarter 43 1/2 30 1/2
Fourth Quarter 45 1/4 38 1/8
1996 HIGH LOW
-------------- -------- ---------
First Quarter 49 3/4 31 1/2
Second Quarter 48 1/4 32 1/2
Third Quarter 39 1/2 24 3/4
Fourth Quarter 43 1/4 34 3/4
As of February 28, 1998, there were approximately 502 holders of record of the
Company's common stock. No cash dividends have been paid on the common stock to
date.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the years
ended December 31, 1997, 1996 and 1995, and as of December 31, 1997 and 1996
have been derived from the audited financial statements included elsewhere
herein and should be read in conjunction with such financial statements and the
accompanying notes. The following selected financial data of the Company for the
years ended December 31, 1994 and 1993, and as of December 31, 1995, 1994 and
1993 have been derived from audited financial statements not included herein.
The results of operations of prior periods are not necessarily indicative of
results that may be expected for any other period. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"ITEM 1. BUSINESS."
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------------------------ ---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue-research and
development collaborative
contracts.................... $25,605 $ 36,460 $ 5,000 $41,065 $22,000
Costs and expenses:
Research and development:
Direct expenditures....... 39,893 30,409 22,904 17,636 7,611
Payments under research
services agreement...... 6,247 10,063 10,075 9,662 8,989
-------- -------- -------- ------- -------
Total research and
development............. 46,140 40,472 32,979 27,298 16,600
General and administrative... 11,113 9,639 8,745 6,840 3,998
------- -------- -------- ------- -------
Total cost and expenses........ 57,253 50,111 41,724 34,138 20,598
------- -------- -------- ------- -------
Income (Loss) from operations (31,648) (13,651) (36,724) 6,927 1,402
Net interest income 10,500 6,092 4,005 2,813 390
------- --------- -------- ------- -------
Income (loss) before taxes..... (21,148) (7,559) (32,719) 9,740 1,792
Provision for (benefit) from
income taxes................. 245 208 (1,651) 2,436 (2)
------- -------- -------- ------- --------
Net income (loss).............. $(21,393) $ (7,767) $(31,068) $ 7,304 $ 1,794
======== ======== ======== ======= =======
Net income (loss) per share.... $ (0.99)(1) $ (0.42)(1) $ (1.98)(1) $ 0.47(1) $ 0.15(1)
======== ======== ======== ======= =======
Net income (loss) per share
assuming dilution............ $(0.99)(1) $ (0.42)(1) $ (1.98)(1) $ 0.47(1) $ 0.14(1)
========== ======== ======== ======= =======
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
investments................ $205,212 $ 116,116 $ 105,462 $ 76,002 $ 69,478
Total assets................. 236,232 140,117 126,963 95,543 82,450
Total debt and capital leases,
less current portions...... 2,224 2,954 4,332 5,346 1,338
Retained earnings (deficit).. (55,522) (34,129) (26,362) 4,706 (2,598)
Total stockholders' equity... 223,254 128,521 115,606 83,785 75,929
</TABLE>
- --------------------------------------------------------------------------------
(1) The net loss per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of net loss per share and the impact
of Statement No. 128, see Notes B and O of the notes to the Company's financial
statements included herein.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company initially focused its efforts on developing proprietary
processes for automating the gene discovery process, establishing collaborative
arrangements, and establishing and expanding its pre-clinical research and
development capabilities. The Company's activities are currently focused on
research and development of novel, proprietary pharmaceutical and diagnostic
products based on the discovery and understanding of the medical utility of
genes.
The Company has not received any product sales revenue or royalties from
product sales and does not anticipate revenues from product sales or from
royalties on product sales in the next several years. Through December 31, 1997,
the Company had received (i) $70 million in revenue and $55 million in equity
payments pursuant to the SB Collaboration Agreements, (ii) payments from the
Additional Collaboration Partners of $34.0 million and (iii) an aggregate of
$23.1 million from other collaborators, including $11.0 million from Pioneer
Hi-Bred International, Inc. ("Pioneer"), $3.0 million from F. Hoffmann-La Roche
("Roche"), $6.0 million from Pharmacia & Upjohn Company ("Pharmacia"), $1.1
million from OraVax Merieux Co. and Merieux OraVax S.N.C. (collectively,
"OraVax") and $2.0 million from Schering Plough (in addition to certain payments
received from Schering Plough pursuant to the Additional Collaboration Partner
Agreements). Pursuant to the terms of such collaboration agreements, the Company
expects to receive license fees and research payments of $63.5 million in the
aggregate over the next three years. See "Business -- Collaborative
Arrangements."
The Company expects that its revenue sources for at least the next several
years may be limited to interest income, payments under various collaboration
agreements, payments from the sale of rights and other payments from other
collaborators and licensees under existing or future arrangements, to the extent
that the Company enters into any such further arrangements. The Company expects
to continue to incur substantial expenses relating to its research and
development efforts, which are expected to increase relative to historical
levels as the Company focuses on preclinical and clinical trials required for
the development of therapeutic protein product candidates. As a result, the
Company expects to incur continued and increasing losses over the next several
years unless it is able to realize additional revenues under existing or new
collaboration agreements. The timing and amounts of such revenues, if any,
cannot be predicted with certainty and will likely fluctuate sharply. Results of
operations for any period may be unrelated to the results of operations for any
other period. In addition, historical results should not be viewed as indicative
of future operating results.
On March 2, 1998, the Company signed a ten year agreement with Transgene
S.A. ("Transgene"), based in Strasbourg, France, to develop gene therapy
products. Under the terms and conditions of the agreement, Transgene will have
the right to exclusively license, and sublicense, up to 10 genes and to develop,
manufacture and commercialize any resulting gene therapy products worldwide. The
two companies may also choose to co-develop and co-market the identified new
gene therapy products, and, in such case, commercialization rights will be held
by the Company for North America and by Transgene for Europe and will be shared
equally for the rest of the world's markets. Transgene will pay an initial
licensing fee and research funding in an amount equal to the proceeds to
Transgene from the Company's purchase of a 10% interest in Transgene. The value
of the 10% interest based on the anticipated close of Transgene's Initial Public
Offering (currently in process) would be approximately $25 million. Additional
payments to the Company are dependent upon the number of genes which Transgene
licenses and the accomplishment of certain milestones. Royalties on future
product sales and partnering revenues will be paid by Transgene to the Company.
On co-marketed products, the Company and Transgene will pay reciprocal
royalties.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. The Company had revenues of $25.6 million and $36.5 million for
the years ended December 31, 1997 and December 31, 1996, respectively. The 1997
revenue consisted of $4.1 million in license fees and research payments from
collaborations with Pioneer and Roche, $12.0 million in annual license fees and
additional payments from collaborations with Schering Plough and Synthelabo,
$5.5 million in annual license fees and additional payments pursuant to a
collaboration agreement with Merck, and $4.0 million in license fees from
collaborations with Pharmacia, MedImmune and OraVax. The 1996 revenue consisted
of $6.9 million for the achievement of the third milestone ("Milestone III")
under the SB Collaboration Agreements, $10.0 million in license fees and
research payments from collaborations with Pioneer and Roche, $12.0 million in
annual license fees and additional payments from collaborations with Schering
Plough and Synthelabo, $5.5 million in annual license fees and additional
payments pursuant to a collaboration agreement with Merck, and $2.1 million in
license fees from collaborations with Pharmacia, MedImmune and OraVax.
22
<PAGE>
Expenses. Research and development expenses increased to $46.1 million for
the year ended December 31, 1997 from $40.5 million for the year ended December
31, 1996. The increase resulted primarily from significant expansions in the
Company's cell biology, protein expression and pharmacology departments, the
production of clinical trial quantities of the Company's first two therapeutic
product candidates and the formation of a medical affairs department to manage
clinical trials. Expenses will continue to increase in support of research and
development of potential products by the Company and in support of the new
collaborations.
General and administrative expenses increased to $11.1 million for the year
ended December 31, 1997 from $9.6 million for the year ended December 31, 1996.
The increase resulted primarily from significantly higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins discovered by the Company. Patent expenses will
continue to increase significantly as additional applications are filed and
existing applications are prosecuted in the United States and internationally.
Interest income was significantly higher for the year ended December 31, 1997
compared to the year ended December 31, 1996 due to higher cash balances.
Net Income (Loss). The Company recorded a net loss of $21.4 million, or
$0.99 per share, for the year ended December 31, 1997 compared to a net loss of
$7.8 million, or $0.42 per share, for the year ended December 31, 1996. The
difference in results for the year ended December 31, 1997 and 1996 is primarily
due to the lower collaboration partner payments during the year ended December
31, 1997 and higher expenses, which were partially offset by higher interest
income.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. The Company had revenues of $36.5 million and $5.0 million for
the years ended December 31, 1996 and December 31, 1995, respectively. The 1996
revenue consisted of $6.9 million for the achievement of Milestone III under the
SB Collaboration Agreements, $10.0 million in license fees and research payments
from collaborations with Pioneer and Roche entered into in the first quarter of
1996, $12.0 million in annual license fees and additional payments from
collaborations with Schering Plough and Synthelabo entered into in the second
quarter of 1996, $5.5 million in annual license fees and additional payments
pursuant to a collaboration agreement entered into with Merck in July 1996, and
$2.1 million in license fees from collaborations with Pharmacia, MedImmune and
OraVax entered into in the fourth quarter of 1996. The 1995 revenue consisted of
$5.0 million from Takeda for an option and license agreement to commercialize
certain future products of the Company in Japan.
Expenses. Research and development expenses increased to $40.5 million for
the year ended December 31, 1996 from $33.0 million for the year ended December
31, 1995. The increase resulted primarily from significant expansions in the
Company's cell biology, protein expression and pharmacology departments and
reflect the Company's increasing emphasis on determining the biological
functions and possible medical utilities of genes and proteins discovered as a
result of the Company's gene discovery efforts.
General and administrative expenses increased to $9.6 million for the year
ended December 31, 1996 from $8.7 million for the year ended December 31, 1995.
The increase resulted primarily from significantly higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins discovered by the Company. Interest income was
significantly higher for the year ended December 31, 1996 compared to the year
ended December 31, 1995 due to higher cash balances and interest rates.
Net Income (Loss). The Company recorded a net loss of $7.8 million, or
$0.42 per share, for the year ended December 31, 1996 compared to a net loss of
$31.1 million, or $1.98 per share, for the year ended December 31, 1995. The
difference in results for the year ended December 31, 1996 and 1995 is primarily
due to the receipt of $36.5 million in license fees and research payments during
the year ended December 31, 1996, which was partially offset by higher expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $196.9 million at December 31, 1997 as
compared to $110.8 million at December 31, 1996. The increase resulted from the
sale in March 1997 of 3,192,750 shares of common stock at a public offering
price of $37.00 per share for which the Company received net proceeds of $112.0
million, which was partially offset by the net loss generated during the year,
capital expenditures, and payments on capitalized leases.
The Company expects to continue to incur substantial expenses relating to
its research and development efforts, which expenses are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
At December 31, 1997, the Company had outstanding commitments for construction
and equipment purchases totaling approximately $353,000.
23
<PAGE>
The Company expects that its existing funds, interest income, and committed
license fees and research payments from the Additional Collaboration Partners
and under existing collaboration agreements will be sufficient to fund the
Company's operations for the foreseeable future. The Company's future capital
requirements and the adequacy of its available funds will depend on many
factors, including scientific progress in its research and development programs
(including its preclinical and clinical product development activities), paper,
the magnitude of those programs, the ability of the Company to establish
collaborative and licensing arrangements, the cost involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and competing
technological and market developments.
The Company entered into a 20 year lease for a process development and
production facility being built to the Company's specifications. Annual base
rent in the amount of $2.2 million is expected to begin January 1, 1999, the
anticipated completion date of the facility.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $51 million which expire, if
unused, by the year 2012. The Company also has available research and
development tax credit carryforwards of approximately $6.8 million, the majority
of which will expire, if unused, by the year 2012.
The Company's funds are currently invested in U.S. Treasury and government
agency obligations and high grade corporate debt securities and commercial paper
investment-grade commercial paper and interest-bearing securities. Such
investments reflect the Company's policy regarding the investment of liquid
assets, which is to seek a reasonable rate of return consistent with the
emphasis on safety, liquidity and preservation of capital.
Recently, national attention has focused on the potential problems and
costs resulting from computer programs being written using two digits rather
than four to define the applicable year. Any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, or engage in similar normal business
activities. While the Company believes that its internal software applications
are Year 2000 compliant, there can be no assurance until the year 2000 that all
systems will function adequately. Further, if the software applications of
others on whose services the Company depends are not Year 2000 compliant, such
noncompliance could have a material adverse effect on the Company.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income,"
which is required to be adopted in the year ended December 31, 1998 consolidated
financial statements. SFAS 130 requires that an enterprise (a) classify items of
comprehensive income by their nature in the financial statements and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholders'
Equity. The Company does not expect the adoption of SFAS 130 to be material to
its financial condition and results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounts Standards No. 131 ("SFAS 13l"), "Disclosures about Segments
of an Enterprise and Related Information," which is required to be adopted in
the year ended December 31, 1998 consolidated financial statements. SFAS changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. The disclosures for
segment information in the consolidated financial statements is not expected to
be material to its financial condition and results of operations.
24
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," including statements concerning future collaboration agreements,
royalties and other payments under collaboration agreements, and product
development and sales and other statements are forward looking statements, as
defined in the Private Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected in the forward looking statements as
a result of risks and uncertainties, including but not limited to, the
following: the scientific progress of the Company in its research and
development programs; the magnitude of these programs; the ability of the
Company to establish additional collaborative and licensing arrangements; the
extent to which the Company engages in clinical development of any products on
its own; the scope and results of pre-clinical testing and clinical trials; the
time and costs involved in obtaining regulatory approvals; the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims;
competing technological and market developments; and whether conditions to
milestone payments are met and the timing of such payments, and other risks and
uncertainties detailed elsewhere herein and from to time in the Company's
filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item are set forth here in on pages F-1 -
F-20.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates herein by reference the information concerning
directors and executive officers in its Notice of Annual Stockholder's Meeting
and Proxy Statement to be filed within 120 days after the end of the Company's
fiscal year (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1998 Proxy
Statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
(1) Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1997 and 1996............................. F-3
Statements of Operations for the years ended December 31, 1997, 1996 and
1995................................................................. F-4
Statements of Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995.................................................. F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995................................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not required.
(3) Exhibits
Exhibit No.
- -----------
3.1* Restated Certificate of Incorporation (Fifth) of the Registrant (Filed
as Exhibit 3.1 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference).
3.2* By-laws of the Registrant (Filed as Exhibit 3.2 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
3.3 Certificate of Amendment of the Certificate of Incorporation of
Registrant
4.1* Form of Common Stock certificate.
10.1*+ Collaboration Agreement, dated May 19, 1993, between the Registrant and
SmithKline Beecham Corporation ("SmithKline Beecham"), as amended on
May 19, 1993 and August 19, 1993 (Filed as Exhibit 10.1 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.2* Second Amendment to HGS-SB Collaboration Agreement, effective September
1, 1993, between the Registrant and SmithKline Beecham (Filed as
exhibit 10.2 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference).
10.3* Amendment to HGS-SB Collaboration Agreement, effective March 17, 1994,
between the Registrant and SmithKline Beecham (Filed as Exhibit 10.3 to
the Registrant's Form 10-K for the fiscal year ended December 31, 1993
and incorporated herein by reference).
10.4*+ License Agreement between the Registrant and SmithKline Beecham
Corporation dated September 15, 1994 (Filed as Exhibit 10.8 to the
Registrant's Form 10-Q filed November 14, 1994 and incorporated herein
by reference).
10.5*+ Amendment to HGS-SB Collaboration Agreement (Therapeutic Protein
Amendment), effective December 23, 1994, between the Registrant and
SmithKline Beecham (Filed as Exhibit 10.4 to the Registrant's Form 10-
K for the fiscal year ended December 31, 1994 and incorporated herein
by reference).
27
<PAGE>
10.6*+ Amendment to HGS-SB Collaboration Agreement (Milestone III Amendment),
effective December 29, 1994, between the Registrant and SmithKline
Beecham (Filed as Exhibit 10.5 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by
reference).
10.7* Amendment to the Series B Convertible Preferred Stock Purchase
Agreement between the Registrant and SmithKline Beecham Corporation,
dated December 29, 1994. (Filed as Exhibit 10.96 to the Registrant's
form S-3 Registration Statement, as amended (Commission File No.
33-96206) originally filed August 25, 1995 and incorporated herein by
reference).
10.8*+ Amendment to HGS-SB Collaboration Agreement, effective April 24, 1995,
between the Registrant and SmithKline Beecham Corporation. (Filed as
Exhibit 10.6 to the Registrant's form S-3 Registration Statement, as
amended (Commission File No. 33-96206), originally filed August 25,
1995 and incorporated herein by reference).
10.9*+ Amendment to HGS-SB Collaboration Agreement, effective May 31, 1995,
between the Registrant and SmithKline Beecham. (Filed as Exhibit 10.1
to the Registrant's Form 10-Q filed August 14, 1995 and incorporated
herein by reference).
10.10*+ Amendment and Restated License Agreement between the Registrant and
SmithKline Beecham effective May 31, 1995 (Filed as Exhibit 10.1 to the
Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
reference).
10.11*+ Amendment to SmithKline Beecham and Human Genome Sciences, Inc.
Collaboration Agreement and License Agreement and Amended and Restated
License Agreement dated June 28, 1996. (Filed as Exhibit 10.1 to the
Registrants 10-Q filed August 14, 1996 and incorporated herein by
reference).
10.12*+ SmithKline Beecham and Human Genome Sciences, Inc. License Agreement
Dated June 28, 1996. ( Filed as Exhibit 10.2 to the Registrants 10 -Q
filed August 14, 1996 and incorporated herein by reference).
10.13*+ Therapeutic Collaboration and License Agreement by and among Human
Genome Sciences, Inc., Schering Corporation, Schering Plough Ltd., and
SmithKline Beecham Corporation dated June 28, 1996. (Filed as Exhibit
10.3 to the Registrants 10-Q filed August 14, 1996 and incorporated
herein by reference).
10.14*+ Gene Therapy Collaboration and License Agreement by and among Human
Genome Sciences, Inc., Schering Corporation, and Schering Plough Ltd.,
June 28, 1996. ( Filed as Exhibit 10.4 to the Registrants 10-Q filed
August 14, 1996 and incorporated herein reference).
10.15*+ Collaboration and License Agreement by and among Human Genome Sciences,
Inc. SmithKline Beecham Corporation and Synthelabo dated June 30, 1996.
(Filed as Exhibit 10.5 to the Registrants 10-Q filed August 14, 1996
and incorporated herein by reference).
10.16*+ Collaboration and License Agreement between SmithKline Beecham
Corporation, Human Genome Sciences, Inc. and Merck KGaA effective July
10, 1996. ( Filed as Exhibit 10.6 to the Registrants 10-Q filed
November 14, 1996 and incorporated herein by reference).
10.17*+ Research Collaboration Agreement between the Registrant and Genetic
Therapy, Inc. dated September 13, 1994 (Filed as Exhibit 10.7 to the
Registrant's Form 10-Q filed November 14, 1994 and incorporated herein
by reference).
10.18*+ Option and License Agreement between the Company and Takeda Chemical
Industries, Ltd. dated June 12, 1995 (Filed as Exhibit 10.3 to the
Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
reference).
10.19*+ Collaboration and License Agreement between the Registrant and
MedImmune, Inc. dated July 27, 1995 (Filed as Exhibit 10.5 to the
Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
reference).
10.20*+ Research Collaboration Agreement, dated January 19, 1996, between
Registrant and Pioneer Hi-Bred International, Inc. ("Pioneer"). (Filed
as Exhibit 10.15 to the Registrants Form 10-K filed March 31,1996 and
incorporated herein by reference).
28
<PAGE>
10.21*+ License Agreement between Registrant and F. Hoffmann-La Roche, Ltd.
("Roche"). (Filed as Exhibit 10.16 to the Registrants Form 10-K filed
March 31,1996 and incorporated herein by reference).
10.22*+ Research Services Agreement, dated October 1, 1992, between the
Registrant and The Institute for Genomic Research ("TIGR") (Filed as
Exhibit 10.4 to the Registrant's Form S-1 Registration Statement, as
amended (Commission File No. 33-69850), originally filed October 1,
1993 and incorporated herein by reference).
10.23*+ Intellectual Property Agreement, dated October 2, 1992, between the
Registrant and TIGR (Filed as Exhibit 10.5 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993 and incorporated herein by reference).
10.24* Lease Funding Agreement and Assignment, dated March 2, 1993, between
the Registrant and TIGR (Filed as Exhibit 10.6 to the Registrant's Form
S-1 Registration Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993 and incorporated herein by reference).
10.25* Letter Agreement, dated March 31, 1993, between the Registrant and TIGR
(Filed as Exhibit 10.7 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.26*+ Letter Agreement, dated April 19, 1993, between the Registrant and TIGR
(Filed as Exhibit 10.8 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.27* Stock Purchase, Restriction and Repurchase Agreement, dated April 26,
1993, between the Registrant and TIGR (Filed as Exhibit 10.47 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.28* Letter Agreement, dated May 7, 1993, between the Registrant and TIGR
(Filed as Exhibit 10.9 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.29*+ Human cDNA Database Agreement among the Registrant, SmithKline Beecham
Corporation, and The Institute for Genomic Research dated July 7, 1994
(Filed as Exhibit 10.5 to the Registrant's Form 10-Q filed November 14,
1994 and incorporated herein by reference).
10.30*+ Amendment to the Human cDNA Database Agreement between the Registrant
and SmithKline Beecham Corporation and the Institute for Genomic
Research dated October 26, 1994 (Filed as Exhibit 10.6 to the
Registrant's Form 10-Q filed November 14, 1994 and incorporated herein
by reference).
10.31*+ Second Amendment to the Human cDNA Database Agreement between the
Registrant and SmithKline Beecham Corporation and the Institute for
Genomic Research dated as of April 14, 1995 (Filed as Exhibit 10.87 to
the Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
10.32* Common Stock Purchase Warrant, dated June 8, 1993, granted to HCV III
(Filed as Exhibit 10.33 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.33* Common Stock Purchase Warrant, dated June 8, 1993, granted to HCV IV
(Filed as Exhibit 10.34 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.34* Common Stock Purchase Warrant, dated June 8, 1993, granted to Everest
(Filed as Exhibit 10.36 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
29
<PAGE>
10.35* Master Lease Agreement, dated January 31, 1993, between the Registrant
and MMC/GATX Partnership No. I (Filed as Exhibit 10.25 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.36* Warrant Agreement, dated January 31, 1993, between the Registrant and
MMC/GATX Partnership No. I (Filed as Exhibit 10.26 to the Registrant's
Form S-1 Registration Statement, as amended (Commission File No. 33-
69850), originally filed October 1, 1993 and incorporated herein by
reference).
10.37* Master Lease Agreement, dated as of January 31, 1993, between the
Registrant and Dominion Ventures, Inc. (Filed as Exhibit 10.27 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.38* Master Lease Agreement, dated January 31, 1993, between the Registrant
and Comdisco, Inc. (Filed as Exhibit 10.29 to the Registrant's Form S-
1 Registration Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993 and incorporated herein by reference).
10.39* Master Lease Agreement (Equipment) between the Registrant and Comdisco,
Inc., dated June 30, 1994 (Filed as Exhibit 10.12 to the Registrant's
Form 10-Q filed August 12, 1994 and incorporated herein by reference).
10.40* Lease of Premises at 9620 Medical Center Drive, Rockville, Maryland
(Filed as Exhibit 10.42 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.41* Lease of Premises at 9430 Key West Avenue, Rockville, Maryland (Filed
as Exhibit 10.44 to the Registrant's Form S-1 Registration Statement,
as amended (Commission File No. 33-69850), originally filed October 1,
1993 and incorporated herein by reference).
10.42* Office Lease between the Registrant and Key West IV Limited
Partnership, dated June 14, 1994 (Filed as Exhibit 10.11 to the
Registrant's Form 10-Q filed August 12, 1994 and incorporated herein by
reference).
10.43* Stock Purchase and Restriction Agreement, dated December 31, 1992,
between the Registrant and William A. Haseltine, Ph.D. (Filed as
Exhibit 10.15 to the Registrant's Form S-1 Registration Statement, as
amended (Commission File No. 33-69850), originally filed October 1,
1993 and incorporated herein by reference).
10.44* Employment Agreement, dated February 25, 1997, with William A.
Haseltine, Ph.D. (Filed as Exhibit 10.44 to the Registrant's Form 10 K
for the fiscal year ended December 31, 1996 and incorporated herein by
reference).
10.45* Restricted Stock Purchase Agreement, dated May 18, 1993, between the
Registrant and William A. Haseltine, Ph.D. (Filed as Exhibit 10.24 to
the Registrant's Form S-1 Registration Statement, as amended
(Commission File No. 33-69850), originally filed October 1, 1993 and
incorporated herein by reference).
10.46* Promissory Note, dated March 4, 1994, given by William A. Haseltine,
Ph.D. to the Registrant (Filed as Exhibit 10.58 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
10.47* First Allonge to Promissory Note, dated December 16, 1994, given by
William A. Haseltine, Ph.D. to the Registrant (Filed as Exhibit 10.65
to the Registrant's Form 10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
10.48* Pledge Agreement, dated March 4, 1994, between William A. Haseltine,
Ph.D. and Registrant (Filed as Exhibit 10.59 to the Registrant's Form
10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
30
<PAGE>
10.49* First Amendment to Pledge Agreement, dated December 16, 1994, between
William A. Haseltine, Ph.D. and Registrant (Filed as Exhibit 10.67 to
the Registrant's Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
10.50* Employment Agreement, dated October 1992, with Craig A. Rosen, Ph.D.
(Filed as Exhibit 10.17 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed
October 1, 1993 and incorporated herein by reference).
10.51* Restricted Stock Purchase Agreement, dated April 21, 1993, between the
Registrant and Craig A. Rosen, Ph.D. (Filed as Exhibit 10.22 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.52* Employment Agreement, dated March 14, 1994, with Bradley G. Lorimier
(Filed as Exhibit 10.22 to the Registrant's Form 10-K for the Fiscal
year ended December 31, 1993 and incorporated herein by reference).
10.53* Promissory Note dated September 12, 1994, given by Bradley G. Lorimier
to the Registrant (Filed as Exhibit 10.9 to the Registrant's Form 10-Q
filed November 14, 1994 and incorporated herein by reference).
10.54* Employment Agreement, dated January 23, 1995 with Robert H. Benson
(Filed as Exhibit 10.27 to the Registrant's From 10-K for the Fiscal
year ended December 31, 1994 and incorporated herein by reference).
10.55* Employment Agreement between the Company and Melvin D. Booth dated June
19, 1995 (Filed as Exhibit 10.4 to the Registrant's Form 10-Q filed
August 14, 1995 and incorporated herein by reference).
10.56* Restricted Stock Purchase Agreement, dated April 21, 1993, between the
Registrant and Catherine G. Blair (Filed as Exhibit 10.19 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.57* Restricted Stock Purchase Agreement, dated April 21, 1993, between the
Registrant and James W. Church (Filed as Exhibit 10.20 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.58* Restricted Stock Purchase Agreement, dated April 21, 1993, between the
Registrant and Donald D. Johnston (Filed as Exhibit 10.21 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.59* 1993 Stock Option Plan (Filed as Exhibit 10.45 to the Registrant's Form
S-1 Registration Statement, as amended (Commission File No. 33- 69850),
originally filed October 1, 1993 and incorporated herein by reference).
10.60* 1994 Stock Option Plan (Filed as Exhibit 4 to the Registrant's
Registration Statement on Form S-8, File No. 33-79020, filed May 17,
1994 and incorporated herein by reference).
10.61* Form of Stock Option Agreement (Filed as Exhibit 10.46 to the
Registrant's Form S-1 Registration Statement, as amended (Commission
File No. 33-69850), originally filed October 1, 1993 and incorporated
herein by reference).
10.62*+ Agreements between the Registrant and Perkin-Elmer Corporation (Filed
as Exhibit 10.48 to the Registrant's Form S-1 Registration Statement,
as amended (Commission File No. 33-69850), originally filed October 1,
1993 and incorporated herein by reference).
10.63* $4,000,000 Maryland Industrial Development Financing Authority Taxable
Variable Rate Demand Economic Development Revenue Bonds dated December
21, 1994 (Filed as Exhibit 10.90 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by
reference).
31
<PAGE>
10.64*+ HGS/TIGR Agreement dated June 20, 1997 (Filed as Exhibit 10.1 to the
Registrant's Form 10-Q filed August 14, 1997 and incorporated herein by
reference).
10.65*+ Amendment to SmithKline Beecham Corporation and SmithKline Beecham
p.l.c. and Human Genome Sciences, Inc. Collaboration Agreement dated
July 24, 1997 (Filed as Exhibit 10.2 to the Registrant's 10-Q filed
August 14, 1997 and incorporated herein by reference).
10.66++ Gene Therapy Collaboration and License Agreement between Human Genome
Sciences, Inc. and Transgene S.A., dated February 25, 1998.
10.67 Lease Agreement between Maryland Economic Development Corporation and
Human Genome Sciences, Inc., dated December 1, 1997.
23.1 Consents of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
- -------------------------------------------------------------------------------
* Incorporated by reference.
+ Confidentiality treatment has been granted by the Commission. The copy filed
as an exhibit omits the information subject to the confidentiality request.
++ Confidentiality treatment has been requested. The copy filed as an exhibit
omits the information subject to the confidentiality request.
32
<PAGE>
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC.
BY: /S/William A. Haseltine, Ph.D.
---------------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/William A. Haseltine Ph.D. Chairman of the Board and Chief March 31, 1998
- -------------------------------------- Executive Officer (principal executive
William A. Haseltine, Ph.D. officer)
/S/Melvin D. Booth President, Chief Operating Officer March 31, 1998
- ----------------------------------------------- Director
Melvin D. Booth
/S/Craig A. Rosen, Ph.D. Senior Vice President, Research and March 31, 1998
- ----------------------------------------------- Development and Director
Craig A. Rosen, Ph.D.
/S/Steven C. Mayer Senior Vice President and March 31, 1998
- ----------------------------------------------- Chief Financial Officer(principal
Steven C. Mayer financial and accounting officer)
/S/Robert A. Armitage Director March 31, 1998
- -----------------------------------------------
Robert A. Armitage
/S/James Cavanaugh, Ph.D. Director March 31, 1998
- -----------------------------------------------
James Cavanaugh, Ph.D.
/S/Jurgen Drews, M.D. Director March 31, 1998
- -----------------------------------------------
Jurgen Drews, M.D.
/S/Beverly Sills-Greenough Director March 31, 1998
- -----------------------------------------------
Beverly Sills-Greenough
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/S/Robert Hormats Director March 31, 1998
- -----------------------------------------------
Robert Hormats
/S/Donald D. Johnston Director March 31, 1998
- -----------------------------------------------
Donald D. Johnston
/S/Max Link, Ph.D. Director March 31, 1998
- -----------------------------------------------
Max Link, Ph.D.
/S/Alan G. Spoon Director March 31, 1998
- -----------------------------------------------
Alan G. Spoon
/S/James Barnes Wyngaarden, M.D. Director March 31, 1998
- -----------------------------------------------
James Barnes Wyngaarden, M.D.
</TABLE>
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1997 and 1996............................. F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995........................................ F-4
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995......................................... F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995........................................ F-6
Notes to Financial Statements............................................ F-7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland
We have audited the accompanying balance sheets of Human Genome Sciences, Inc.
as of December 31, 1997 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 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 Human Genome Sciences, Inc. at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
February 23, 1998
F-2
<PAGE>
HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ --------------
ASSETS (dollars in thousands, except
- ------ for share and per share amounts)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 44,346 $ 27,341
Short-term investments........................................................ 160,866 88,775
Prepaid expenses and other current assets..................................... 2,120 2,935
------------ --------------
Total current assets...................................................... 207,332 119,051
Property, plant and equipment (net of accumulated depreciation and amortization)... 20,647 18,031
Restricted investments............................................................. 6,582 1,705
Other assets....................................................................... 1,671 1,330
------------ --------------
TOTAL..................................................................... $236,232 $140,117
============ ==============
LIABILITIES
- -----------
Current liabilities:
Current portion of long-term debt............................................. $ 444 $ 444
Accounts payable and accrued expenses......................................... 4,656 3,361
Accrued payroll and related taxes............................................. 2,077 1,120
Current obligation under capital leases....................................... 223 811
Deferred revenues............................................................. 3,020 2,537
------------ --------------
Total current liabilities................................................. 10,420 8,273
Long-term debt, net of current portion............................................. 2,224 2,668
Obligations under capital leases, net of current portion........................... 0 286
Other liabilities.................................................................. 334 369
------------ --------------
TOTAL..................................................................... 12,978 11,596
Commitments and other matters...................................................... - -
STOCKHOLDERS' EQUITY
- ---------------------
Common stock - $.01 par value; shares authorized - 50,000,000; shares issued -
22,313,504 and 18,784,382 at December 31, 1997 and 1996, respectively......... 223 188
Additional paid-in capital......................................................... 278,626 162,583
Unearned portion of compensatory stock............................................. (121) -
Unrealized gain (loss) on investments available for sale........................... 48 (121)
Retained deficit................................................................... (55,522) (34,129)
------------ --------------
Total stockholders' equity................................................ 223,254 128,521
------------ --------------
TOTAL..................................................................... $236,232 $140,117
============ ==============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
--------------- -------------- ------------------
(dollars in thousands, except for share
and per share amounts)
<S> <C> <C> <C>
Revenue - research and development collaborative contracts..... $ 25,605 $ 36,460 $ 5,000
Costs and expenses:
Research and development:
Direct expenditures................................... 39,893 30,409 22,904
Payments under research services agreement............ 6,247 10,063 10,075
--------------- -------------- -----------------
Total research and development..................... 46,140 40,472 32,979
General and administrative..................................... 11,113 9,639 8,745
--------------- -------------- -----------------
Total costs and expenses.............................. 57,253 50,111 41,724
--------------- -------------- -----------------
Income (loss) from operations.................................. (31,648) (13,651) (36,724)
Interest income................................................ 10,889 6,462 4,555
Interest expense............................................... (389) (370) (550)
--------------- -------------- -----------------
Income (loss) before taxes..................................... (21,148) (7,559) (32,719)
Provision for (benefit) from income taxes:
Current................................................... 245 208 (1,651)
--------------- -------------- -----------------
Net Income (Loss).............................................. $ (21,393) $ (7,767) $ (31,068)
=============== ============== =================
Basic and diluted net income (loss) per share.................. $ (0.99) $ (0.42) $ (1.98)
=============== ============== =================
Weighted average shares outstanding basic and diluted.......... 21,525,283 18,630,986 15,723,144
=============== ============== =================
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
Unrealized
Common Stock Unearned Gain (Loss)
---------------------- Portion of on
Number Additional Compensatory Investments Retained
Of Paid-In Stock and Available Earnings
Shares Amount Capital Warrants for Sale (Deficit) Total
- -------------------------------------------- ----------- ---------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 14,846,009 $ 148 $ 80,729 $ (1,584) $ (214) $ 4,706 $ 83,785
Exercise of options 113,691 1 932 - - - 933
Warrants exercised by lessor 216,330 2 (2) - - - -
Warrants exercised 7,499 - 1 - - - 1
Issuance of common stock
pursuant to public offering
(net of expenses) 3,048,402 31 60,964 - - - 60,995
Compensatory stock and warrants
earned - - - 699 - - 699
Net loss - - - - - (31,068) (31,068)
Unrealized gain on investments - - - - 261 - 261
----------- ----------- ---------- --------------- ------------- ----------- -----------
Balance - December 31, 1995 18,231,931 182 142,624 (885) 47 (26,362) 115,606
Exercise of options 193,752 3 1,897 - - - 1,900
Warrants exercised by lessor 17,431 - - - - - -
Warrants exercised 2,203 - - - - - -
Issuance of common stock in
connection with SB Milestone
III 339,065 3 18,062 - - - 18,065
Compensatory stock and warrants
earned - - - 885 - - 885
Net loss - - - - - (7,767) (7,767)
Unrealized (loss) on investments - - - - (168) - (168)
----------- ----------- ---------- --------------- ------------- ----------- -----------
Balance - December 31, 1996 18,784,382 188 162,583 - (121) (34,129) 128,521
Exercise of options 280,340 3 4,173 - - - 4,176
Warrants exercised by lessor 5,161 - - - - - -
Warrants exercised 50,871 - 10 - - - 10
Issuance of common stock
pursuant to public
offering (net of expenses) 3,192,750 32 111,713 - - - 111,745
Compensatory stock options
issued - - 147 (147) - - -
Compensatory stock and warrants
earned - - - 26 - - 26
Net loss - - - - - (21,393) (21,393)
Unrealized gain on investments - - - - 169 - 169
----------- ----------- ---------- --------------- ------------- ----------- -----------
Balance - December 31, 1997 22,313,504 $ 223 $278,626 $ (121) $ 48 $(55,522) $223,254
=========== =========== ========== =============== ============= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss).......................................................... $ (21,393) $ (7,767) $(31,068)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Accrued interest on U.S. Treasury bills and commercial paper........... (1,109) (857) (251)
Depreciation and amortization.......................................... 6,359 5,858 4,395
Loss due to disposal and write-down of property, plant and equipment... 50 66 665
Compensation expense related to stock options and warrants............. 26 885 699
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........................... 738 (718) (699)
Funds available - facility fund..................................... - - (52)
Other assets........................................................ (341) 3 12
Accounts payable and accrued expenses............................... 988 1,376 305
Accrued payroll and related taxes................................... 957 428 143
Deferred income..................................................... 483 537 2,000
Income taxes payable................................................ - - (2,134)
Other liabilities................................................... (35) (5) (26)
---------- ----------- ----------
Net cash provided by (used in) operating activities................. (13,277) (194) (26,011)
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment....................... (8,717) (8,306) (7,697)
Purchase of investments and marketable securities.......................... (205,572) (182,030) (98,717)
Proceeds from sale and maturities of investments
and marketable securities................................................ 134,833 159,499 73,552
---------- ----------- ----------
Net cash provided by (used in) investing activities................. (79,456) (30,837) (32,862)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................................... - - 2,353
Repayment of long-term debt................................................ (444) (444) (444)
Restricted cash............................................................ (4,877) 295 -
Payments on capital lease obligations...................................... (874) (1,297) (1,139)
Proceeds from issuance of common stock (net of expenses)................... 115,933 19,965 61,929
---------- ----------- ----------
Net cash provided by (used in) financing activities................. 109,738 18,519 62,699
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 17,005 (12,512) 3,826
Cash and cash equivalents - beginning of year.................................. 27,341 39,853 36,027
---------- ----------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR........................................ $ 44,346 $ 27,341 $ 39,853
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................................... $ 240 $ 199 $ 233
Income taxes........................................................... 245 208 508
</TABLE>
See Note G for noncash exercise of warrants.
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - THE COMPANY
Human Genome Sciences, Inc. (the "Company") was incorporated and commenced
operations on June 26, 1992. The Company is engaged in the research and
development of novel, proprietary pharmaceutical and diagnostic products based
on the discovery and understanding of the medical utility of genes. The
Company's revenues are currently derived from license fees and research payments
under collaboration agreements. The Company does not yet generate any revenues
from product sales.
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
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.
Cash equivalents and Short-Term Investments
The Company considers all highly liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. On December 31, 1997
and 1996, the Company had purchased $15,171,000 and $6,840,054, respectively, of
U.S. Government securities under agreements to resell on January 1, 1998 and
1997, respectively. Due to the short-term nature of the agreements, the Company
did not take possession of the securities which were held by the Company's asset
managers. The market value of the securities approximated the carrying amount.
The Company classifies its short-term investments into the categories:
"held-to-maturity" and "available-for-sale," each of which have different
accounting treatment. Investments in securities that are classified as
available-for-sale and have readily determinable fair values are measured at
fair market value in the balance sheet, and unrealized holding gains and losses
for these investments are reported as a separate component of stockholders'
equity until realized. Debt securities classified as held-to-maturity securities
will be carried at amortized cost.
During 1997, the Company instructed its cash portfolio managers to hold all
securities as available-for-sale to be available for current operations. For
comparative purposes, the Company has reclassed long-term investments to
short-term investments.
Investment Risk
The Company has invested its cash in obligations of the U.S. Government and in
high grade corporate debt securities and commercial paper. The Company's
investment policy limits investments to certain types of instruments issued by
institutions with investment grade credit ratings, and places restrictions on
maturities and concentration by type and issuer.
Investments
All investments in which the Company has the ability to exercise significant
influence over the investee, but less than a controlling voting interest, are
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's share of the investee's earnings or losses are
included in operations, to the extent the Company has an investment recorded as
an asset plus the amount of any continuing commitment to fund the investee.
F-7
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets as follows:
Laboratory equipment................................. 3 - 10 years
Computers and EDP equipment.......................... 3 years
Furniture and office equipment....................... 3 - 5 years
Leasehold improvements............................... over the lease term
Equipment acquired under capital lease agreements is amortized over the terms of
the leases ranging from three to four years.
Impairment of Long-Lived Assets
Periodically, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The
Company made no adjustments to the carrying values of the assets during the
years ended December 31, 1997, 1996, and 1995.
Stock-Based Compensation
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The provisions
of SFAS No. 123 allow companies to either expense the estimated fair value of
stock options or to continue to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but disclose the pro forma effects on net income
(loss) had the fair value of the options been expensed. The Company has elected
to continue to apply APB No. 25 in accounting for its stock option incentive
plans. See Note L to the financial statements for further information.
Revenue recognition
Nonrefundable license fees, research payments, additional payments and milestone
payments in connection with collaboration agreements are recognized when they
are earned in accordance with the applicable performance requirements and / or
contractual terms.
Research and development
Research and development costs are charged to expense as incurred.
Patent costs
Patent application costs are charged to expense as incurred.
Net income (loss) per share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All net income (loss) earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
SFAS No. 128 requirements.
F-8
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sources of supply
The Company currently relies on a single supplier, Applied Biosystems, a
division of Perkin-Elmer Corporation, to provide all of its gene sequencing
machines and certain reagents required in connection with the gene sequencing
process. The Company has not experienced problems in obtaining either gene
sequencing machines or reagents in a timely manner. While other gene sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. No assurance can
be given that either the gene sequencing machines or the reagents will remain
available in commercial quantities at costs that are not economically
prohibitive.
Reclassification
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentations.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which is required to be adopted for the Company's December 31, 1998
financial statements. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is the total of net loss and
all other nonowner changes in equity. The impact of SFAS No. 130 on the
Company's December 31, 1998 financial condition and results of operations is not
expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is required to be
adopted for the Company's December 31, 1998 financial statements. SFAS No. 131
establishes annual and interim reporting standards for a company's operating
segments and related disclosures about its products, services, geographic areas
and major customers. The impact of SFAS No. 131 on the Company's December 31,
1998 financial condition and results of operations is not expected to be
material.
(NOTE C) - INVESTMENTS
Investments, including accrued interest, at December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Amortized Unrealized
Available-for-Sale Cost Fair Value Gain/(Loss)
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
U.S. Treasury and agencies $ 16,838,000 $ 16,836,000 $ (2,000)
Corporate debt securities 143,980,000 144,030,000 50,000
-------------- --------------- -------------
$160,818,000 $160,866,000 $ 48,000
============== =============== =============
December 31, 1996
-----------------
Held-to-Maturity
----------------
Corporate debt securities $58,282,000 $58,247,000 $ (35,000)
============== =============== =============
Available-for-Sale
------------------
U.S. Treasury and agencies $15,262,000 $15,194,000 $ (68,000)
Corporate debt securities 15,352,000 15,299,000 (53,000)
-------------- --------------- -------------
$30,614,000 $30,493,000 $(121,000)
============== =============== =============
</TABLE>
F-9
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - AGREEMENT WITH THE INSTITUTE FOR GENOMIC RESEARCH ("TIGR")
In June 1997, the Company and TIGR reached an agreement to terminate the
Research Services Agreement (the "Services Agreement") dated October 1, 1992,
the Intellectual Property Agreement dated October 2, 1992, the Lease Funding
Agreement and Assignment dated March 2, 1993, the Agreement of April 19, 1993
related to human cDNA sequencing, and all other agreements entered into any time
prior to the Termination Date between the Company and TIGR. Pursuant to the
Termination Agreement, the Company retains rights in intellectual property
arising out of TIGR's research prior to June 2, 1997, but will have no rights to
intellectual property resulting from future research by TIGR. The Company is
relieved of its obligation to provide future funding (including all research
funding) to TIGR, which would have amounted to approximately $38 million.
Certain limitations on TIGR's publication of intellectual property and
restrictions on TIGR entering into commercial agreements contained in the prior
agreements were also terminated. However, pursuant to the Termination Agreement,
TIGR has agreed not to enter into commercial agreements for the next four years
with respect to selected therapeutic proteins and associated diagnostic tests
currently in development by the Company. In addition, the Company will be
entitled to be paid a percentage of certain payments received by TIGR from
commercial agreements relating to human therapeutic proteins in which TIGR
grants or agrees to grant rights within two years.
(NOTE E) - COLLABORATION AGREEMENTS
Agreements with SmithKline Beecham Corporation
In May 1993, the Company entered into a collaboration agreement, as amended ("SB
Collaboration Agreements"), providing SmithKline Beecham Corporation ("SB") a
first right to develop and market products in human and animal healthcare ("SB
Products"), based upon human genes identified by the Company. In return, SB has
paid $125 million to the Company since 1993. Approximately $55 million was
allocated to the purchase price of 1,351,738 shares of common stock with the
balance of $70 million recognized from license fees, option rights and milestone
payments. Of the $70 million recognized since 1993, $6.9 million was recognized
during the year ended December 31, 1996.
The 1996 payment by SB of $25 million was made pursuant to the Company's
achievement of Milestone III. Pursuant to the SB Collaboration Agreements, the
payment was allocated as follows. The Company sold 339,065 shares of common
stock to SB at $58.28 per share, which was calculated pursuant to the contract
as 125% of the average market price of the Company's common stock for the five
trading days preceding payment, for total proceeds of approximately $18.1
million. The remainder of the payment was allocated to the deliverables and
other data being transferred to SB and recorded by the Company as revenue.
In addition, the Company is entitled to (i) royalties on the net sales of SB
Products, (ii) product development progress payments and (iii) the option to
co-promote up to 20% of any product development by SB under the collaboration
agreement.
In June 1996, the SB Collaboration Agreements were substantially amended (the
"SB Amendment") to allow the Company and SB together to enter into collaboration
agreements with additional pharmaceutical companies ("Collaboration Partners")
in the SB Field (other than diagnostics and animal healthcare in which SB has
generally retained exclusive rights). The SB Amendment restricts the Company
from entering into further collaborations in the SB Field during the initial
research term (through June 2001). The restriction also applies to certain
products which are subject to research plans submitted by SB prior to the
expiration of the initial research term and for a period thereafter. SB has the
right to extend the research term for up to five additional years by making
certain payments, which would extend the time for submitting research plans as
to therapeutic products.
The SB Amendment provides that SB and the Company will share equally in any
license fee payments paid by the Collaboration Partners and that the Company
will receive all royalties and research payments paid by the Collaboration
Partners. The SB Collaboration Agreements provide for payments to the Company by
SB of royalties on net sales of SB Products based on the Company's patents or
technologies made by SB and milestone payments in connection with the
development of SB Products.
In July 1997, the Collaboration Agreement with SB was amended with respect to
human diagnostic products based on the Company's human gene technology. The
amended agreement simplified procedures for outlicense by SB of diagnostic
products based on the Company's human gene technology. In addition, the new
agreement permits the Company to develop and market diagnostic tests that
correspond to therapeutic products developed by the Company pursuant to its
collaboration agreement with SB and to outlicense diagnostic tests corresponding
to therapeutic products outlicensed by the Company. Under the new agreement, SB
has agreed to pay a royalty to the Company
F-10
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - COLLABORATION AGREEMENTS (Continued)
Agreement with Smithkline & Beecham (Continued)
which is at a rate that is competitive in the diagnostic field on diagnostic
products based on the Company's human gene technology sold or outlicensed by SB.
Except for the modifications relating to human diagnostic products, this amended
agreement has no effect on the existing collaboration between the Company and
SB, nor does it have any effect on collaboration agreements with the Company's
and SB's collaboration partners.
Other Collaboration Agreements in the SB Field
In June 1995, the Company entered into an Option and License Agreement with
Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted
an exclusive option to license rights under the Company's patents and technology
in the field of human healthcare (other than gene therapy, antisense and
diagnostics) to make and sell a limited number (equal to the number of
collaboration partners other than SB and Takeda with which the Company enters
into collaboration agreements in the SB field) of products in Japan. In
consideration of the grant of the option, Takeda paid the Company $5 million,
which was recognized as revenue by the Company in 1995, and agreed to pay to the
Company royalties based on the sale of Takeda products covered by the Option and
License Agreement and certain milestone payments.
In June 1996, the Company and SB entered into collaboration agreements
("Additional Collaboration Partner Agreements") with Schering Corporation and
Schering Plough Ltd. ("Schering Plough"), Synthelabo S.A., and Merck KGaA
("Merck"), (collectively "Additional Collaboration Partners"). The Additional
Collaboration Partner Agreements provide the Additional Collaboration Partners
the rights and licenses to access the Company's Human Gene Technology, as well
as biological information developed by the Company and SB prior to, and in the
case of the Company, after the effective date of such Agreement, to discover,
develop and commercialize products based upon or derived from such Company
technology in the SB Field (other than diagnostics and animal healthcare). The
Additional Collaboration Partners are obligated to pay license fees, research
payments, milestone payments and royalties in connection with the agreements.
The initial research term expires in June 2001. The Additional Collaboration
Partners have the right to extend the term for up to five additional years by
making certain additional payments. Aggregate license fees and research payments
due under the Additional Collaborative Partner Agreements to which the Company
is entitled is $87.5 million, payable in equal installments over a five-year
period. The Company has recognized revenue of $16.5 million and $16.5 million in
license fees and additional payments during 1997 and 1996, respectively, related
to the Additional Collaboration Partner Agreements.
Collaborative Agreements Outside of the SB Field
In January 1996, the Company entered into a comprehensive Research Collaboration
Agreement in the field of corn genomics with Pioneer Hi-Bred International, Inc.
("Pioneer"). Under the terms of the agreement, the Company will receive $16
million from Pioneer over three years for work performed under the
collaboration. The relationship is exclusive for five years. Pioneer will own
all sequence information and intellectual property developed as a result of this
collaboration. The Company retains commercial rights to use any gene sequence in
human health and for certain specialty and industrial enzyme applications. In
January 1997, the Company received $3 million pursuant to this agreement that
the Company recognized as revenue in 1997. During 1996, pursuant to this
agreement, the Company received and recorded as revenue $8 million from Pioneer
related to license fees and research payments.
In March 1996 the Company entered into a License Agreement with F. Hoffmann-La
Roche, Ltd. ("Roche") to sequence and assemble the genome of Streptococcus
pneumoniae, a major bacterial pathogen responsible for severe respiratory and
other infections. Roche has received a license to use this information to
identify potential new anti-infectives and antibiotics. During 1997, the Company
received and recorded as revenue $1 million from Roche related to an additional
research payment. The Company received $2 million from Roche in 1995, which was
recorded as revenue in 1996. The Company will receive additional research
payments and potential future royalties.
In June 1996, the Company entered into a Collaboration and License Agreement
with Schering Plough relating to the field of human gene therapy (including gene
therapy vaccines to a limited extent). Under this agreement, the Company has
granted Schering Plough a non-exclusive license to use the Company's Human Gene
Technology to conduct research, and an option to obtain an exclusive license to
specific genes in the field of gene therapy. The agreement provides that
Schering Plough will pay the Company a $5 million license fee (payable over five
years) for
F-11
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)
Collaborative Agreements Outside of the SB Field (continued)
a non-exclusive research license, an option exercise fee and development
milestone payments for each gene for which it exercises its option to obtain an
exclusive license and royalties on net sales of gene therapy products resulting
from research under the agreement. The agreement is for an initial term expiring
June 2001, subject to extension until 2006 on payment of certain amounts. The
Company has received $1 million for the license fee each in 1997 and 1996, which
the Company recorded as revenue.
In October 1996, the Company entered into a License and Research Agreement with
Pharmacia & Upjohn Company to sequence a certain genome. Pharmacia & Upjohn
Company has received license rights to use this information to develop products
for the human pharmaceutical and veterinary fields. The Company received $3
million from Pharmacia & Upjohn Company in 1997 related to license fees and
research payments of which $2 million has been recorded as revenue during 1997
with the remaining $1 million recorded as deferred revenues. The Company
received $3 million from Pharmacia & Upjohn Company in 1996 of which $1.5
million was recorded as deferred revenue at December 31, 1996, and recognized as
revenue in 1997.
(NOTE F) - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including equipment under capital leases, are
stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Laboratory equipment.................................... $18,854,000 $16,692,000
Computers and EDP equipment............................. 6,073,000 5,363,000
Furniture and office equipment.......................... 1,113,000 1,010,000
Leasehold improvements.................................. 8,551,000 7,777,000
Construction in Progress................................ 2,787,000 -
-------------- -----------
37,378,000 30,842,000
Less accumulated depreciation and amortization.......... 16,731,000 12,811,000
------------- -----------
$20,647,000 $18,031,000
============== ===========
</TABLE>
(NOTE G) - EQUIPMENT LEASE OBLIGATIONS
Prior to 1995, the Company entered into sale and leaseback agreements in
connection with certain computer and laboratory equipment having a net book
value of $2,132,000 and $1,302,000, respectively. The Company sold the equipment
for $2,198,000 and $1,575,000, respectively, and entered into three master lease
agreements pursuant to which it leased back the above equipment for initial
terms of 48 months. All of the equipment leased under these agreements has been
accounted for as capital leases. In addition, the Company entered into other
capital lease agreements for certain equipment for initial terms of 36 months.
The recording of capital leases is considered a non-cash transaction, and
therefore is excluded from the Statements of Cash Flows. Amortization expense
related to equipment under capital leases is included in depreciation and
amortization on the statements of cash flows.
The net book value of the equipment held under capital leases was $81,000 and
$719,000 at December 31, 1997 and 1996, respectively.
As of December 31, 1997, the Company had future capital lease payments for
fiscal 1998 of $223,000.
F-12
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - EQUIPMENT LEASE OBLIGATIONS (CONTINUED)
In conjunction with the master lease agreements, the Company granted warrants to
the lessors to purchase 594,000 shares of the Company's common stock, which the
Company valued at $.27 per warrant. The warrants may be exercised at a purchase
price of $1.33 per share or by receiving shares equal to the value (as
determined by a formula) of the warrants by surrender of the warrants. The
warrants contain registration and certain antidilution rights and are
exercisable through November 1998.
In 1997, a lessor exercised warrants for the purchase of 5,350 shares by
electing to receive 5,161 shares. In 1996, a lessor exercised warrants for the
purchase of 18,000 shares by electing to receive 17,431 shares. In 1995, the
lessors exercised warrants for the purchase of 230,000 shares by electing to
receive 216,330 shares.
(NOTE H) - OTHER ASSETS
Other assets at December 31, 1997 and 1996, include a note receivable from an
officer of $891,000. The note is due on demand and does not bear interest. The
note is collateralized by shares of the Company's common stock owned by the
officer that have a market value of at least 200% of the outstanding balance of
the note.
(NOTE I) - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Equipment purchases..................................... $ 868,000 $ 561,000
Professional fees....................................... 1,223,000 489,000
Other accrued expenses.................................. 2,565,000 2,311,000
------------- -------------
$4,656,000 $ 3,361,000
============= =============
</TABLE>
(NOTE J) - LONG-TERM DEBT
In December 1994, the Company entered into a loan agreement with Maryland
Industrial Development Financing Authority ("MIDFA"). Major leasehold
improvements were financed with the proceeds of a $4,000,000 taxable variable
rate bond issue (the "Bonds") from MIDFA. The Company is required to make annual
payments of $444,000 commencing December 1995 plus interest at a variable rate
of interest (6.06% at December 31, 1997 and 5.64% at December 31, 1996), to the
trustee on behalf of the bondholders which is equal to the interest and
principal requirements on the bonds. The variable rate is equal to 50 basis
points plus the higher of the yield equivalent of the average 30-day or 90-day
commercial paper rate. Under certain circumstances, the rate may be adjusted
either upward or downward but in no event in excess of 10 basis points above or
below the rate determined above. MIDFA has entered into an indenture with the
Trustee whereby the Trustee has obtained an irrevocable letter of credit on
behalf of the bondholders.
The following fund was created under the terms of the trust indenture:
Bond fund
Required monthly principal payments of $37,000 plus interest are deposited into
this fund beginning January 1, 1995. The interest is disbursed monthly to the
bondholders. Principal is to be repaid from this fund to the bondholders at the
rate of $444,000 annually commencing on December 1, 1995 with a final payment of
$448,000 on December 1, 2003. The Company deposited $797,850 and $632,000 of
principal and interest into this fund during the years ended December 31, 1997
and 1996, respectively.
In connection with the Loan Agreement, the Company entered into an irrevocable
Letter of Credit Agreement with a bank for the account of the Company and in
favor of the Trustee in the initial amount of $4,066,667 which expires on
December 15, 2003. Concurrently, the Company entered into a Collateral Pledge
Agreement with the bank.
F-13
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - LONG-TERM DEBT (CONTINUED)
The Company is required to maintain 43% of the outstanding principal amount of
the Bonds (50% is required under certain circumstances) with the bank as
Collateral for the Letter of Credit. Pursuant to the Collateral Pledge Agreement
at December 31, 1997 and 1996, the Company had $1,452,000 and $1,705,000,
respectively, on deposit with the bank that is invested in a U.S. Government
agency security, which is included in Restricted Investments in the Balance
Sheets. The pledge collateral will be released upon the payment and performance
in full of the Company's Letter of Credit obligations. The agreement contains
covenants with respect to tangible net worth, cash and cash equivalents and
investment securities, as well as other covenants and prohibits the payment of
cash dividends. During 1994, the Company incurred costs of $136,000 in
connection with this loan which are being amortized over the term of the loan.
(NOTE K) - COMMITMENTS AND OTHER MATTERS
Operating leases
The Company leases office and laboratory premises and equipment pursuant to
operating leases expiring at various dates through 2017. The leases contain
various renewal options. Minimum annual rentals are as follows:
Years Ending December 31,
------------------------------
1998............................$..2,304,000
1999...............................3,876,000
2000...............................3,765,000
2001...............................3,762,000
2002...............................3,767,000
Thereafter........................36,608,000
--------------
$54,082,000
==============
The Company has entered into leases for office and laboratory space which
provide for certain rent abatement and rent escalations on each anniversary of
the lease commencement date. For financial reporting purposes, rent expense is
charged to operations on a straight-line basis over the term of the lease,
resulting in a liability for deferred rent of $300,000 and $262,000 included in
other liabilities at December 31, 1997 and 1996, respectively.
Certain other leases provide for escalation for increases in real estate taxes
and certain operating expenses, as well as various renewal terms.
The Company entered into a 20 year lease for a process development and
production facility being built to the Company's specifications. Annual base
rent of $2.2 million is expected to begin January 1, 1999, the anticipated
completion date of the facility.
Rent expense aggregated $2,384,000, $1,988,000, and $1,866,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Capital expenditures
At December 31, 1997 and 1996, the Company had commitments for capital
expenditures, consisting primarily of laboratory equipment, of $353,000 and
$700,000, respectively.
401(k) Plan
Effective January 15, 1993, the Company adopted a 401(k) pension plan available
to eligible full-time employees. The Company made discretionary contributions of
$235,000, $168,000, and $97,000 to the plan for the years ended December 31,
1997, 1996, and 1995, respectively.
F-14
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - STOCKHOLDERS' EQUITY
Preferred Stock
In November 1993, the shareholders authorized a new series of preferred stock of
1,000,000 shares, $.01 par value, none of which was issued and outstanding at
December 31, 1997 and 1996.
Common Stock
The Company has the right of first refusal on the sale of certain common stock
issued in connection with restricted stock purchase agreements. The price to be
paid by the Company is $1.13 and $.19 per share less than the price of any
proposed sale for 561,160 and 246,052 shares, respectively.
Stock option plan
The 1993 Employee Incentive and Non-qualified Stock Option Plan (the "1993
Plan") provides for the granting of options to purchase up to 565,827 shares of
the Company's common stock, at a price, for the incentive options, of not less
than the fair market value of the common stock on the date of grant. The vesting
period of the options is determined by the Board of Directors and is generally
five years. Outstanding options expire after ten years.
Additional information with respect to 1993 Stock Option activity is summarized
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 293,618 $11.21 399,111 $ 9.16 428,592 $ 4.40
Options granted - - - - 78,455 27.50
Options exercised (105,748) 8.68 (96,128) 2.07 (73,449) 2.98
Options canceled or expired (20,911) 14.41 (9,365) 17.90 (34,487) 4.89
------------- ------------- -------------
Outstanding at end of year 166,959 12.41 293,618 11.21 399,111 9.16
============= ============= =============
Options exercisable at end
of year 128,979 11.53 148,900 9.25 118,724 3.27
============= ============= =============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Weighted- Weighted- Weighted-
Average Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Outstanding Life (In Years) Price Exercisable Price
--------------- ----------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$.20 to $6.00 92,806 5.4 $ 2.66 78,331 2.23
$9.00 to $27.50 74,153 7.5 24.60 50,648 25.91
--------------- ----------------- ------------ ------------- ------------
166,959 6.3 $12.41 128,979 11.53
=============== ================= ============ ============= ============
</TABLE>
F-15
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - STOCKHOLDERS' EQUITY (CONTINUED)
Stock option plan (continued)
On March 14, 1994, the Company adopted a 1994 Employee Incentive and
Nonqualified Stock Option Plan (the "1994 Plan") for the granting of options to
purchase up to 950,000 shares of common stock to officers, employees, directors,
consultants and non-employee directors. The exercise price of options granted
under the plan may not be less than the market price on the date of grant. In
May 1996 an amendment was approved to increase the number of shares available
for issuance from 950,000 options to 2,450,000 options. In February 1997, an
amendment was approved to increase the number of shares available for issuance
from 2,450,000 options to 3,450,000 options. The vesting period of the options
is determined by the Board of Directors and is generally five years. Outstanding
options expire after ten years.
Additional information with respect to 1994 Stock Option activity is summarized
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 1,528,779 $25.29 884,214 $18.01 655,958 $18.01
Options granted 1,644,351 48.57 790,616 32.18 348,263 17.86
Options exercised (174,592) 18.66 (97,624) 17.42 (40,242) 17.75
Options canceled or expired (122,588) 28.41 (48,427) 20.58 (79,765) 17.54
------------- ------------- -------------
Outstanding at end of year 2,875,950 38.87 1,528,779 25.29 884,214 18.01
============= ============= =============
Options exercisable at end
of year 597,305 26.00 348,533 $20.05 190,861 $17.52
============= ============= =============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Price Outstanding Life (In Years) Price Exercisable Price
--------------- ----------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$12.75 to $22.00 457,074 6.77 $16.71 267,114 17.11
$23.50 to $34.50 634,150 8.34 28.62 136,450 25.87
$36.25 to $39.00 739,375 9.15 37.37 108,925 37.31
$39.25 to $42.56 695,351 9.63 40.09 84,816 39.66
$70.00 to $100.00 350,000 9.06 87.14 -0- -0-
--------------- ----------------- ------------ ------------- ------------
2,875,950 8.70 $38.87 597,305 26.00
=============== ================= ============ ============= ============
</TABLE>
The Company applies APB No. 25 in accounting for its stock option incentive plan
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS No. 123 on 1997, 1996 and 1995
pro forma net loss and net loss per share as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, (1) the vesting period of the stock options and the (2) fair
value of additional stock
F-16
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - STOCKHOLDERS' EQUITY (CONTINUED)
Stock option plan (continued)
options in future years. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under the plans consistent with the methodology prescribed under SFAS No. 123,
the Company's net loss in 1997, 1996, and 1995 would have been approximately
$32.5 million, $12.9 million, and $32.8 million, respectively, or $1.51 per
share, $0.69 per share, and $2.08 per share, respectively. The fair value of the
options granted during 1997 and 1996 are estimated as $18.26 and $23.73 per
share, respectively, on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield 0%, volatility of 46.03%
for 1997 and 63.61% for 1996, risk-free interest rate of 5.75% for 1997 and
6.28% for 1996, and expected life of 6 years.
At December 31, 1997, options for 79,375 and 261,592 were available for future
grant under the 1993 Plan and 1994 Plan, respectively. At December 31, 1996,
options for 58,464 and 783,355 were available for future grant under the 1993
Plan and 1994 Plan, respectively.
Reserved for issuance:
The Company has also reserved shares of common stock for issuance upon exercise
of warrants and options as follows:
<TABLE>
<CAPTION>
<S> <C>
(i) Warrants issued in conjunction with leasing agreements (Note G)........... 75,650
(ii) Warrants issued to certain stockholders (a).............................. 14,415
(iii)Stock option plan - 1993 plan.....,....................................... 246,334
(iv) Stock option plan - 1994 plan............................................. 3,137,542
</TABLE>
(a) These warrants were issued in connection with a commitment made by
certain stockholders in 1993; they are exercisable at $.20 per
share and expire in December 1998.
(NOTE M) - INCOME TAXES
The Company provides for income taxes using the liability method. The difference
between the tax provision and the amount that would be computed by applying the
statutory Federal income tax rate to income before taxes is attributable to the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Federal income tax provision at 34%................... $(7,181,000) $(2,570,000) $ (11,124,000)
State taxes, net of federal effect.................... - - (1,511,000)
Expenses for which no tax benefit is available........ 31,000 112,000 96,000
Expenses for which no book benefit is available....... (1,550,000) - -
Utilization of NOL carryforward....................... - - -
Increase in valuation allowance on deferred tax
assets......................................... 12,465,000 3,262,000 12,484,000
State taxes and valuation allowance change............ (1,286,000) (391,000) -
Foreign taxes paid.................................... 245,000 225,000 500,000
Tax credits generated and not used.................... (2,436,000) (403,000) (2,305,000)
Other................................................. (43,000) (27,000) 209,000
--------------- ---------------- ----------------
$ 245,000 $ 208,000 $ (1,651,000)
=============== ================ ================
</TABLE>
F-17
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE M) - INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
ASSET/(LIABILITY) ASSET/(LIABILITY)
---------------- ----------------
<S> <C> <C>
December 31, 1997
Net operating loss carryforward...................................... $ - $ 19,359,000
Research and development tax credit carryforward..................... - 7,186,000
Depreciation......................................................... - 744,000
Other................................................................ 267,000 118,000
---------------- ----------------
267,000 27,407,000
Less valuation allowance............................................. (267,000) (27,407,000)
================ ================
$ - $ -
================ ================
December 31, 1996
Net operating loss carryforward...................................... $ - $ 11,808,000
Research and development tax credit carryforward..................... - 4,750,000
Deferred start-up costs.............................................. 41,000 -
Other................................................................ 218,000 262,000
---------------- ----------------
259,000 16,820,000
Less valuation allowance............................................. (259,000) (16,820,000)
================ ================
$ - $ -
================ ================
</TABLE>
The Company recognized a valuation allowance to the full extent of its deferred
tax assets since the likelihood of realization of the benefit cannot be
determined.
Provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................. $ - $ - $(1,643,000)
State............................................... (17,000) (508,000)
Foreign taxes....................................... 245,000 225,000 500,000
Deferred................................................ - - -
------------- --------------- --------------
$245,000 $ 208,000 $(1,651,000)
============= =============== ==============
</TABLE>
<TABLE>
<CAPTION>
The Company has available tax credit carryforwards expiring as follows:
<S> <C>
2000............................................................... $ 500,000
2001............................................................... 225,000
2002............................................................... 245,000
2008............................................................... 745,000
2009............................................................... 1,297,000
2010............................................................... 534,000
2011............................................................... 846,000
2012............................................................... 2,191,000
No expiration...................................................... 238,000
==============
$ 6,821,000
==============
</TABLE>
F-18
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE M) - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards for federal income tax purposes
of approximately $51.0 million which expire, if unused, from the year 2010
through the year 2012. According to APB 25, the tax benefit of approximately
$4.6 million of net operating losses related to stock options will be credited
to equity when the benefit is realized through utilization of the net operating
loss carryforwards.
(NOTE N) - INVESTMENT IN VASCULAR GENETICS INC.
In November 1997, the Company entered into an agreement with three other parties
to form a new privately held company, Vascular Genetics Inc. ("Vascular
Genetics"), to pursue the development and commercialization of gene therapy
products for the treatment of vascular diseases. The Company will hold a 19.9%
equity interest in Vascular Genetics' common stock in exchange for technology.
Under the terms of the agreement, the Company will receive warrants for the
purchase of an additional 5.1% equity interest in Vascular Genetics which can be
exercised at any time while Vascular Genetics is privately held. The Company
also holds preemptive rights that will permit retention of the Company's
ownership position in the event of a future financing. In addition, the Company
has the option to purchase 100% of Vascular Genetics' common stock at fair
market value upon receiving the approval from one of the other parties and the
board of directors of Vascular Genetics. The Company will earn royalties on net
sales from products developed and commercialized by Vascular Genetics or by a
party granted a sublicense by Vascular Genetics. Royalty rates are competitive
and increase as specified sales targets are reached. In addition, the Company
has the option to manufacture certain products developed by Vascular Genetics
Inc. and receive a manufacturing fee. The Company has committed to lend Vascular
Genetics up to $600,000 at an interest rate of prime plus 1%. As of 12/31/97,
the Company had lent $200,000 to Vascular Genetics. The Company has appointed
two directors to the Board of Directors of Vascular Genetics.
(NOTE O) - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- --------------- -----------------
<S> <C> <C> <C>
Numerator:
Net loss $(21,393,000) $(7,767,000) $(31,068,000)
================= ================ =================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 21,525,283 18,630,986 15,723,144
================= ================ =================
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 21,525,283 18,630,986 15,723,144
================= ================ =================
Basic loss per share $(0.99) $(0.42) $(1.98)
================= ================ =================
Diluted loss per share $(0.99) $(0.42) $(1.98)
================= ================ =================
</TABLE>
F-19
<PAGE>
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE P) - EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
On March 2, 1998, the Company signed a ten year agreement with Transgene
S.A. ("Transgene"), based in Strasbourg, France, to develop gene therapy
products. Under the terms and conditions of the agreement, Transgene will have
the right to exclusively license, and sublicense, up to 10 genes and to develop,
manufacture and commercialize any resulting gene therapy products worldwide. The
two companies may also choose to co-develop and co-market the identified new
gene therapy products, and, in such case, commercialization rights will be held
by the Company for North America and by Transgene for Europe and will be shared
equally for the rest of the world's markets. Transgene will pay an initial
licensing fee and research funding in an amount equal to the proceeds to
Transgene from the Company's purchase of a 10% interest in Transgene. The value
of the 10% interest based on the anticipated close of Transgene's Initial Public
Offering (currently in process) would be approximately $25 million. Additional
payments to the Company are dependent upon the number of genes which Transgene
licenses and the accomplishment of certain milestones. Royalties on future
product sales and partnering revenues will be paid by Transgene to the Company.
On co-marketed products, the Company and Transgene will pay reciprocal
royalties.
F-20
LEASE AGREEMENT
BETWEEN
MARYLAND ECONOMIC DEVELOPMENT CORPORATION
AND
HUMAN GENOME SCIENCES, INC.
DATED DECEMBER 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Demise of Leased Premises.................................................... 1
2. Certain Definitions.......................................................... 2
3. Title........................................................................ 10
4. Plans and Specifications; Construction....................................... 11
5. Use of Leased Premises....................................................... 11
6. Term; Purchase Option........................................................ 12
7. Rent......................................................................... 17
8. Net Lease; Non-Terminability................................................. 20
9. Payment of Impositions; Compliance with Law and Restrictive Covenants........ 21
10. Liens; Recording and Title; Easements........................................ 22
11. Indemnification.............................................................. 22
12. Tenant's Equipment; Building Equipment; Maintenance and Repair............... 23
13. Alterations.................................................................. 25
14. Condemnation................................................................. 27
15. Insurance.................................................................... 28
16. Casualty and Restoration..................................................... 31
17. Assignment and Subletting.................................................... 33
18. Permitted Contests........................................................... 35
19. Default Provisions........................................................... 36
20. Additional Rights of Landlord................................................ 40
21. Inspection................................................................... 41
22. Notices, Demands and Other Instruments....................................... 42
23. Estoppel Certificates........................................................ 42
24. No Merger.................................................................... 43
25. Representations and Warranties of Tenant..................................... 43
26. Affirmative Covenants of Tenant.............................................. 45
27. Negative Covenants of Tenant................................................. 51
28. Non-Recourse................................................................. 52
29. Separability................................................................. 52
30. Subordination................................................................ 53
31. Binding Effect............................................................... 54
32. Heading...................................................................... 54
33. Environmental Matters........................................................ 54
34. Quiet Enjoyment.............................................................. 59
35. Miscellaneous................................................................ 59
</TABLE>
<PAGE>
LIST OF EXHIBITS
EXHIBIT A Description of Land
EXHIBIT B List of Construction Contracts
EXHIBIT C List of Tenant's Equipment
EXHIBIT D Schedule of Option Purchase Prices
EXHIBIT E Notice and Payment Addresses
2
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made as of December 1, 1997, by
and between MARYLAND ECONOMIC DEVELOPMENT CORPORATION, a body politic and
corporate and an instrumentality of the State of Maryland ("Landlord") and HUMAN
GENOME SCIENCES, INC., a Delaware corporation ("Tenant").
RECITALS
A. Landlord, at the request of Tenant, has acquired from Montgomery
County, Maryland a certain parcel of land located at the Johns Hopkins Belward
Research Campus in Montgomery County, Maryland, more particularly described on
Exhibit A attached hereto and made a part hereof (the "Land") as further defined
in Paragraph 1 below). ---------
B. Landlord is acquiring the Land at the request of Tenant for the sole
purposes of (a) constructing on the Land, a process development and
manufacturing plant consisting of approximately 80,000 square feet in accordance
with plans and specifications to be approved by Landlord and Tenant, and (b)
leasing the Leased Premises (hereinafter defined) to Tenant.
C. The parties desire to enter into this Lease defining their
respective rights, duties, obligations and liabilities relating to the Leased
Premises.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby
covenant and agree as follows:
A. Demise of Leased Premises. In consideration of the rents and
covenants herein stipulated to be paid and performed, Landlord hereby demises
and lets to Tenant, and Tenant hereby demises and lets from Landlord, the
premises (collectively, the "Leased Premises") consisting of (i) the parcel of
land described in Exhibit A hereto, together with the easements, rights and
appurtenances thereunto belonging or appertaining (collectively, the "Land"),
(ii) the buildings, structures and other improvements to be constructed on the
Land pursuant to Paragraph 4 hereof (the "Improvements"), and (iii) the
equipment and fixtures to be installed in the Improvements which are integral to
the occupancy of the Leased Premises as a "tenantable shell" (e.g., all
elevators, escalators, shades, awnings, floor coverings, screens, landscaping
and security systems and building code required
<PAGE>
plumbing, heating, electrical, ventilation and fire-extinguishing equipment) and
financed with proceeds of the Bonds (hereinafter defined) or the State Loans
(hereinafter defined) as evidenced through the requisitions from the Facility
Fund (hereinafter defined) and the requisitions for the State Loans (the
"Building Equipment"), but excluding therefrom the Tenant's Equipment
(hereinafter defined).
2. Certain Definitions. The following terms shall have the definitions
provided below. Unless specifically provided otherwise, all accounting terms
have the definitions given them in accordance with GAAP (hereinafter defined) as
applied to the applicable Person on a consistent basis by its accountants in the
preparation of its previous annual financial statements.
Act of Bankruptcy means with respect to any Person, the filing of a
petition in bankruptcy under the Bankruptcy Code, or the commencement of a
proceeding under any other applicable law concerning insolvency, reorganization
or bankruptcy, by or against such Person as debtor.
Accumulated Funding Deficiency means an "accumulated funding
deficiency" as defined in Section 302 of ERISA or Section 412(a) of the Code.
Additional Rent means Additional Rent as defined in Paragraph 7.
Affiliate means: (a) any Person in which Tenant legally or beneficially
owns or holds, directly or indirectly, any capital stock or other equity
interest; (b) any Person that is a partnership in which Tenant is a partner, or
a joint venturer in which Tenant is a joint venturer or a limited liability
company of which Tenant is a managing member; (c) any Person that is a director,
officer, employee, stockholder (legally or beneficially) or other affiliate of
any of the foregoing or of Tenant; and (d) any Person that directly or
indirectly controls, is under the control of, or is under common control with,
Tenant, including, without limitation, any Person that directly or indirectly
has the right or power to direct the management or policies of Tenant and any
Person whose management or policies Tenant directly or indirectly has the right
or power to direct.
Alterations means all changes, additions (including additional
Improvements on the Land), improvements or repairs to, all alterations,
reconstructions, renewals or removals of and all substitutions or replacements
for any of the Improvements, both interior and exterior, structural and
non-structural, and ordinary and extraordinary.
2
<PAGE>
Assignments means, collectively, the Bond Assignment and the State Loan
Assignment.
Bank means The First National Bank of Maryland, a national banking
association, its successors and assigns.
Bankruptcy Code means Title 11 of the United States Code, as amended,
and all rules and regulations promulgated pursuant thereto.
Basic Rent means Basic Rent as defined in Paragraph 7.
Basic Rent Payment Date means any date on which an installment of Basic
Rent is due pursuant to Paragraph 7 hereof.
Beneficiaries mean, collectively, the Bond Beneficiary and the State
Loan Beneficiary.
Bond Assignment means the Assignment, Subordination and Non-Disturbance
Agreement by and among Landlord, the Tenant and the Bank, dated as of December
1, 1997, together with all amendments thereto and modifications thereof.
Bond Beneficiary means, collectively, MIDFA, the Bank and any other
Credit Facility Provider, as Beneficiary under the Bond Deed of Trust.
Bond Deed of Trust means the Deed of Trust dated as of December 1,
1997, encumbering the Leased Premises, from Landlord to certain individual
trustees for the benefit of the Bond Beneficiary, together with all amendments
thereto and modifications thereof.
Bond Documents has the meaning given to such term in the Indenture.
Bond Purchase Drawing has the meaning given to such term in the
Indenture.
Bonds means the $23,000,000 Taxable Variable Rate Demand/Fixed Rate
Revenue Bonds (Human Genome Sciences, Inc. Facility), 1997 Issue, being issued
by the Landlord to finance a portion of the costs of the acquisition and
construction of the Leased Premises.
Building Equipment means the Building Equipment as defined in the
Recitals to this Lease.
3
<PAGE>
Closing Date means the date on which fully executed and authenticated
Bonds are issued and initially delivered.
Code means the Internal Revenue Code of 1986, or any applicable
predecessor statutory provision. Each reference to a section of the Code herein
shall be deemed to include the United States Treasury Regulations in effect or
proposed from time to time with respect thereto.
Collateral Pledge Agreement means the Collateral Pledge Agreement dated
as of December 1, 1997 from Tenant to Landlord, together with all amendments
thereto and modifications thereof.
Commonly Controlled Entity means any trade or business (whether or not
incorporated) which is a member of a "controlled group of corporations" (as such
phrase is used and defined in Section 414(b) of the Code) or which is under
"common control" (as such phrase is used and defined in Section 414(c) of the
Code), and of which Tenant or any Subsidiary of Tenant is a part.
Construction Contracts means those certain Construction Contracts
between Contractors and Landlord listed on Exhibit B hereto (which Exhibit B
shall be updated from time to time if and when new construction contracts are
entered into with Tenant's written consent).
Contractors means the contractors named in the Construction Contracts.
Credit Facility Agreement has the meaning given to such term in the
Indenture. The initial Credit Facility Agreement is the Letter of Credit
Agreement.
Credit Facility Documents has the meaning given to such term in the
Indenture. The initial Credit Facility Documents are the Letter of Credit
Documents.
Credit Facility Provider has the meaning given to such term in the
Indenture. The initial Credit Facility Provider is the Bank.
Deeds of Trust means, collectively, the Bond Deed of Trust and the
State Loan Deed of Trust.
Default Rate means the Default Rate as defined in Paragraph 7(e).
Encumbrances means Encumbrances as defined in Paragraph 30.
4
<PAGE>
ERISA means the Employee Retirement Income Security Act of 1974, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
Event of Default means an Event of Default as defined in Paragraph 19.
Facility Fund means the "Facility Fund", as such term is defined in the
Indenture.
GAAP means generally accepted accounting principles in the United
States of America in effect from time to time, consistently applied. In the
event of a change in GAAP affecting the covenants contained in Paragraphs 26 or
27 of this Lease or definitions contained in Paragraph 2 of this Lease relating
to such covenants, such covenants and definitions shall continue to be applied
as though such change in GAAP had not occurred unless and until Landlord, the
Credit Facility Provider, MIDFA, the State and Tenant shall agree in writing to
amend or adjust such covenants or definitions as deemed necessary as a result of
such change in GAAP.
Hedge means any interest rate swap or similar hedge arrangement in
existence at any time or from time to time between Landlord and the Hedge
Counterparty.
Hedge Agreement means any agreement between Landlord and the Hedge
Counterparty in existence at any time or from time to time, executed in
connection with the Hedge, including (without limitation) the Swap Agreement (as
defined in the Letter of Credit Agreement), together with all amendments thereto
and modifications thereof.
Hedge Counterparty means any Person, in its capacity as counterparty to
the Hedge Agreement, with which Landlord has entered the Hedge or may hereafter
at any time or from time to time enter into the Hedge, including (without
limitation) the Bank and any other Credit Facility Provider.
Hedge Documents means, collectively, the Hedge Agreement and all other
documents in existence at any time or from time to time, executed and delivered
to evidence, secure, or in connection with, the Hedge.
Impositions means all taxes, including, without limitation, sales and
use taxes (but excluding, except as hereinafter provided, income, franchise,
profits and gross receipt taxes), assessments (including, without limitation,
all assessments for public improvements or benefits), water and sewer rents,
rates and
5
<PAGE>
charges, excises, levies, license fees, permit fees, inspection fees and other
authorization fees and other charges or costs of any nature whatsoever, in each
case whether general or special, ordinary or extraordinary, foreseen or
unforeseen, of every character (including all interest and penalties thereon),
which at any time during or in respect of the term hereof may be assessed
against, levied upon, confirmed or imposed on, or in respect of, or be a lien
upon (a) the Leased Premises or any part thereof or any estate, right or
interest therein, (b) any occupancy, use or possession of, or activity conducted
on, the Leased Premises or any part thereof, (c) any Basic Rent or Additional
Rent or other sum reserved or payable by Tenant hereunder, or (d) this Lease or
Landlord. Notwithstanding the foregoing provisions, the term "Impositions" shall
exclude (i) franchise, capital stock or similar taxes, if any, of Landlord and
assessments, levies and liens arising therefrom; (ii) transfer, income, profits
or other taxes, if any, of Landlord, determined on the basis of its net income
or net revenues, and assessments, levies and liens arising therefrom; (iii)
excise, gross receipts or gross income taxes imposed upon or measured by Basic
Rent, Additional Rent or other sums payable by Tenant pursuant to this Lease,
unless the taxes referred to in clauses (i) and (ii) above are in lieu of or a
substitute for any other tax or assessment upon or with respect to the Leased
Premises or any increases therein which, if such other tax or assessment were in
effect, would be payable by Tenant.
Improvements means Improvements as defined in Paragraph 1.
Indenture means the Trust Indenture dated as of December 1, 1997
between Landlord and the Trustee, together with all amendments thereto and
modifications thereof.
Insurance and Award Trustee has the meaning given to that term in
Paragraph 15.
Land means that parcel of land described in Exhibit A attached hereto,
together with the easements, rights and appurtenances thereunto belonging or
appertaining.
Landlord means Maryland Economic Development Corporation, a body
politic and corporate and a public instrumentality of the State of Maryland.
Landlord's Bond Obligations means the "Issuer's Bond Obligations," as
such term is defined in the Indenture.
6
<PAGE>
Landlord's Credit Facility Obligations means the "Issuer's Credit
Facility Obligations", as such term is defined in the Indenture.
Landlord's State Loan Obligations means all of Landlord's limited
obligations to the State pursuant to the terms and conditions of the State Loan
Documents.
Law means the Constitution of the United States and of the State of
Maryland and any statute or rule of law of the United States and of the State of
Maryland.
Lease Documents has the meaning given to such term in Paragraph 25.
Leased Premises means the Land, the Improvements and the Building
Equipment.
Legal Requirements means all laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, directions, requirements and agreements with all governments,
departments, commissions, boards, courts, authorities, agencies, officials and
officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any
time hereafter may be applicable to the use, occupancy, possession, maintenance,
alteration, repair or reconstruction of any of the Leased Premises.
Letter of Credit means that certain Letter of Credit to be issued by
the Bank in the original stated amount of $23,378,083 for the account of
Landlord as security for the Bonds, as the same may from time to time be
modified, amended, supplemented, renewed or replaced.
Letter of Credit Agreement means that certain Letter of Credit
Agreement between the Bank and Landlord dated as of December 1, 1997, as the
same may from time to time be modified, amended, supplemented, renewed or
replaced.
Letter of Credit Documents has the meaning given to such term in the
Letter of Credit Agreement.
LIBOR Rate means the fluctuating annual rate of interest which shall at
all times equal the interest rate which the Credit Facility Provider announces
and declares from time to time to be its one month London Interbank Offered
Rate, adjusted for any Federal Reserve Board requirements imposed on the Credit
Facility Provider from time to time. All interest at the LIBOR Rate or computed
thereon shall be calculated on the basis of a 360-day year factor applied to
actual days elapsed and shall be adjusted on any date on which a change occurs
in the LIBOR Rate.
7
<PAGE>
MIDFA means the Maryland Industrial Development Financing Authority.
MIDFA Insurance Agreement means the Insurance Agreement of even date
herewith by and among MIDFA, the Bank and Landlord, together with all amendments
thereto and modifications thereof.
Multiemployer Plan means a multiemployer plan (as defined in ERISA) to
which Tenant, or any Commonly Controlled Entity, as appropriate, has or had an
obligation to contribute.
Net Award has the meaning given to such term in Paragraph 14.
Net Proceeds has the meaning given to such term in Paragraph 15.
Paying Agent has the meaning given to such term in the Indenture.
Permitted Equipment Lien means any encumbrance or other lien upon, or
security interest in, or any equipment lease of, any Tenant's Equipment, or
interest therein, provided that the acquisition to which any such encumbrance,
lien, security interest or lease relates shall not result in a default under any
other provisions of this Lease.
Permitted Use means the Permitted Use as defined in Paragraph 5.
Person means any natural person, firm, association, corporation,
company, trust, partnership, public body or other entity.
Plan means any pension, profit sharing, savings, stock bonus or other
deferred compensation plan which is intended to qualify under Code '401 and is
subject to the requirements of ERISA, together with any related trusts.
Plans means the Plans and Specifications for the Improvements which
have been approved, and which will be approved from time to time, in writing by
Landlord and Tenant, as the same may be modified or amended in accordance with
Paragraph 4.
Prohibited Transaction means a "prohibited transaction" as defined in
Section 406 of ERISA or Section 4975 of the Code.
Rating Agency means any rating agency which at any time or from time to
times provides or furnishes a rating with respect to the Bonds.
8
<PAGE>
Registrar has the meaning given to such term in the Indenture.
Remarketing Agent has the meaning given to such term in the Indenture.
Remarketing Agreement means the "Placement and Remarketing Agreement"
as such term is defined in the Indenture.
Rent Commencement Date means the Rent Commencement Date as defined in
Paragraph 7(a).
Reportable Event means a "reportable event" as defined by Title IV of
ERISA.
Restrictive Covenants means the covenants and restrictions set forth in
(a) the Declaration of Covenants, Easements and Restrictions (Protective
Covenants) made the 24th day of September, 1997, by The Johns Hopkins
University, and recorded among the Land Records of Montgomery County, Maryland,
in Liber 15181 at folio 074, and (b) The Johns Hopkins University Belward
Research Campus Declaration of Covenants, Conditions, Easements and Restrictions
made the 24th day of September, 1997, by The Johns Hopkins University, and
recorded among the Land Records of Montgomery County, Maryland, in Liber 15181
at folio 084.
Scheduled Completion Date means December 30, 1999, regardless of the
actual date the Improvements are completed.
State means the State of Maryland, acting through the Maryland
Department of Business and Economic Development and any other department or
agency of the State of Maryland which makes any of the State Loans to Landlord.
State Loans means, collectively, the following loans to be made by the
State to Landlord for the purpose of financing a portion of the costs of the
acquisition and construction of the Leased Premises:
(a) Loan in the principal amount of $2,000,000, from the
Maryland Department of Business and Economic Development
under the Maryland Industrial Land Act;
(b) Loan in the principal amount of $3,000,000, made by the
Maryland Department of Business and Economic Development
from the Maryland Industrial and Commercial Redevelopment
Fund; and
9
<PAGE>
(c) Loan in the principal amount of $2,000,000, made by the
Maryland Department of Business and Economic Development
from the Maryland Economic Development Opportunities Program
Fund.
State Loan Assignment means the Assignment, Subordination and
Non-Disturbance Agreement by and among Landlord, the Tenant and the State, dated
December 31, 1997, together with all amendments thereto and modifications
thereof.
State Loan Beneficiary means the Beneficiary as such term in defined in
the State Loan Deed of Trust.
State Loan Deed of Trust means the Second Deed of Trust dated December
31, 1997, encumbering the Leased Premises, from Landlord to certain individual
trustees for the benefit of the State Loan Beneficiary, together with all
amendments thereto and modifications thereof.
State Loan Documents means, collectively, any and all documents
executed and delivered by Landlord as evidence of, as security for, or in
connection with, the State Loans, including (without limitation) the State Loan
Deed of Trust and the State Loan Assignment.
Subsidiary means, with respect to any Person, any present or future
corporation at least a majority of whose outstanding Voting Stock shall at the
time be owned by such Person or by one or more Subsidiaries of such Person, or
by such Person and one or more Subsidiaries of such Person.
Substantial Completion means the date on which the Improvements are in
such condition that Tenant may commence its final fit out of the Improvements
and move in and a Certificate of Occupancy of a tenantable shell either has been
issued or would be issued except for work to be performed by Tenant.
Tenant's Equipment means that certain equipment described on Exhibit C
attached hereto (as such Exhibit C may from time to time be updated by the
Tenant to include equipment to be used for the Permitted Use), together with all
replacements thereof. It is anticipated that some or all of Tenant's Equipment
will be leased by Tenant.
Term means the Term as defined in Paragraph 6.
Trustee means FMB Trust Company, National Association, its successors
and assigns.
10
<PAGE>
Voting Stock means the shares of any class of capital stock of a
corporation having ordinary voting power to elect the directors, managers or
trustees thereof (irrespective of whether or not at the time stock of any class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingencies).
3. Title.
(a) The Leased Premises are demised and let subject to (i) the
Deeds of Trust and any Encumbrances executed in connection therewith and all of
the terms and provisions thereof, including but not limited to the provisions
governing disbursement of insurance proceeds and condemnation awards, (ii) the
existing state of the title of the Land as of the date hereof and any other
exceptions or encumbrances of record as of the date hereof and any other
restrictions, exceptions and Encumbrances entered into subsequent to the date
hereof with Tenant's knowledge and written consent, which consent shall not be
unreasonably withheld or delayed provided Tenant's rights hereunder are not
adversely affected in a material manner (including Tenant's option to purchase
the Leased Premises as hereinafter provided), (iii) any state of facts which an
accurate survey or physical inspection of the Leased Premises might show, and
(iv) the condition of the Leased Premises, as of the Rent Commencement Date,
without representation or warranty by Landlord, and without liability or
obligation of Landlord for patent or latent defects (except that Landlord shall
assign the benefit of all warranties written and implied to Tenant and Tenant
shall be a third party beneficiary of such warranties under the Construction
Contracts).
(b) Tenant has made its own investigation as to the existing state of
the title of the Land and has made arrangements for its own
survey.
4. Plans and Specifications; Construction.
(a) Landlord will cause the Improvements to be constructed on the
Land in accordance with the Plans by the execution and delivery
of the Construction Contracts. Landlord has entered into, or will
enter into, the Construction Contracts listed on Exhibit B
attached hereto.
(b) Landlord will not agree to any modifications of the Plans without
Tenant's consent thereto, and any modifications to the Plans will
be made and approved in accordance with the requirements of
11
<PAGE>
the Bond Documents, the Credit Facility Documents and the State
Loan Documents.
(c) Any change orders with respect to the Construction Contracts will
be entered into and approved in accordance with the requirements
of the Bond Documents, the Credit Facility Documents and the
State Loan Documents.
(d) Landlord may enter into additional Construction Contracts. All
such Construction Contracts are subject to Tenant's approval,
which approval will not be unreasonably withheld or delayed, and
must be approved by the Credit Facility Provider and the State.
5. Use of Leased Premises.
Tenant shall occupy and use the Leased Premises only as a
biological research, product development and manufacturing and related
administrative use facility (the "Permitted Use"), or for such other lawful
purpose as may be approved by Landlord, the Credit Facility Provider, MIDFA and
the State in their sole discretion (except that Landlord, the Credit Facility
Provider, MIDFA and the State will not unreasonably withhold consent to
additional uses which are related to the Permitted Use), subject, in addition,
to the terms and provisions of any covenants, easements, conditions or
restrictions of record now or hereafter recorded with the written consent of
Tenant, including but not limited to the Deeds of Trust and the Restrictive
Covenants, and for no other purpose. Tenant shall not abandon the Leased
Premises. Tenant shall not permit any unlawful occupation, business or trade to
be conducted on any of the Leased Premises or any use to be made thereof
contrary to applicable Legal Requirements. Tenant shall not use or occupy or
permit any of the Leased Premises to be used or occupied, nor do or permit
anything to be done in or on any of the Leased Premises, in a manner which would
or might (i) make void or voidable any insurance then in force with respect to
any of the Leased Premises, (ii) make it difficult or impossible to obtain fire
or other insurance which Tenant is required to furnish hereunder, (iii) cause
structural injury to any of the Improvements, or (iv) constitute a public or
private nuisance or waste.
12
<PAGE>
6. Term; Purchase Option.
(a) This Lease shall be effective from and after the date of
its execution and delivery by Landlord and Tenant, December 31, 1997. Subject to
the terms, covenants, agreements and conditions contained herein, Tenant shall
have and hold the Leased Premises for a term (the "Term") commencing on the Rent
Commencement Date and ending at midnight on January 1, 2019. From the effective
date of this Lease, as set forth above, to and including the Rent Commencement
Date, Tenant shall have the right to enter the Leased Premises for the purpose
of performing, or causing to be performed, "tenant improvement work" for the
purpose of installing, or causing to be installed, Tenant's Equipment and for
the purpose of monitoring the construction of the Improvements.
Landlord shall have the right during the last twelve months of
the Term of this Lease to (i) advertise the availability of the Leased Premises
for sale or for reletting and to erect upon the Leased Premises signs indicating
such availability (provided that such signs do not unreasonably interfere with
the use of the Leased Premises by Tenant), and (ii) show the Leased Premises to
prospective purchasers or tenants at such reasonable times and on reasonable
prior notice during normal business hours as Landlord may select, subject to
Tenant's customary access restrictions.
(b) Provided that, at the time of exercise of the following
purchase option and at the time of closing of the purchase of the Leased
Premises pursuant to such option, (i) no Event of Default or event which, with
the giving of notice or the lapse of time, or both, would constitute an Event of
Default which would entitle Landlord to terminate this Lease or evict Tenant
from possession of the Leased Premises, shall exist, (ii) all payments of Basic
Rent and Additional Rent shall have been paid through the date of the exercise
of such purchase option, and (iii) this Lease shall be in full force and effect
(unless this Lease in not in full force and effect due to Landlord's default),
then Tenant shall have the right and option, by giving notice as set forth
below, to acquire the Leased Premises from Landlord as provided below. Tenant
may not exercise such purchase option during any period in which the Bonds are
not subject to redemption pursuant to Section 3.1(c) or Section 3.1(e) of the
Indenture, unless the Bonds are to remain outstanding after the closing of such
purchase option.
From and after the date which is five years after the Rent
Commencement Date, Tenant may exercise such purchase option by written notice to
Landlord, with a copy of such written notice
13
<PAGE>
to MIDFA, the State and the Credit Facility Provider; provided that, in the
event that Landlord is in default under the provisions of the Bond Documents,
the Credit Facility Documents or the State Loan Documents and such default is
not the result of an Event of Default under this Lease, Tenant may also exercise
such purchase option during such five year period by written notice to Landlord,
with a copy of such written notice to MIDFA, the State and the Credit Facility
Provider. If Tenant exercises such purchase option by giving such written
notice, and (i) the Bonds have been previously redeemed, the closing of such
purchase option shall occur no later than the 90th day following such notice (or
the next business day if such 90th day is not a business day), or (ii) the Bonds
then bear interest at a variable rate, the closing of such purchase option shall
occur no later than the 180th day following such notice (or the next business
day if the 180th day is not a business day), or (iii) the Bonds then bear
interest at a fixed rate, the closing of such purchase option shall occur no
later than the later of (A) the first day on which the Bonds may be redeemed
pursuant to Section 3.1(e) of the Indenture, and (B) the 180th day following
such notice (or the next business day if the 180th day is not a business day),
PROVIDED THAT, in the case of (ii) or (iii) above, unless the Bonds are to
remain outstanding after the closing of such purchase option, the closing of
such purchase option shall not take place unless all Bonds shall have been
redeemed on or before the date of the closing of such purchase option.
Not later than 50 days prior to the date of the closing of
such purchase option, Tenant shall pay to Landlord, in immediately available
funds, the sum of the following (the "Basic Purchase Price"), which sum shall be
held, in trust, by Landlord and used by Landlord solely for the purposes
hereinafter set forth:
(A) the applicable option purchase price set forth on
the Schedule of Option Purchase Prices attached hereto as Exhibit D and
made a part hereof, plus
(B) if Tenant exercises such purchase option during a
period in which the Bonds bear interest at a fixed rate, an amount of
money equal to any redemption premium payable upon redemption of the
Bonds on the next optional redemption date as set forth in Section
3.1(e) of the Indenture, unless the Bonds are to remain outstanding
after the closing of such purchase option.
Any portion of the Basic Purchase Price which is not paid to the Trustee, as
provided below, will be held by Landlord, in trust, upon terms and conditions
mutually acceptable to Landlord and
14
<PAGE>
Tenant, in an interest bearing account at a commercial bank mutually acceptable
to Landlord and Tenant, pending the closing of such purchase option.
Upon receipt by Landlord of the Basic Purchase Price, Landlord
shall pay to the Trustee from the Basic Purchase Price, to be held in an
irrevocable escrow for the redemption of the Bonds, in immediately available
funds, an amount sufficient, when added to moneys then held by the Trustee and
available for the redemption of Bonds, to redeem all of the Bonds in full on the
next date on which the Bonds may be redeemed pursuant to Section 3.1(c) or
3.1(e) of the Indenture, unless the Bonds are to remain outstanding after the
closing of such purchase option.
In addition, at the closing of such purchase option, Tenant
shall pay to Landlord, in immediately available funds, the sum of the following:
(A) all Basic Rent and Additional Rent through the
date of the closing of such purchase option, plus
(B) all actual third party costs and expenses
(including reasonable attorneys fees and expenses) of the Credit
Facility Provider, Landlord, MIDFA and the State (excluding Landlord's
internal overhead) incurred in connection with such purchase, including
(without limitation) any costs incurred by Landlord in connection with
"unwinding" the Hedge, but deducting any benefits accruing to Landlord
in connection with "unwinding" the Hedge, plus
(C) all transfer and recordation taxes, brokerage
fees, if any, and other costs and expenses required or necessary to be
paid in connection with the transfer of the Leased Premises from
Landlord to Tenant.
At the closing of such purchase option, Landlord will use a
portion of the Basic Purchase Price received by Landlord to pay the outstanding
principal balance and all accrued and unpaid interest on the State Loans;
provided, however, that in the event that, in connection with the purchase of
the Leased Premises by Tenant pursuant to such purchase option, Tenant assumes
all of the obligations of Landlord under the State Loan Documents with respect
to the State Loans, the Basic Purchase Price will be reduced by the total amount
of the State Loans then outstanding which are so assumed by Tenant as of the
date of the closing of such purchase option.
If, at the time Tenant exercises such purchase option, any of
the Bonds shall have been redeemed or paid prior to
15
<PAGE>
maturity or any portion of the principal of the State Loans shall have been
prepaid prior to maturity, the Basic Purchase Price shall be reduced by an
amount equal to the total amount of Bonds so redeemed or paid and the portion of
the principal of the State Loans so prepaid.
If, at the time Tenant exercises such purchase option, there
shall be on deposit with the Trustee any moneys which are available for the
redemption of the Bonds upon the closing of such purchase option, and the
outstanding Bonds are to be redeemed upon the closing of such purchase option,
the Basic Purchase Price shall be reduced by an amount equal to the amount of
moneys so on deposit with the Trustee.
Upon Tenant's exercise of such purchase option, Tenant may
advise Landlord that Tenant will purchase the Leased Premises pursuant to such
purchase option, subject to the Bond Documents and the Credit Facility
Documents, and that Tenant either will assume all of the obligations of Landlord
under the Bond Documents and the Credit Facility Documents or, in the
alternative, pay the portion of the Basic Purchase Price attributable to the
outstanding Bonds by the delivery of a loan agreement, or similar document,
evidencing Tenant's agreement to pay Landlord amounts which are sufficient to
enable Landlord to pay its monetary obligations under the Bond Documents and the
Credit Facility Documents, in which event (i) the Basic Purchase Price will be
reduced by the principal amount of the Bonds which would have been redeemed upon
the closing of such purchase option, (ii) at or prior to the closing of such
purchase option, Tenant and Landlord will execute and deliver such documents,
and take such actions, as Landlord, the Credit Facility Provider and MIDFA may
require, in their sole discretion, to provide for the assumption by Tenant of
Landlord's obligations under the Bond Documents and the Credit Facility
Documents, and (iii) the Bonds will not be redeemed but will remain outstanding
after the closing of such purchase option.
At the closing of such purchase option, Landlord shall pay,
from the moneys paid to Landlord by Tenant as set forth above, (1) to the State,
in immediately available funds, an amount sufficient to pay the outstanding
principal of and accrued and unpaid interest on the State Loans, unless, and to
the extent that, Tenant shall have assumed all of the obligations of Landlord
under the State Loan Documents as set forth above, (2) to the Trustee, the
Paying Agent, the Registrar, the Remarketing Agent, the Rating Agency, the
Credit Facility Provider, MIDFA, the State and the Hedge Counterparty, all
accrued fees, costs and expenses then payable to the Trustee, the Paying Agent,
the Registrar, the Remarketing Agent, the Rating Agency, the Credit Facility
Provider, MIDFA, the State and the Hedge Counterparty, (3) to the
16
<PAGE>
Credit Facility Provider, MIDFA and the State, all actual third party costs and
expenses (including reasonable attorneys fees and expenses) incurred by them in
connection with such purchase of the Leased Premises by Tenant and, if
applicable, in connection with the assumption by Tenant of the obligations of
Landlord under the State Loan Documents, the Bond Documents and the Credit
Facility Documents.
In consideration of the payment by Tenant to Landlord of the
Basic Purchase Price and the other amounts of money set forth above, Landlord,
by special warranty deed, will transfer its interest in the Leased Premises, as
well as incidental personal property relating to the Leased Premises, to Tenant
as of the date of the closing of such purchase option, free of all Encumbrances,
other than (1) Encumbrances in existence on the date of this Lease, (2)
Encumbrances assumed by Tenant, (3) Encumbrances approved by Tenant, (4) the
State Loan Documents in the event that in connection with the purchase of the
Leased Premises by Tenant pursuant to such Purchase Option Tenant assumes all of
Landlord's obligations under the State Loan Documents, and (5) the Bond
Documents and the Credit Facility Documents in the event that in connection with
the purchase of the Leased Premises by Tenant pursuant to such purchase option
Tenant assumes all of Landlord's obligations under the Bond Documents and the
Credit Facility Documents; and Landlord will assign to Tenant all contracts and
warranties (to the extent assignable) relating to the Leased Premises and/or
incidental to any and all personal property relating to the Leased Premises.
Notwithstanding any other provision of this Lease, Landlord
will not accept the Basic Purchase Price and the other amounts of money set
forth above, and will not close such purchase option, unless the amount of the
Basic Purchase Price is sufficient to enable Landlord to (1) redeem all of the
Bonds at the then applicable redemption price, and to pay all of Landlord's Bond
Obligations and Landlord's Credit Facility Obligations in connection therewith,
unless, in connection with the purchase of the Leased Premises by Tenant
pursuant to such purchase option, Tenant assumes all of the obligations of
Landlord under the Bond Documents and the Credit Facility Documents, or, in the
alternative, delivers a loan agreement, or similar document, in payment of a
portion of the Basic Purchase Price as set forth above, and (2) to prepay all of
the State Loans in full, including all accrued and unpaid interest thereon, and
to pay all of the Landlord's State Loan Obligations in connection therewith,
unless, and to the extent that, in connection with the purchase of the Leased
Premises by Tenant pursuant to such purchase option, Tenant assumes all of the
obligations of Landlord under the State Loan Documents.
17
<PAGE>
Concurrently with the closing of such purchase option,
Landlord shall cause the Bond Deed of Trust (if not previously satisfied) to be
released upon the payment by Landlord to the Trustee of the amounts set forth
above, unless Tenant shall have assumed all of the obligations of Landlord under
the Bond Documents and the Credit Facility Documents as set forth above, in
which event the Bond Deed of Trust will not be so released; and Landlord shall
cause the State Loan Deed of Trust (if not previously satisfied) to be released
upon the payment by Landlord to the State of the amounts set forth above, unless
Tenant shall have assumed all of the obligations of Landlord under the State
Loan Documents as set forth above, or, in the alternative, shall have delivered
a loan agreement, or similar document, in payment of a portion of the Basic
Purchase Price, as set forth above, in which event the State Loan Deed of Trust
will not be so released.
Upon the closing of such purchase option and the payment of
all amounts set forth above, Tenant shall be released of all of its obligations
under this Lease; provided, however that any and all obligations and liabilities
of Tenant under this Lease that survive the Term of this Lease (such as
indemnification obligations) shall survive the closing of such purchase option.
(c) In the event Tenant exercises its option to purchase the
Leased Premises from Landlord as set forth above, but fails to close as and when
required as set forth above, such failure shall constitute an Event of Default
under this Lease.
7. Rent.
(a) As used herein, the term "Rent Commencement Date" means
the earlier to occur of (i) the first day of the first month following the date
on which Tenant gives written notice to Landlord, with a copy of such written
notice to the Credit Facility Provider, the State and MIDFA, that Tenant's
beneficial use of the Leased Premises has begun, and (ii) January 1, 1999.
18
<PAGE>
(b) Tenant covenants to pay to Landlord, on the first day of
each and every calendar month, beginning on the Rent Commencement Date, basic
rent in the amount of $186,376.00 per month, subject to adjustment as set forth
in subparagraph (c) below (such basic rent, as so adjusted from time to time, is
hereinafter referred to as "Basic Rent"). Basic Rent shall be payable to
Landlord by separate check or wire transfer at Landlord's payment addresses set
forth in Exhibit E attached hereto and made a part hereof or at such other place
or bank account within the continental United States or to such other Person as
Landlord from time to time may designate to Tenant in writing, in lawful money
of the United States of America.
(c) Landlord and Tenant acknowledge and agree that the Basic
Rent has been determined based upon a number of factors, which include the
amount of debt service payable by Landlord with respect to the Bonds and the
State Loans and other costs which may fluctuate from time to time. Accordingly,
the Basic Rent shall be adjusted from time to time by Landlord and Tenant to
reflect (i) any redemption of the Bonds prior to maturity and any prepayment of
any of the State Loans prior to maturity, and (ii) the expiration of the Hedge
or any default by the Hedge Counterparty in the performance of its obligations
under the Hedge Documents.
(d) Tenant covenants to pay and discharge, as additional rent,
the following (collectively, the "Additional Rent"):
(i) the amount of any cost or expense required to be
paid by Landlord with respect to or in connection with the acquisition,
construction and financing of the Improvements and the ownership of the
Leased Premises and the leasing of the Leased Premises to Tenant,
including (without limitation), consultants' fees, accounting fees,
legal fees and other expenses relating to any litigation involving the
Leased Premises (except to the extent that Landlord is otherwise
indemnified therefor pursuant to another provision of this Lease),
costs of maintenance, upkeep and repair of the Leased Premises paid for
by Landlord, costs of permits, charges by governmental authorities, and
amounts paid pursuant to any declaration or covenants including the
Restrictive Covenants, and all indemnification obligations of Landlord
to any Person or Persons resulting from or growing out of such
acquisition, construction, financing, ownership and leasing, and any
sales taxes, plus
(ii) all fees and amounts payable by Landlord to any
Person or Persons in connection with the acquisition, construction and
financing of the Improvements, including (without limitation) all
credit facility fees, remarketing
19
<PAGE>
fees, insurance premiums payable to MIDFA, common area maintenance fees
or rents or other similar charges relating to the maintenance of the
Leased Premises or any roads or otherimprovements related thereto,
monthly deposits on account of Impositions and insurance premiums, in
the event that Landlord is required to make such monthly deposits on
account of Impositions and insurance premiums, and amounts representing
increases in fees payable to the Rating Agency or to the Trustee or the
Registrar or the Paying Agent pursuant to the Indenture or increases in
the negotiation fee payable to the Credit Facility Provider, and
amounts representing changes in costs resulting from any conversion of
the interest rate payable on the Bonds from a variable rate to one or
more fixed rates or from one or more fixed rates to one or more other
fixed rates or to a variable rate, plus
(iii) to the extent not paid on the Closing Date from
the proceeds of the Bonds, the amounts determined by Landlord to be
sufficient to enable Landlord to make payments of all other monetary
obligations of Landlord under the Bond Documents, the Credit Facility
Documents, the State Loan Documents and the Hedge Documents.
Landlord, as promptly as practicable after obtaining knowledge that any
Additional Rent will be payable under this Lease, will advise Tenant, by written
notice, of the amount of any Additional Rent payable hereunder and the date on
which any Additional Rent is due and payable by Tenant in order for Landlord to
meet its obligations with respect to payments by Landlord to other Persons.
Additional Rent shall be paid to Landlord's payment addresses set forth in
Exhibit E attached hereto. In the event of any failure by Tenant to pay or
discharge any Additional Rent, Landlord shall have all rights, powers and
remedies provided herein or by Law in the case of non-payment of Basic Rent.
Unless otherwise provided herein, all payments of Additional Rent shall be due
on the date specified by Landlord in such written notice as the date on which
such Additional Rent is due and payable.
(e) In the event that any payment of Basic Rent or Additional Rent is
not made within 15 days after the date on which the same is due and payable, any
such payment in default and the entire unpaid balance of all amounts owing to
Landlord shall bear interest, from the date on which the payment was due until
such payment in default is paid in full, at the fluctuating rate which is at all
times equal to the LIBOR Rate plus 3% per annum (the ADefault Rate@). In
addition, Tenant shall pay (i) a late charge equal to 2% of the payment in
default as set forth above (except for any payment with respect to a Bond
Purchase Principal Drawing,
20
<PAGE>
as defined in the Indenture) which is made more than 15 days after the date on
which the same is due and payable, and (ii) all costs of collection, including
attorneys= fees, if collection of amounts due to Landlord is referred to an
attorney after default by Tenant.
8. Net Lease; Non-Terminability.
(a) This is a net lease, and Basic Rent, Additional Rent and
all other sums payable by Tenant shall be paid without notice (except as
specifically provided herein) or demand.
(b) Except as expressly provided in this Lease, Tenant shall
not be entitled to any set-off, counterclaim, recoupment, abatement, suspension,
deferment, diminution, deduction, reduction or defense of or to Basic Rent or
Additional Rent or any other sums payable hereunder and the obligations of
Tenant under this Lease shall not be affected, for any reason, including the
following: (i) any damage to or the destruction of all or any part of the Leased
Premises from whatever cause, (ii) the taking of the Leased Premises or any
portion thereof or interest therein by condemnation, requisition or otherwise
for any reason, (iii) the prohibition, limitation or restriction of Tenant's use
of all or any part of the Leased Premises, or any interference with such use,
(iv) any title defect or encumbrance, or any eviction from the Leased Premises
by paramount title or otherwise, (v) Tenant's acquisition or ownership of any
interest in all or any part of the Leased Premises otherwise than pursuant to an
express provision of this Lease, (vi) any failure on the part of Landlord to
observe any provision of this Lease, or any default by Landlord under any other
agreement to which Landlord and Tenant may be parties, (vii) any claim which
Tenant has or might have against Landlord, or (viii) any other cause whether
similar or dissimilar to the foregoing, any present or future Law to the
contrary notwithstanding except by agreement by and among Landlord, Tenant, the
State and the Bank. It is the intention of the parties hereto that the
obligations of Tenant hereunder shall be separate and independent covenants and
agreements, that Basic Rent, Additional Rent and all other sums payable by
Tenant hereunder shall continue to and be payable in all events, and that the
obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform the same shall have been terminated pursuant to an
express provision of this Lease.
(c) Tenant agrees that it will remain obligated under this Lease
in accordance with its terms, and that it will not take any action to terminate,
rescind or avoid this Lease or abate the rent required hereby, notwithstanding
(i) the bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, winding-up or other proceeding affecting
21
<PAGE>
Landlord or any assignee of Landlord in any such proceeding or/and (ii) any
other action (including rejection) with respect to this Lease which may be taken
by any trustee or receiver of Landlord or of any assignee of Landlord in any
such proceeding or by any court in any such proceeding; and, in any such event,
so long as Tenant pays and performs its obligations under this Lease and does
not take any action to terminate, rescind or avoid this Lease or abate the rent
required hereby, Tenant shall be entitled to the benefits of Tenant set forth in
this Lease.
(d) Except as otherwise provided in this Lease, Tenant waives
all rights which may now or hereafter be conferred by law (i) to quit, terminate
or surrender this Lease or (ii) to any abatement, suspension, deferment or
reduction of Basic Rent, Additional Rent or any other sums payable under this
Lease, except as expressly approved by the State and the Credit Facility
Provider or as otherwise expressly provided herein.
(e) Subject to Paragraph 35(f), Tenant and Landlord agree that
the State and the Credit Facility Provider are and shall be third-party
beneficiaries of this Lease and that, as such, the State and the Credit Facility
Provider shall have the right to pursue any right, remedy or performance to
which Landlord shall be entitled pursuant hereto notwithstanding that but for
the provisions of this subparagraph (e), the State and the Credit Facility
Provider may not have had the right to pursue any such right, remedy or
performance.
22
<PAGE>
9. Payment of Impositions; Compliance with Law and Restrictive
Covenants.
(a) Subject to the provisions of Paragraph 18 relating to
contests, Tenant shall pay all Impositions before any fine, penalty, interest or
cost may be added for non-payment. Tenant agrees to furnish to Landlord, within
30 days after written demand therefor, proof of the payment of all Impositions
payable by Tenant as provided in this Paragraph 9. In the event that any
Imposition becomes due and payable during the Term and may be legally paid in
installments, Tenant shall have the option to pay such Imposition in
installments; and in such event, Tenant shall be liable only for those
installments which become due and payable during the Term, with appropriate
proration in the case of fractional years. Any Impositions which are
attributable in part to the Term and in part to a period preceding or following
the Term, as the case may be, shall be equitably apportioned between Landlord
and Tenant. If Landlord is required pursuant to the Bond Documents or the Credit
Facility Documents or the State Loan Documents to make monthly deposits on
account of Impositions and insurance premiums, and Landlord informs Tenant in
writing thereof specifying the amount of such deposits, Tenant shall pay such
monthly deposits to Landlord, as Additional Rent hereunder as provided in
Paragraph 7 (d).
(b) Tenant shall promptly comply with and conform to all Legal
Requirements concerning the use, occupancy and conditions of the Leased Premises
and all machinery, equipment, furnishings, fixtures and improvements therein. If
any such Legal Requirement requires an occupancy or use permit, license, special
exception, or other local, state or federal agency certification, then Tenant
shall promptly obtain and keep current the same.
(c) Tenant shall comply with all of the Restrictive Covenants.
23
<PAGE>
10. Liens; Recording and Title; Easements.
(a) Tenant will not, directly or indirectly, create or permit
to remain, and will promptly discharge, at its expense, any mortgage, lien,
encumbrance or charge on, pledge of, or conditional sale or other title
retention agreement with respect to, the Leased Premises or any part thereof or
Tenant's interest therein or Basic Rent, Additional Rent or other sums payable
by Tenant under this Lease, other than Permitted Equipment Liens. The existence
of any mechanic's, laborer's, materialman's, supplier's or vendor's lien, or any
right in respect thereof, shall not constitute a violation of this Paragraph 10
if payment is not yet due upon the contract or for the goods or services in
respect of which any such lien has arisen so long as such payment is made or
bonded off within 30 days after the later to occur of the completion of the work
which gave rise to the imposition of said liens or the rendering of the invoice,
statement or demand for such payment. Nothing contained in this Lease shall be
construed as constituting the consent or request of Landlord, expressed or
implied, of any contractor, subcontractor, laborer, materialman or vendor to or
for the performance of any labor or services or other furnishing of any
materials for any construction, alteration, addition, repair or demolition of or
to the Leased Premises or any part thereof.
(b) At Tenant's request and at Tenant's sole cost and expense,
Landlord and Tenant will execute and deliver a memorandum evidencing Tenant's
option to purchase set forth in Paragraph 6, and shall cause such memorandum to
be recorded, filed or registered in such manner and in such places as may be
required by any present or future Law in order to publish notices and protect
the validity of such option to purchase.
(c) Subject to the terms and conditions of Paragraph 30,
Landlord shall have the right to encumber the Leased Premises, provided that any
such encumbrance (except for the Deeds of Trust and other Credit Facility
Documents and State Loan Documents) shall be made expressly subject to Tenant's
rights under this Lease including the purchase option.
11. Indemnification. Tenant shall pay, protect, indemnify and save
harmless Landlord from and against any and all liabilities, losses, damages,
costs, expenses (including all reasonable attorneys' fees and expenses),
penalties, causes of action, suits, claims, demands or judgments of any nature
whatsoever arising from (i) any injury to, or the death of, any person or any
damage to property on the Leased Premises or upon adjoining sidewalks, streets
or ways, if caused by the negligence of Tenant or its agents or employees, or in
any manner growing out of or connected with the use, failure of use, condition
or
24
<PAGE>
occupancy of the Leased Premises or any part thereof or resulting from the
condition thereof, (ii) any violation by Tenant of any covenant, agreement or
condition of this Lease, and (iii) any violation by Tenant of the terms of any
contract or agreement to which Tenant is a party and which affects the Leased
Premises; provided, however, that if any such liability, loss, damage, penalty,
cost or expense, cause of action, suit, claim, demand or judgment results from
the negligence of Landlord, its agents or employees, or if any such act or
omission is determined to be a failure by Landlord to observe any provision of
this Lease (if observance is required of Landlord), the foregoing indemnity by
Tenant shall apply with respect to Landlord only to the extent of the insurance
coverage maintained (or required to be maintained, if greater) by Tenant
pursuant to the provisions of Paragraph 15 of this Lease. In case any action or
proceeding is brought against Landlord by reason of any such claim, Tenant
covenants, upon notice from Landlord, to resist or defend such action or
proceeding by counsel reasonably satisfactory to Landlord, and, at the expense
of Tenant, Landlord will cooperate and assist in the defense of such action or
proceeding if reasonably requested so to do by Tenant.
Tenant also shall pay, protect, indemnify and save harmless Landlord
for all amounts, liabilities, indemnities and obligations which Tenant assumes
or agrees to pay or discharge pursuant to this Lease, as well as any payments or
indemnification made or required to be made by Landlord under the Credit
Facility Documents, the Bond Documents, the State Loan Documents or the Hedge
Documents as a result of Tenant's default hereunder, together with every fine,
penalty, interest and cost which may be added for nonpayment or late payment
thereof.
The obligation of Tenant under this Paragraph 11 shall survive any
termination of this Lease as to any right of indemnity which shall have accrued
prior to such termination.
25
<PAGE>
12. Tenant's Equipment; Building Equipment; Maintenance and Repair.
(a) Tenant, at its expense, shall install all specialized machinery,
apparatus and equipment which Tenant, in its sole and absolute discretion, deems
necessary to permit the Leased Premises to be used for the Permitted Use
including, without limitation, the Tenant's Equipment described on Exhibit C
attached hereto. All Tenant's Equipment shall remain the property of the lessor
thereof or the property of the Tenant, as applicable, notwithstanding its
attachment to the Leased Premises. At the expiration of the Term, all of
Tenant's Equipment shall remain the property of the lessor thereof or the
property of the Tenant (as applicable) and shall be removed by Tenant or lessor
in accordance with subparagraph (c) below.
(b) Tenant, at its sole cost and expense, will keep and maintain
the Leased Premises, including any altered, rebuilt, additional or substituted
buildings, structures and parts of the Improvements, in good repair and
appearance, except for ordinary wear and tear, and will with reasonable
promptness make all structural and nonstructural, foreseen and unforeseen, and
ordinary and extraordinary changes and repairs of every kind and nature which
may be required to be made upon or in connection with the Leased Premises, the
Building Equipment, or any part thereof; in order to keep and maintain the
Leased Premises and the Building Equipment in such good repair and appearance.
All repairs, replacements and renewals shall be at least equal in quality to the
original work and all replacements shall have a value and useful life at least
equal to the value and remaining estimated useful life of the item being
replaced, and be suitable for a use which is the same or similar to that of the
item being replaced. Landlord shall not be required to maintain, repair or
rebuild, or to make any Alteration to the Leased Premises, the Building
Equipment, or Tenant's Equipment, or any part thereof, whether ordinary or
extraordinary, structural or non-structural, foreseen or unforeseen, or to
maintain the Leased Premises, the Building Equipment, or Tenant's Equipment, or
any part thereof, in any way, and Tenant hereby expressly waives the right to
make repairs at the expense of Landlord, notwithstanding the fact that such
right may be provided for in any Law in effect at the time of the execution and
delivery of this Lease or which may thereafter be enacted.
Notwithstanding anything herein to the contrary, Tenant shall not
be required to replace any Building Equipment during the last 3 years of the
Term, but Tenant, at Tenant's expense, shall keep all Building Equipment in good
working condition throughout the Term.
26
<PAGE>
(c) Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Leased Premises in good condition, reasonable wear
and tear and damage by casualty excepted, with all Building Equipment in good
working condition, and all Tenant's Equipment removed. Any Tenant's Equipment
required to be removed but not removed by Tenant within 30 days after the
expiration or earlier termination of this Lease shall be considered abandoned by
Tenant and may be appropriated, sold, destroyed or otherwise disposed of by
Landlord without first giving notice thereof and without obligation to account
therefor to either Tenant or any lessor of such Tenant's Equipment. Tenant
agrees to pay all costs and expenses incurred in removing, storing and disposing
of Tenant's Equipment required to be removed but not removed. Tenant shall
repair (i.e., replace, restore or repair to a sightly and usable condition), at
its expense, any damage to the Leased Premises caused by removal of Tenant's
Equipment, whether effected by Landlord, Tenant, or Tenant's lessor. Landlord
shall not be responsible for any loss or damage to Tenant's Equipment under any
circumstances. The provisions of this subparagraph (c) are not applicable in the
event that Tenant purchases the Leased Premises as provided in Paragraph 6.
Notwithstanding anything herein to the contrary, Tenant shall not
be required to replace any Building Equipment during the last 3 years of the
Term, but Tenant, at Tenant's expense, shall keep all Building Equipment in good
working condition throughout the Term.
(d) Landlord shall, from time to time upon Tenant's written
request, execute appropriate documents for the benefit of Tenant's lenders or
equipment lessors confirming the provisions of this Paragraph 12 and containing
such further undertakings of Landlord concerning the right of any such lender or
lessor to enter the Leased Premises following termination of this Lease for the
purpose of exercising its rights with respect to the collateral of such lender
or lessor, including removing the same, provided such further undertakings are
on commercially reasonable terms and conditions and require such lender or
lessor to repair any damage to the Leased Premises caused by the removal of
Tenant's Equipment.
27
<PAGE>
13. Alterations.
(a) So long as no Event of Default or event which, with the
giving of notice, the lapse of time, or both, would constitute an Event of
Default shall have occurred and be continuing, Tenant may, at its expense, make
Alterations, subject to the advance written consent of Landlord and subject to
the Deeds of Trust provided that the consent of Landlord shall not be required
for non-structural Alterations which do not involve the exterior of the building
or changes in utilities, electrical, mechanical or other existing systems and
which as in each separate Alteration do not exceed $500,000 in cost. Landlord
agrees not to withhold, delay or condition its consent provided that (i) all
such Alterations, construction and installations shall be performed in a good
and workmanlike manner; (ii) all such Alterations, construction and
installations shall be expeditiously completed in compliance with all Legal
Requirements; (iii) all work done in connection with any such Alterations,
construction or installation shall comply with the requirements of any insurance
policy required to be maintained by Tenant hereunder; (iv) Tenant shall promptly
pay all costs and expenses of any such Alteration, construction or installation
and shall discharge all liens filed against any of the Leased Premises arising,
out of the same; (v) Tenant shall procure and pay for all permits and licenses
required in connection with any such Alteration, construction or installation;
(vi) all such Alterations, construction and installations (except as provided in
subparagraph 13(c) below) shall be the property of Landlord and shall be subject
to this Lease; (vii) the design of any Alterations visible from the exterior of
the Leased Premises shall comply with the terms of the Restrictive Covenants
(including obtaining any consents required thereunder); (viii) the contractor
performing such alterations shall be reputable, licensed and insured and shall,
if required by Landlord, be required to obtain performance and payment bonds;
and (ix) Landlord shall incur no expense or cost whatsoever in connection with
such Alterations, including without limitation, costs for reviewing and
approving plans, additional common area maintenance fees, tap fees or other
utility fees, and costs incurred by Landlord in obtaining the approval of the
Credit Facility Provider and the State. Landlord may require, as a condition to
its consent to any Alterations, reasonable appropriate payments, assurances and
undertakings from Tenant to ensure that all such conditions are satisfied.
Notwithstanding the foregoing, it shall not be unreasonable for Landlord to
withhold its consent, or to condition its consent, if either of the
Beneficiaries withholds its consent to any of the foregoing, or requires that
certain conditions or requirements be satisfied or observed.
(b) In the event that any Alterations shall encroach
28
<PAGE>
upon any property, street or right-of-way adjoining or adjacent to the Leased
Premises, or shall violate the agreements or conditions contained in any
restrictive covenant affecting the Leased Premises or any part thereof, or shall
hinder or obstruct any easement or right-of-way to which the Leased Premises are
subject or shall impair the rights of others under any such easement or
right-of-way, then promptly after written request of Landlord or of any Person
affected by any such encroachment, violation, hindrance, obstruction or
impairment, Tenant shall, at its expense, either (i) obtain valid and effective
waivers or settlements of all claims, liabilities and damages resulting from
each such encroachment, violation, hindrance, obstruction or impairment, whether
the same shall affect Landlord, Tenant or both, or (ii) take such other action
as shall be necessary to remove such encroachments, hindrances or obstructions
and to end such violations or impairments.
(c) All Tenant improvements that can be removed without damage to
the structural integrity of the Leased Premises or the normal functions of the
Leased Premises or that are not necessary for the normal use of a building as a
tenantable shell building, and which were not financed with the proceeds of the
Bonds or the State Loans, shall, on termination of this Lease, become the
property of the Tenant.
14. Condemnation.
(a) Tenant, immediately upon obtaining knowledge of the
institution of any proceeding for any condemnation of the Leased Premises, shall
notify Landlord thereof and Landlord shall be entitled to participate with
Tenant in any condemnation proceeding at Tenant's expense. Tenant hereby
irrevocably assigns to Landlord any condemnation award or condemnation payment
to which Tenant may be or become entitled (except as set forth in subparagraph
(b) below) by reason of any taking of the Leased Premises or any part thereof,
in or by condemnation or other eminent domain proceedings pursuant to any Law,
or by reason of the temporary requisition of the use or occupancy of the Leased
Premises or any part thereof, by any governmental authority, civil or military,
whether the same shall be paid or payable in respect of Tenant's leasehold
interest hereunder or otherwise. The proceeds of the condemnation award shall be
made available for restoration if permitted by the Deeds of Trust and if this
Lease is not terminated. As used herein, the term "Net Award" means any
condemnation award received by Landlord, less Landlord's expenses and Tenant's
expenses, if any, in collecting same.
(b) The foregoing notwithstanding, nothing in this Lease shall
impair Tenant's right to any award or payment on account of Tenant's trade
fixtures, Tenant's Equipment, and other
29
<PAGE>
tangible property, moving expenses, loss of business and the like, if available,
to the extent Tenant shall have a right to make a separate claim therefor
against the appropriate governmental authority, but in no event shall any such
separate claim be based upon the value of Tenant's leasehold interest in the
Leased Premises or result in a reduction of the award or payment which would
have been payable to Landlord absent such separate claim by Tenant.
(c) If there shall be taken by condemnation or other eminent
domain proceedings pursuant to any Law, general or special, (i) the entire
Leased Premises or (ii) any substantial portion of the Leased Premises which is
sufficient to render the remaining portion thereof, in the reasonable judgment
of Landlord or Tenant, unsuitable for restoration for the continued use and
occupancy of Tenant's business, or (iii) if the Credit Facility Provider or the
State shall retain any Net Award pursuant to the Deeds of Trust (it being
recognized that as a result thereof, either of the Beneficiaries may refuse to
allow the award to be disbursed for restoration under certain circumstances, as
provided in the Deeds of Trust), then Landlord and Tenant may each, not later
than 90 days after any such taking, give notice to the other of its intention to
terminate this Lease on any Basic Rent Payment Date specified in such notice,
which date shall not be prior to the date of the vesting of title to the Leased
Premises or portion thereof in the condemning authority. In the event Landlord
elects to terminate this Lease in the case of (ii) or (iii) above, if Tenant
elects to provide funds which, together with the Net Award, are sufficient to
restore the Leased Premises and pay Basic Rent and Additional Rent during such
restoration and provides evidence satisfactory to Landlord, the State and the
Credit Facility Provider (in the Credit Facility Provider's and the State's sole
and absolute subjective judgment) of its ability to do so within 30 days of
Landlord's election, Landlord's election to terminate shall be rescinded, this
Lease shall continue in full force and effect pursuant to subsection (d) below,
and restoration of the Leased Premises shall proceed in accordance with
Paragraph 16(b). In the event either Landlord or Tenant elects to terminate this
Lease under the provisions of this Paragraph 14(c), Landlord shall be entitled
to recover from Tenant, and Tenant will pay to Landlord, on or prior to the
effective date of termination, an amount equal to the Basic Rent, Additional
Rent and other sums which are then due and payable to the effective date of
termination; provided that in the event of such termination, Tenant may exercise
its purchase option under Paragraph 6(b) within 20 days after notice of
termination.
(d) If a portion of the Leased Premises shall be taken in or by
condemnation or other eminent domain proceedings pursuant to any Law, general or
special, which does not result in a
30
<PAGE>
termination of this Lease, then this Lease shall continue in full force and
effect, and there shall be no abatement or reduction of rent payable hereunder,
except to the extent that any portion of the Net Award is used to redeem Bonds
or to prepay the State Loans prior to maturity. Unless Tenant immediately elects
to exercise its purchase option under Paragraph 6 above, subject to the
provisions of the Deeds of Trust, the Net Award of such condemnation shall be
paid to Landlord and, promptly after such condemnation and payment to Landlord
of the Net Award, Landlord shall make the Net Award available to Tenant for
restoration, in accordance with Paragraph 16.
(e) For the purposes of this Lease, all amounts payable pursuant
to any agreement with any condemning authority which has been made in settlement
of or under threat of any condemnation or other eminent domain proceeding
affecting the Leased Premises shall be deemed to constitute an award made in
such proceeding.
15. Insurance.
(a) Tenant will maintain at its expense (i) such fire, casualty,
extended coverage and all risk insurance on the Improvements and Building
Equipment as is required to be maintained by Landlord, as Grantor under the
Deeds of Trust, provided that the amount of any casualty insurance shall be in
no event less than the actual replacement value of the Improvements and Building
Equipment, less footings, foundations and other non-insurable portions, (ii)
commercial general public liability insurance with a single limit of not less
than $10,000,000, including contractual liability coverage insuring the
obligations assumed by Tenant under this Lease, premises and operations
coverage, broad form property damage coverage and independent contractors
coverage, (iii) worker's compensation insurance as required by Law, (iv)
business interruption insurance in the amount of $4,500,000, and (v) employer's
liability insurance in an amount not less than $2,000,000 for each accident,
$2,000,000 disease- policy limit and $2,000,000 disease-each employee.
(b) The insurance referred to in Paragraph 15(a) shall be written
by companies of recognized financial standing which are authorized to conduct an
insurance business in the State of Maryland and which are reasonably acceptable
to Landlord, the Credit Facility Provider, MIDFA and the State. All commercial
public liability insurance shall name as the insured parties thereunder
Landlord, Tenant, MIDFA, the State and the Credit Facility Provider, as their
interests may appear. Landlord shall not be required to prosecute any claim
against, or to contest any settlement proposed by, any insurer, provided that
Tenant may, at its expense, prosecute any such claim or contest any such
31
<PAGE>
settlement. In such event, Tenant may bring such prosecution or contest in the
name of Landlord, Tenant, or both, and Landlord will join therein at Tenant's
written request upon the receipt by Landlord of a satisfactory indemnity from
Tenant against all costs, liabilities and expenses in connection with such
prosecution or contest.
(c) So long as no Event of Default exists hereunder, insurance
claims by reason of damage to or destruction of any portion of the Leased
Premises shall be adjusted by Tenant, but Landlord, the State and the Credit
Facility Provider shall have the right to join with Tenant in adjusting any such
loss. In furtherance of Tenant's right to adjust, collect and compromise, in its
discretion, all claims under any of the insurance policies required by this
Paragraph 15, Tenant is authorized to execute and deliver all necessary proofs
of loss, receipts, vouchers and releases required by the insurers.
(d) Every fire, casualty, extended coverage or all risk
insurance policy required above (other than on Tenant's Equipment) shall contain
a non-contributory mortgagee endorsement in favor of Landlord, the Credit
Facility Provider, the State and MIDFA. Every policy which Tenant is obligated
to carry under the terms of Paragraph 15(a) shall contain an agreement by the
insurer that it will not cancel such policy except after 30 days' prior written
notice to Landlord, the Credit Facility Provider, the State and MIDFA, and that
any loss otherwise payable thereunder shall be payable notwithstanding any act
or negligence of Landlord or Tenant which might, absent such agreement, result
in a forfeiture of all or a part of such insurance payment and notwithstanding
any foreclosure or other action or proceeding taken by either of the
Beneficiaries pursuant to any provision of the Deeds of Trust upon the happening
of an Event of Default, as defined therein, or any change in title or ownership
of the Leased Premises.
(e) Any and all insurance which Tenant is obligated to carry
pursuant to Paragraph 15(a) may be carried under a "blanket" policy or policies
covering other properties or liabilities of Tenant and may be effected by a
combination of basic and excess or umbrella policies, provided, that such
"blanket" policy or policies otherwise comply with the provisions of this
Paragraph 15. The amount of total insurance allocated to the Leased Premises,
which amount shall not be less than the amounts required pursuant to this
Paragraph 15, shall be specified either (i) in each such "blanket" policy or
(ii) in a written statement, which Tenant shall deliver to landlord from the
insurer thereunder.
(f) Tenant shall promptly comply with and conform to (i) all
provisions of each insurance policy and (ii) all
32
<PAGE>
requirements of the insurers thereunder, applicable to Landlord, MIDFA, the
Credit Facility Provider, the State, Tenant or the Leased Premises or to the
use, manner of use, occupancy, possession, operation, maintenance, alteration or
repair of the Leased Premises, even if such compliance necessitates structural
changes or improvements or results in interference with the use or enjoyment of
any of the Leased Premises. Tenant shall not use the Leased Premises in any
manner which would permit the insurer to cancel any insurance policy unless
Tenant obtains, prior to such cancellation, substitute insurance in accordance
with the provisions of this Paragraph 15 which permits such use of the Leased
Premises.
(g) Any loss under any policy of casualty insurance required to
be carried by Landlord or Tenant hereunder (other than on Tenant's Equipment)
shall be made payable to the Credit Facility Provider or, if references to the
Credit Facility Provider shall be ineffective as provided in Paragraph 35(f), to
the State as long as the State Loans are outstanding, and then to such other
party as the Landlord may designate (in any such case, the "Insurance and Award
Trustee") and each casualty insurer shall be authorized and directed to make
payment under said policies directly to the Insurance and Award Trustee for
disbursement in accordance with the provisions of first, the Bond Deed of Trust
second, the State Loan Deed of Trust, and third, this Lease. As used herein, the
term "Net Proceeds" means any casualty insurance proceeds received by Landlord,
less Landlord's expenses and Tenant's expenses, if any, in collecting same. The
term "Net Proceeds" shall not include proceeds of insurance on Tenant's
Equipment, which proceeds shall be paid directly to Tenant or the lessor of such
Tenant's Equipment.
(h) Tenant shall not carry separate insurance concurrent in form
or continuing in the event of loss with that required in this Paragraph 15
unless (i) Landlord, MIDFA, the State and the Credit Facility Provider are
included therein as named insureds, with lender's loss payable endorsements as
provided herein, and (ii) such separate insurance complies with the other
provisions of this Paragraph 15. Tenant shall immediately notify Landlord,
MIDFA, the State and the Credit Facility Provider of such separate insurance and
shall deliver to Landlord, MIDFA, the State and the Credit Facility Provider
duplicate original policies therefor. Notwithstanding the foregoing, Tenant may
maintain insurance to compensate Tenant for loss of use of the Improvements.
33
<PAGE>
16. Casualty and Restoration.
(a) In the event of any casualty resulting in damage to the
Leased Premises, including any casualty which renders the entire Leased Premises
or a substantial portion thereof unsuitable for continued use, this Lease shall
continue in full force and effect and there shall be no abatement or reduction
of rent payable hereunder.
(b) Until such time as the Deeds of Trust shall have been
released and discharged, any Net Proceeds and any Net Award shall be applied
either to the restoration or replacement of the property that was lost or to the
redemption of Bonds and payment of the State Loans, as provided in the Deeds of
Trust.
(c) Unless there shall have occurred and be continuing an Event
of Default hereunder pursuant to which Landlord is taking action to take
possession of the Leased Premises or to terminate this Lease, or the Net
Proceeds or the Net Award are to be used as directed by either of the
Beneficiaries as provided in the Deeds of Trust, Landlord shall cause the Net
Proceeds or Net Award to be held by the Insurance and Award Trustee in a
restoration fund which shall be disbursed as follows:
(i) If the estimated cost of restoration is less than
$100,000, and if prior to commencement of restoration, no Event of Default or
event which would constitute an Event of Default pursuant to which Landlord is
taking action to take possession of the Leased Premises or to terminate this
Lease shall exist and no mechanics' or materialmen's liens shall have been filed
and remain undischarged, and if the architects, contracts, contractors, plans
and specifications for the restoration shall have been approved by Landlord
(which approval shall not be unreasonably withheld or delayed), and Landlord
shall be provided with reasonable assurance against mechanics' liens, accrued or
incurred, as Landlord may reasonably require, and acceptable performance and
payment bonds reasonably acceptable to Landlord in an amount and form having a
surety reasonably acceptable to Landlord, and naming Landlord, the Credit
Facility Provider, MIDFA and the State each as additional obligees; then such
proceeds shall be payable to Landlord and made available to Tenant for
application to pay the costs of restoration incurred by Tenant and Tenant shall
promptly complete such restoration.
(ii) If the estimated cost of restoration is equal to or
exceeds $100,000, and if the conditions set forth in subparagraph (i) above
shall have been satisfied, and if Tenant provides evidence satisfactory to
Landlord, the Credit Facility Provider, MIDFA and the State that sufficient
funds are available to restore the Leased Premises, disbursements shall be made
from
34
<PAGE>
time to time in an amount not exceeding the cost of the work completed since the
date covered by the last disbursement, upon receipt of (A) satisfactory
evidence, including architect's certificates, of the stage of completion, of the
estimated cost of completion and of performance of the work to date in a good
and workmanlike manner in accordance with the contracts, plans and
specifications, (B) waivers of liens, (C) contractors' and subcontractors' sworn
statements, (D) a satisfactory bring-to-date of title insurance, and (E) other
evidence of cost and payment so that Landlord can verify that the amounts
disbursed from time to time are represented by work that is completed, in place
and free and clear of mechanics' lien claims.
(iii) Each request for disbursement shall be accompanied by a
certificate of Tenant, signed by the President or any Vice President thereof,
describing the work for which payment is requested, stating the cost incurred in
connection therewith and stating that Tenant has not previously received payment
for such work; the certificate to be delivered by Tenant upon completion of the
work shall, in addition, state that the work has been completed and complies
with the applicable requirements of this Lease.
(iv) Landlord may retain 10% of each requisition against the
restoration fund until the restoration is fully completed subject to reduction
of the retained amount upon approval by the Credit Facility Provider in
accordance with local custom;
(v) The restoration fund shall be invested in an interest
bearing account of the Insurance and Award Trustee;
(vi) At all times the undisbursed balance of the restoration
fund shall be not less than the cost of completing the restoration work free and
clear of all liens; and
(vii) Landlord may impose other reasonable conditions provided
the same are consistent with those imposed upon such disbursements by either of
the Beneficiaries under the Deeds of Trust. In addition, prior to commencement
of restoration and at any time during restoration, if the estimated cost of
restoration, as determined by the evaluation of an independent engineer
acceptable to Landlord, exceeds the amount of the Net Proceeds or the Net Award
available for such restoration, Tenant will provide evidence satisfactory to
Landlord that the amount of such excess will be available to restore the Leased
Premises. Any sum which remains in the restoration fund upon completion of
restoration shall be refunded to Tenant up to the amount of Tenant's deposits
pursuant to the immediately preceding sentence. If no such refund is required or
any sum remains in the
35
<PAGE>
restoration fund after such refund, such sum remaining in the restoration fund
(including the residue of any Net Award in a condemnation remaining after
restoration) upon completion of restoration shall be applied (x) during any
period in which the Credit Facility is in effect, to the Landlord's
reimbursement obligations to the Credit Facility Provider to the extent of any
drawings honored by the Bank to pay the redemption price of Bonds redeemed in
accordance with Section 3.1(b) of the Indenture or to pay the purchase price of
Bonds purchased pursuant to Section 4.4 of the Indenture or (y) during any
period in which any Bonds are outstanding, to the redemption of Bonds in
accordance with Section 3.1(b) of the Indenture or to the purchase of Bonds as
set forth in Section 4.4 of the Indenture. During any period in which any Bonds
are outstanding, any sums remaining in an amount less than the minimum
Authorized Denomination (as defined in the Indenture) shall be deposited in the
Principal Account (as defined in the Indenture). If no Bonds are outstanding,
and the Credit Facility Agreement is still in effect, such remaining sum shall
be applied to the Landlord's Credit Facility Obligations under the Credit
Facility Documents. If no Bonds are outstanding and the Credit Facility
Agreement is no longer in effect, such remaining sum shall be distributed to the
State for repayment of the State Loans and then to Landlord and Tenant in
proportion to the value of each party's interest in the Leased Premises as
determined by mutual agreement.
(d) Tenant shall be solely responsible for the replacement
and/or repair of any of Tenant's Equipment damaged by casualty.
36
<PAGE>
17. Assignment and Subletting.
(a) Provided no Event of Default or event which, with the
giving of notice or the lapse of time or both, would constitute an Event of
Default, shall have occurred and be continuing, with prior notice to Landlord,
Tenant may sublet all or any part of the Leased Premises to an Affiliate, or
assign this Lease to an Affiliate, which Affiliate will use the Leased Premises
for the Permitted Use. Provided no Event of Default or event which, with the
giving of notice or the lapse of time or both, would constitute an Event of
Default, shall have occurred and be continuing, with the consent of Landlord,
(which consent shall not be unreasonably withheld) Tenant may sublet all or any
part of the Leased Premises to a Person which is not an Affiliate, or assign
this Lease to a Person which is not a Affiliate, which Person will use the
Leased Premises for the Permitted Use. Notwithstanding the foregoing, in any
instance in which Landlord may not unreasonably withhold its consent, it shall
not be unreasonable for Landlord to withhold its consent, or to condition its
consent, if the Credit Facility Provider, MIDFA or the State withholds its
consent to any assignment or subletting, or requires that certain conditions or
requirements be satisfied or observed. Tenant shall give Landlord at least 30
days' advance written notice of its intention to enter into any transaction
governed by this Paragraph 17, together with such information as Landlord, the
Credit Facility Provider, MIDFA or the State may reasonably request concerning
the business and financial background of the proposed subtenant or assignee.
Within 10 days after the execution and delivery of any assignment or sublease
permitted pursuant to this Paragraph 17, Tenant shall deliver a conformed copy
thereof to Landlord, and within 10 days after the execution and delivery of any
permitted sublease, Tenant shall give notice to Landlord of the existence and
term thereof, and of the name and address of the sublessee thereunder.
(b) If Tenant assigns all its rights and interests under this
Lease, the assignee under such assignment shall expressly assume all the
obligations of Tenant hereunder in a written instrument delivered to Landlord at
the time of such assignment. No assignment or sublease shall affect or reduce
any of the obligations of Tenant hereunder, and all such obligations shall
continue in full effect as obligations of a principal and not as obligations of
a guarantor or surety, to the same extent as though no assignment or subletting
had been made. No assignment or sublease shall impose any obligations on
Landlord beyond those of Landlord under this Lease or otherwise affect any of
the rights of Landlord under this Lease. Any assignment or subletting,
Landlord's consent thereto, or Landlord's collection or acceptance of rent from
any assignee or subtenant shall not be construed either as waiving or releasing
Tenant from any of its liabilities
37
<PAGE>
or obligations under this Lease, or as relieving Tenant or any assignee or
subtenant from the obligation of obtaining Landlord's prior written consent to
any subsequent assignment or subletting.
(c) Upon the occurrence of an Event of Default under this
Lease, Landlord shall have the right to collect and enjoy all rents and other
sums of money payable under any sublease of any of the Leased Premises, and
Tenant hereby irrevocably and unconditionally assigns such rents and money to
Landlord, which assignment may be exercised upon and after (but not before) the
occurrence of an Event of Default. From and after the date, if any, that such
Event of Default is cured, such rents shall again become payable to Tenant and
the excess, if any, of the sublease rents collected by Landlord over the amount
thereof applied toward Tenant's obligations under this Lease shall be paid to
Tenant.
(d) All restrictions and obligations imposed pursuant to this
Lease on Tenant shall be deemed to extend to any subtenant or assignee, and
Tenant shall cause such Person to comply with such restrictions and obligations.
Each sublease is subject to the condition that if the Term is terminated or
Landlord succeeds to Tenant's interest in the Leased Premises by voluntary
surrender or otherwise, at Landlord's option the subtenant shall be bound to
Landlord for the balance of the term of such sublease and shall attorn to and
recognize Landlord as its landlord under the then executory terms of such
sublease.
18. Permitted Contests. Notwithstanding any other provision of this
Lease to the contrary, Tenant shall not be required to (i) pay any Imposition,
or (ii) discharge or remove any lien, encumbrance or charge referred to in
Paragraph 10 or 12, so long as Tenant shall contest, in good faith and at its
expense, the existence, the amount or the validity thereof, the amount of the
damages caused thereby, or the extent of its liability therefor, by appropriate
proceedings, provided that such contest shall operate at all times during the
pendency thereof to prevent (i) the collection of, or other realization upon,
the sums payable to satisfy any Imposition or lien, encumbrance or other charge
so contested, (ii) the sale, forfeiture or loss of the Leased Premises, or any
part thereof, or any interest therein or Basic Rent or any Additional Rent, or
any portion thereof, (iii) any interference with the use or occupancy of the
Leased Premises or any part thereof, (iv) any interference with the payment of
Basic Rent or any Additional Rent, or any portion thereof, (v) the cancellation
of any fire or other insurance policy, unless such policy is replaced prior to
its cancellation by another policy complying with the provisions of this Lease,
and (vi) the imposition of any civil or criminal liability upon Landlord. While
any such proceedings are pending, Landlord shall not have the right to pay,
remove or cause to be discharged the tax,
38
<PAGE>
assessment, levy, fee, rent or charge or lien, encumbrance or charge thereby
being contested, provided that Landlord shall have the right to require Tenant
to establish reasonable reserves for such liabilities being contested if the
Landlord reasonably determines such reserves to be necessary. Tenant further
agrees to give Landlord prompt notice of Tenant's intention to contest any
Imposition and that each such contest shall be promptly prosecuted to a final
conclusion. Tenant will pay, and save Landlord harmless against, any and all
losses, judgments, decrees and costs (including all reasonable attorneys' fees
and expenses) in connection with any such contest and will, promptly after the
final settlement, compromise or determination of such contest, fully pay and
discharge the amounts which shall be levied, assessed, charged or imposed or be
determined to be payable therein or in connection therewith, together with all
penalties, fines, interests, costs and expenses thereof or in connection
therewith, and perform all acts the performance of which shall be ordered or
decreed as a result thereof.
19. Default Provisions.
(a) Any of the following occurrences or acts shall constitute
an Event of Default under this Lease:
(i) Tenant fails to pay, within 5 days after notice
from Landlord to Tenant, any installment of Basic Rent.
(ii) Tenant fails to pay any payment of Additional
Rent, or any other payment required to be paid by Tenant hereunder, including,
without limitation, payment of Impositions and insurance premiums, and such
failure continues for 30 days after written notice thereof shall have been given
to Tenant by Landlord.
(iii) Tenant fails to observe or perform any other
provision hereof for 30 days (or such shorter period of time as Landlord may
reasonably determine if such default endangers life or property) after Landlord
shall have delivered to Tenant written notice (except in the case of an
emergency) of such failure (provided that, in the case of any default referred
to in this clause (iii) which does not endanger life or property and which
cannot with diligence be cured within such 30 day period, if Tenant shall
proceed promptly to cure the same and thereafter shall prosecute the curing of
such default with diligence, then upon receipt by Landlord of a certificate from
an authorized officer of Tenant stating the reason that such default cannot be
cured within 30 days and stating that Tenant is proceeding with diligence to
cure such default, the time within which such failure may be cured shall be
extended for such additional period as may be necessary to complete the curing
of the same with diligence.
39
<PAGE>
(iv) An Act of Bankruptcy occurs with respect to
Tenant, or Tenant becomes generally unable to pay its debts as they become due;
provided, however, if a proceeding with respect to an Act of Bankruptcy is filed
or commenced against Tenant, the same shall not constitute an Event of Default
if such proceeding is dismissed within 90 days from the date of such Act of
Bankruptcy.
(v) Default is made (A) with respect to any evidence
of indebtedness of liability for borrowed money of Tenant to the Credit Facility
Provider, or (B) with respect to any evidence of indebtedness or liability of
Tenant to any other Person for borrowed money or pursuant to a lease obligation,
if the effect of such default described in clause (A) or (B) above is to
accelerate the maturity of such evidence of indebtedness or liability prior to
its stated maturity (whether automatically, following an election by the holder
or obligee thereof to accelerate, or otherwise) or any such indebtedness is not
paid as and when due and payable; provided, however, that it shall not
constitute an Event of Default if the outstanding principal balance of such
indebtedness or liability of Tenant to any Person other than the Credit Facility
Provider or the State is not in excess of $1,000,000 or Tenant certifies to the
Credit Facility Provider, the State and MIDFA that it is contesting such default
in good faith and by appropriate and diligent proceedings.
(vi) Any amendment to this Lease shall have been made
without the prior written consent of the Credit Facility Provider, the State and
MIDFA, which consent shall not be unreasonably withheld, conditioned or delayed,
and, except for material changes which would require the consent or approval of
the State Board of Public Works or the State Legislative Policy Committee, which
consent shall be deemed given by the Credit Facility Provider, the State or
MIDFA if the Credit Facility Provider, the State or MIDFA does not object to any
proposed amendment within 15 business days after the receipt thereof by the
Credit Facility Provider, the State or MIDFA.
(vii) Tenant abandons the Leased Premises.
(viii) The interest of Tenant in the Leased Premises
or any part thereof shall be assigned or subleased in violation of Paragraph 17,
or shall be levied upon or attached in any proceeding involving a claim in
excess of $1,000,000 and such proceeding is not vacated, discharged or bonded
against to the reasonable satisfaction of Landlord, the Credit Facility
Provider, the State and MIDFA within 30 days thereafter.
(ix) Any representation or warranty made by Tenant
40
<PAGE>
or its representatives in this Lease or any of the Lease Documents executed and
delivered by Tenant or any statement or representation made by Tenant or its
representatives in any certificate, report or opinion (including legal opinions)
financial statement or other instrument furnished in connection with this Lease
or any of the Lease Documents executed and delivered by Tenant proves to have
been incorrect, false or misleading in any material respect when made.
(x) Any judgment against Tenant or any attachment or
other levy against the property of Tenant with respect to a claim for an amount
in excess of $1,000,000 remains unpaid, unstayed on appeal, undischarged,
unbonded or undismissed for a period of 60 days.
(xi) Tenant fails to comply with any material
requirement of any governmental authority having jurisdiction over the Leased
Premises within the time required by such governmental authority; or any
proceeding is commenced or action taken to enforce any remedy for a violation of
any material requirement of a governmental authority or any restrictive covenant
affecting the Leased Premises or any part thereof; provided, however, it shall
not constitute an Event of Default if Tenant is contesting the validity or
applicability of any such requirement or covenant, at its sole cost and expense,
in good faith and by appropriate and diligent proceedings.
(xii) If any material provision of this Lease at any
time for any reason ceases to be valid and binding on Tenant, or is declared to
be null and void, or the validity or enforceability thereof is contested by
Tenant or any governmental agency or authority, or Tenant denies that it has any
further liability or obligation under this Lease or any of the Lease Documents
executed and delivered by Tenant.
(xiii) Landlord, the Credit Facility Provider, the
State or MIDFA, or any of their respective representatives are not permitted, at
all reasonable times (after at least 48 hours prior written notice to Tenant,
unless an Event of Default shall have occurred and be continuing in which event
notice will not be required), to enter upon the Leased Premises, to inspect the
Leased Premises and all materials, equipment, fixtures and other items used or
to be used in the construction thereof, and to examine all detailed plans, shop
drawings and specifications which relate to or the appurtenances thereto or to
be used in the operation thereof, provided, however, any person conducting such
inspection shall comply with Tenant's safety and operating policies and
procedures.
(b) If an Event of Default shall have happened and be
41
<PAGE>
continuing, Landlord shall have the right at its election, then or at any time
thereafter while such Event of Default shall continue, to give Tenant written
notice of Landlord's intention to terminate this Lease on a date specified in
such notice (such termination being hereinafter referred to as a "Default
Termination" and such notice being hereinafter referred to as a "Default
Termination Notice"). Upon giving a Default Termination Notice, the Term and the
estate hereby granted shall terminate on the date specified in the Default
Termination Notice as fully and completely and with the same effect as if such
date were the date hereinbefore fixed for the expiration of the Term, and all
rights of Tenant hereunder shall terminate, but Tenant shall remain liable as
hereinafter provided. Notwithstanding the foregoing, no Default Termination
Notice shall be effective unless it is also executed by the Credit Facility
Provider and the State and MIDFA.
(c) If an Event of Default shall have happened and be
continuing, Landlord shall have the immediate right, whether or not the Term
shall have been terminated pursuant to Paragraph 19(b), to re-enter and
repossess the Leased Premises or any part thereof by force (if legally permitted
in the State of Maryland), summary proceedings, ejectment or otherwise and the
right (subject to the rights and interests of equipment lessors) to remove all
Persons and property therefrom. Landlord shall be under no liability for or by
reason of any such entry, repossession or removal. No such re-entry or taking of
possession of the Leased Premises by Landlord shall be construed as an election
on Landlord's part to terminate this Lease unless a Default Termination Notice
shall have been given to Tenant, or unless the termination of this Lease be
finally decreed by a court of competent jurisdiction.
(d) At any time or from time to time after the repossession of
the Leased Premises or any part thereof pursuant to Paragraph 19(c), whether or
not this Lease shall have been terminated pursuant to Paragraph 19(b), Landlord
shall use reasonable efforts to relet the Leased Premises or any part thereof
for the account of Tenant or Landlord or otherwise, without notice to Tenant,
for such term or terms and on such conditions (which may include concessions of
free rent) and for such uses as Landlord, in its absolute discretion, may
determine, and Landlord may collect and receive any rents payable by reason of
such reletting. Landlord shall not be responsible or liable for any failure to
relet the Leased Premises or any part thereof or for any failure to collect any
rent due upon any such reletting.
(e) In the event of the termination of this Lease upon an
Event of Default or repossession of the Leased Premises or any part thereof
pursuant to Paragraph 19(c) or otherwise, or the
42
<PAGE>
reletting of the Leased Premises or any part thereof pursuant to Paragraph
19(d), Tenant shall remain liable as hereinafter provided.
(f) In the event of any Default Termination or repossession of
the Leased Premises or any part thereof by reason of the occurrence of an Event
of Default, Tenant will pay to Landlord Basic Rent, Additional Rent and other
sums required to be paid by Tenant to and including the date of such termination
or repossession (including, without limitation, the amount of all sums which
have become due and payable by Landlord under the Credit Facility Documents and
the Bond Documents and the State Loan Documents); and, thereafter, Tenant shall,
until the end of what would have been the Term in the absence of such
termination or repossession, and whether or not the Leased Premises or any part
thereof shall have been relet, be liable to Landlord for, and shall pay to
Landlord, as liquidated and agreed current damages on each Basic Rent Payment
Date and on any other date when due and payable: (i) Basic Rent, Additional Rent
and other sums which would be payable under this Lease by Tenant in the absence
of such termination or repossession, less (ii) the net proceeds, if any, of any
reletting effected for the account of Tenant pursuant to Paragraph 19(d), after
deducting from such proceeds all Landlord's expenses in connection with such
reletting (including, without limitation, all repossession costs, brokerage
commissions, legal expenses, attorneys' fees, employees' expenses, alteration
costs and expenses of preparation for such reletting). Tenant will pay such
current damages on the days on which Basic Rent would have been payable under
this Lease in the absence of such termination or repossession, and Landlord
shall be entitled to recover the same from Tenant on each such day.
(g) At any time after a Default Termination, Landlord shall be
entitled to recover from Tenant, and Tenant will pay to Landlord within 120 days
of demand therefor, an amount equal to Basic Rent, Additional Rent and other
sums which would be payable under this Lease, from the date to which Tenant
shall have satisfied in full its obligations under Paragraph 19(f) to pay
current damages, to the end of the remaining Term of this Lease in the absence
of such termination (assuming, in computing the amount of Basic Rent that would
have been due under Paragraph 7, an interest rate which is equal to the rate
applicable to such obligations on the date the Default Termination Notice is
issued "the "Assumed Rate"), discounted at the Assumed Rate, or such lower rate
as shall be necessary to provide that the sum payable by Tenant hereunder shall
satisfy in full the sum of (I) all Landlord's Credit Facility Obligations" and
"Landlord's Bond Obligations" and the Landlord's State Loan Obligations accrued
through the date of the payment due under this Paragraph 19(g), including
without limitation, all accrued fees, costs and expenses
43
<PAGE>
payable to the Trustee, Remarketing Agent, Rating Agency, Credit Facility
Provider, plus (II) all costs and expenses (including reasonable attorneys fees
and expenses) of the Credit Facility Provider, Landlord, MIDFA and the State in
connection with such Default Termination.
(h) The words "enter", "re-enter" or "re-entry", as used in
this Paragraph 19, are not restricted to their technical meaning.
20. Additional Rights of Landlord.
(a) No right or remedy herein conferred upon or reserved to
Landlord is intended to be exclusive of any other right or remedy given
hereunder or now or hereafter existing at Law or in equity. The failure of
either party to insist at any time upon the strict performance of any covenant
or agreement or to exercise any option, right, power or remedy contained in this
Lease shall not be construed as a waiver or a relinquishment thereof for the
future. A receipt by Landlord of any Basic Rent, Additional Rent or any other
sum payable hereunder with knowledge of the breach of any covenant or agreement
contained in this Lease shall not be deemed a waiver of such breach, and no
waiver of any provision of this Lease shall be deemed to have been made unless
expressed in writing and signed by the waiving party. In addition to other
remedies provided in this Lease, Landlord shall be entitled, to the extent
permitted by applicable law, to injunctive relief in case of the violation, or
attempted or threatened violation, of any of the covenants, agreements,
conditions or provisions of this Lease, or to a decree compelling performance of
any of the covenants, agreements, conditions or provisions of this Lease, or to
any other remedy allowed to Landlord at Law or in equity.
(b) Tenant hereby waives and surrenders, to the extent not
prohibited by Law, for itself and all those claiming under it, including
creditors of all kinds, (i) any right and privilege which it or any of them may
have under any present or future Law to redeem the Leased Premises or to have a
continuance of this Lease for the Term after termination of Tenant's right of
occupancy by order or judgment of any court or by any legal process or writ, or
under the terms of this Lease, or after the termination of the Term as herein
provided, and (ii) the benefits of any present or future law which exempts
property from liability for debt or for distress for rent.
(c) In the event Tenant shall be in default in the performance
of any of its obligations under this Lease, and an action shall be brought for
the enforcement thereof in which it shall be determined that Tenant was in
default, Tenant shall pay
44
<PAGE>
to Landlord all the expenses incurred in connection therewith including
reasonable attorney's fees. In the event Landlord shall, without fault on its
part, be made a party to any litigation commenced against Tenant, and if Tenant,
at its expense, shall fail to provide Landlord with counsel reasonably approved
by Landlord, Tenant shall pay all costs and reasonable attorney's fees incurred
or paid by Landlord in connection with such litigation.
(d) If an Event of Default has happened and is continuing,
Landlord may, but shall not be obligated to, make any payment or perform any act
required hereunder to be made or performed by Tenant which has not been
performed within the time period specified herein for such performance, with the
same effect as if made or performed by Tenant, provided that no entry by
Landlord upon the Leased Premises for such purpose shall create any liability to
Tenant on the part of Landlord or shall constitute or shall be deemed to be an
eviction of Tenant, and no such entry shall waive or release Tenant from any
obligation or default hereunder. All sums so paid by Landlord and all costs and
expenses (including reasonable attorney's fees and expenses) incurred by
Landlord in connection with the performance of any such act, together with
interest at the Default Rate, shall constitute Additional Rent payable by Tenant
hereunder.
21. Inspection. Tenant shall permit Landlord, the Credit Facility
Provider, the State, MIDFA, and the holder of any Encumbrance, and its and their
representatives and agents to enter the Leased Premises, with notice to Tenant
and with an escort provided by Tenant, unless (i) an Event of Default shall have
occurred and be continuing, or (ii) an emergency threatening life or property
exists, in either of which cases, no advance notice shall be required, without
charge therefor and without diminution of the rent payable by Tenant, in order
to examine, inspect and protect the Leased Premises, or, during the last year of
the Term, to exhibit the same to brokers, prospective tenants, lenders,
purchasers and others. In connection with any such entry, Landlord shall
endeavor to minimize the disruption to Tenant's normal business operations in
the Leased Premises.
22. Notices, Demands and Other Instruments. All notices, demands,
requests, consents, approvals, certificates or other communications required
under this Lease shall be in writing, and shall be sufficiently given and shall
be deemed to have been properly given (i) if delivered by hand, when written
confirmation of delivery is received by the sender, (ii) three days after the
same is mailed by certified mail, postage prepaid, return receipt requested, or
(iii) if sent by overnight courier, 24 hours (plus 24 hours for any intervening
day that is not a business day) after delivery to such overnight courier
addressed to the Person to whom
45
<PAGE>
any such notice, demand, request, consent, approval, certificate or other
communication is to be given, at the appropriate address designated on Exhibit E
attached hereto. Any party listed on Exhibit E shall each have the right from
time to time to specify as its address for purposes of this Lease any other
address in the United States of America upon giving 15 days' written notice
hereunder.
23. Estoppel Certificates. Landlord or Tenant, as the case may be,
shall, at any time and from time to time, upon not less than 20 days' prior
written notice by the other (but neither shall be required to do so more than
twice in any calendar year), execute, acknowledge and deliver to the requesting
party a statement in writing, executed by an authorized representative of
Landlord or by the President or a Vice President of Tenant, as the case may be,
certifying (i) that this Lease is unmodified and in full effect (or, if there
have been modifications, that this Lease is in full effect as modified, and
setting forth such modifications), (ii) the dates to which Basic Rent,
Additional Rent and all other sums payable hereunder have been paid, (iii) that
to the knowledge of the signer of such certificate no default by either Landlord
or Tenant exists hereunder or specifying each such default of which the signer
may have knowledge; and (iv) that, in the case of any statement being given by
Tenant, to the knowledge of the signer of such certificate, there are no
proceedings pending or threatened against Tenant before or by any court or
administrative agency which, if adversely decided, would materially and
adversely affect the financial condition and operations of Tenant or Tenant's
ability to perform or fulfill its obligations under this Lease, or if any such
proceedings are pending or threatened to said signer's knowledge, specifying and
describing the same. It is intended that any such statements may be relied upon
by the Credit Facility Provider, the State, Landlord or their assignees or by
any prospective purchaser of the Leased Premises or by any transferee or
assignee of Tenant's interest in the Lease or a sublessee of Tenant or by any
party providing financing to Tenant. Any certificate required under this
Paragraph 23 shall (i) state briefly the nature and scope of the examination or
investigation upon which the statements contained in such certificate are based,
(ii) state that in the opinion of each Person signing such certificate he has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to the subject matter of such certificate, and (iii)
certify to the correctness of the statements contained therein.
24. No Merger. There shall be no merger of this Lease or of the
leasehold estate hereby created with any other estate or interest in the Leased
Premises or any part thereof by reason of the fact that the same Person may
acquire or hold, directly or
46
<PAGE>
indirectly, (a) any interest in this Lease or the leasehold estate hereby
created or (b) any such other estate or interest in the Leased Premises or any
part.
25. Representations and Warranties of Tenant. Tenant makes the
following representations and warranties to Landlord:
(a) Good Standing. Tenant (i) is a corporation duly organized
and existing, in good standing, under the laws of the State of Delaware, (ii)
has the corporate power and all material governmental licenses, authorizations,
consents and approvals required to own its property and to carry on its business
as now being conducted, and (iii) is duly qualified to do business and is in
good standing in each jurisdiction in which the character of the properties
owned by it therein or in which the transaction of its business makes such
qualification necessary, including, but not limited to, the State of Maryland.
(b) Authority. Tenant has full corporate power and authority
to enter into and execute and deliver this Lease and each of the other documents
executed and delivered by Tenant in connection herewith (collectively, the
"Lease Documents"), and to incur and perform the obligations provided for
therein and herein, all of which have been duly authorized by all proper and
necessary corporate action by Tenant. No consent or approval of stockholders or
of any other Person or public authority or regulatory body is required as a
condition to the validity or enforceability of this Lease or any of the other
Lease Documents, or if required the same has been duly obtained.
(c) Binding Agreements. This Lease and each of the other Lease
Documents have been duly and properly executed by Tenant, constitute the valid
and legally binding obligations of the Tenant, and are fully enforceable against
Tenant in accordance with their respective terms; except to the extent that
enforceability may be affected by any bankruptcy or insolvency proceeding filed
by or against the Tenant and subject to the exercise of judicial discretion in
accordance with general principles of equity.
(d) Litigation. There is no litigation or proceeding pending
or, so far as Tenant knows, threatened, before any court or administrative
agency which, in the opinion of Tenant, will materially adversely affect the
financial condition or operations of Tenant, Tenant's ability to perform and
fulfill its obligations under this Lease, or the authority of Tenant to enter
into, or the validity or enforceability of, this Lease or any of the other Lease
Documents.
(e) No Conflicting Agreements, Laws, etc. There is
47
<PAGE>
(i) no charter, by-law or preference stock provision of the Tenant and no
provision of any existing mortgage, indenture, contract or agreement binding on
the Tenant or affecting Tenant's property, and (ii) to the knowledge of Tenant,
no provision of Law or order of court binding on the Tenant or affecting any of
Tenant's property, which would conflict with or in any way prevent the
execution, delivery, or performance of the terms of this Lease or any of the
other Lease Documents, or which would be in default or violated as a result of
such execution, delivery or performance, or for which adequate consents or
waivers have not been obtained.
(f) Tax Returns. Tenant has filed all required federal, state
and local tax returns and has paid all taxes as shown on such returns as they
have become due. No claims have been assessed and are unpaid with respect to
such taxes, and Tenant has established reserves which it believes to be adequate
for the payment of additional taxes for years which have not been audited by the
respective tax authorities.
(g) Place of Business of Tenant. Tenant's principal place of
business is located at 9410 Key West Avenue, Rockville, Maryland 20850.
(h) Brokers. To the best of Tenant's knowledge (other than
Scheer Partners Inc. and Manekin Corporation, the payment of whose fees are the
responsibility of Montgomery County, Maryland), no Person has, or as a result of
any action of or by Tenant in connection with the transactions contemplated
hereby and by the Lease will have, any right, interest or valid claim against or
on the Landlord for any commission, fee or other compensation as a broker or
finder, or in any similar capacity . Tenant shall indemnify the Landlord against
any claimed fee, commission or other compensation arising from or in connection
with the transactions contemplated hereby or by the Lease Documents.
(i) ERISA. (i) Any Plan established and maintained by the
Tenant or any Commonly Controlled Entity is a qualifying plan under the
applicable requirements of Section 401 of the Code and there is no current
matter which would materially adversely affect the qualified tax-exempt status
of any Plan; (ii) neither the Tenant nor any Commonly Controlled Entity has
engaged in or is engaging in any Prohibited Transaction or has incurred any
Accumulated Funding Deficiency in connection with any such Plan, whether or not
waived, and no Reportable Event has occurred with respect to any Plan subject to
the minimum funding requirements of Section 412 of the Code; (iii) no
Multiemployer Plan has "terminated", as that term is defined in ERISA; (iv)
neither the Tenant nor any Commonly Controlled Entity has "withdrawn" or
"partially withdrawn" from any Multiemployer Plan; and (v) no Multiemployer Plan
is in "reorganization" nor has notice been
48
<PAGE>
received from the administrator of any Multiemployer Plan that any such Plan
will be placed in "reorganization".
26. Affirmative Covenants of Tenant. Tenant shall:
(a) Financial Statements. Furnish or cause to be furnished to
Landlord:
(i) as soon as available but in no event more than 45
days after the close of each fiscal quarter of Tenant, a copy of the 10Q Report
of Tenant filed with the Securities and Exchange Commission (the "SEC")
accompanied by a certificate of the chief financial officer of Tenant stating
whether any event has occurred which constitutes an Event of Default, or which
would constitute such an Event of Default with the giving of notice or the lapse
of time or both, and, if so, stating the facts with respect thereto; and
(ii) as soon as available but in no event more than
90 days after the close of each fiscal year of Tenant, a copy of the 10K Report
of Tenant filed with the SEC and a copy of the annual audited financial
statements relating to Tenant prepared in accordance with GAAP, which financial
statements shall include a balance sheet of Tenant as at the end of such fiscal
year and a statement of earnings and changes in stockholder's equity of Tenant
for such fiscal year; and
(iii) as soon as available but in no event more than
90 days after the close of each fiscal year of Tenant, a certificate of the
chief financial officer of Tenant stating whether any event which constitutes an
Event of Default under this Lease has occurred, or any event which would
constitute such an Event of Default with the giving of notice or the lapse of
time or both has occurred, and, if so, stating the facts with respect thereto;
and
49
<PAGE>
(iv) promptly upon transmission thereof, copies of
any financial statements, proxy statements, reports and the like which Tenant
sends to its shareholders and copies of all registration statements (with
exhibits); and
(v) promptly upon request, access to the registration
materials submitted to the Federal Drug Administration (the "FDA") to evidence
the internal validation and registration of the Leased Premises as a
pharmaceutical-manufacturing facility, any correspondence, notices and the like
received from the FDA relating to the initial and on-going validation and
registration of the Leased Premises as a pharmaceutical-manufacturing facility
with the FDA and, promptly upon receipt thereof, copies of any threatened or
actual revocation, restriction, suspension or expiration of any such validation
and/or registration; and
(vi) with reasonable promptness, such additional
information, reports or statements as the Landlord, the Credit Facility
Provider, MIDFA or the State may from time to time reasonably request.
(b) Taxes and Claims. Pay and discharge or cause to be paid
and discharged all taxes imposed upon it or its income or properties prior to
the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any of its properties. Tenant shall
have the right to contest the validity of any such tax, assessment, charge, levy
or claim, by timely and appropriate proceedings, provided that Tenant shall (1)
give the Landlord written notice of its intention to contest, (2) diligently
prosecute such contest, (3) at all times effectively stay or prevent any
official or judicial sale of the Leased Premises or Building Equipment or any
part thereof by reason of nonpayment of any such taxes, and (4) establish
reasonable reserves for such liabilities being contested if the Landlord
reasonably determines such reserves to be necessary.
(c) Insurance. In addition to the insurance required by
Paragraph 15 of this Lease, maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity.
Tenant shall file with Landlord, upon its request, a detailed list of the
insurance then in effect covering Tenant and Tenant's properties, stating the
names of the insurance companies, the amounts and rates of the insurance, dates
of the expiration thereof and the properties and risks covered thereby; and,
within 30 days after notice in writing from the Landlord, obtain such additional
insurance as the Landlord may reasonably request.
50
<PAGE>
(d) Corporate Existence. Maintain its existence in good
standing as a Delaware corporation, qualified to transact business in the State
of Maryland.
(e) Compliance with Laws. Comply with all Legal Requirements,
subject to Tenant's right to contest the validity or applicability of any of the
foregoing, at its sole cost and expense, in good faith and by appropriate and
diligent proceedings, in accordance with Paragraph 18 hereof.
(f) Books and Records. Maintain appropriate books and records
with respect to the Leased Premises and permit access by Landlord, the Credit
Facility Provider, the State and MIDFA and their respective authorized
representatives and employees to the books and records of Tenant at the offices
of Tenant during normal business hours.
(g) Employment Count. Within 30 days after the Closing Date
and on each anniversary date thereafter, and upon subsequent request of
Landlord, the State or MIDFA, the Tenant shall supply the Landlord, the State
and MIDFA with the employment count at the Leased Premises.
(h) Equal Employment. Tenant shall prohibit discrimination on
the basis of (i) political or religious opinion or affiliation, marital status,
race, color, creed, or national origin, or (ii) sex or age, except when sex or
age constitutes a bona fide occupational qualification, or (iii) the physical or
mental disability of a qualified individual with a disability; and shall, upon
the request of MIDFA or the State Department of Business and Economic
Development (the "Department"), submit information relating to its employment
practices and operations with regard to the above on a form to be prescribed by
the State.
(i) Drug and Alcohol Free Workplace. Tenant shall make a good
faith effort to eliminate illegal drug use and alcohol and drug abuse from its
workplace during the Term and specifically, shall:
(i) prohibit the unlawful manufacture,
distribution, dispensation, possession, or use
of drugs in its workplace;
(ii) prohibit its employees from working under the
influence of alcohol or drugs;
(iii) not hire or assign to work on an activity
funded in whole or part with State of Maryland
funds, anyone whom it knows, or in
51
<PAGE>
the exercise of due diligence should know,
currently abuses alcohol or drugs and is not
actively engaged in a bona fide rehabilitation
program;
(iv) promptly inform the appropriate law
enforcement agency of every drug related crime
that occurs in its workplace if it or its
employee has observed the violation or
otherwise has reliable information that a
violation has occurred; and
52
<PAGE>
(v) notify employees that drug and alcohol abuse
is banned in the workplace, impose sanctions
on employees who abuse drugs and alcohol in
the workplace, and institute steps to maintain
a drug and alcohol free workplace.
(j) Financial Covenants. Maintain the following:
53
<PAGE>
(i) Unrestricted cash and securities (exclusive of
any unrestricted cash or securities maintained
by a consolidated subsidiary of Tenant) with a
market value of at least $50,000,000 at all
times, of which unrestricted cash and
securities at least $10,000,000 (in addition
to the pledge described in the Collateral
Pledge Agreement) shall be maintained in an
account with the Bank or an affiliate of the
Bank. The cash and/or marketable securities
pledged by Tenant pursuant to the Collateral
Pledge Agreement shall be credited against the
foregoing $50,000,000 requirement. In the
event that the market value of such
unrestricted cash and securities falls below
$50,000,000, Tenant shall pledge to Landlord,
as security for Tenant's obligations under
this Lease, in addition to the pledge
described in the Collateral Pledge Agreement,
cash and/or marketable securities acceptable
to the Bank, as the assignee of Landlord, in
its sole discretion and margined as required
by the Bank, as the assignee of Landlord, with
a market value at all times equal to at least
$5,000,000. In the event that the market value
of unrestricted cash and securities falls
below $25,000,000, Tenant shall pledge to
Landlord, as security for Tenant's obligations
under this Lease, in addition to any other
pledge theretofore made to Landlord, cash
and/or marketable securities acceptable to the
Bank, as the assignee of Landlord, in its sole
discretion and margined as required by the
Bank, as assignee of Landlord, with a market
value at all times equal to at least
$5,000,000. Any cash and/or marketable
securities pledged hereunder shall be held by
the Bank. Tenant shall deposit with the Bank,
as the assignee of Landlord, additional cash
and/or marketable securities acceptable to the
Bank, as the assignee of Landlord, in its sole
discretion and margined as required by the
Bank, as the assignee of Landlord, whenever
the market value of each additional pledge
hereunder falls below $5,000,000 to make up
the deficiency. Whenever the market value
54
<PAGE>
of any cash and/or marketable securities
pledged to Landlord (margined as required by
the Bank, as the assignee of the Landlord)
exceeds the required amount, i.e., $5,000,000
or $10,000,000, as the case may be, the Bank,
as the assignee of Landlord, shall, in
accordance with the terms of the Collateral
Pledge Agreement, release from the pledge cash
and/or marketable securities equal to such
excess.
(ii) A "Tangible Net Worth" (as hereinafter
defined) with a market value of not less than
$50,000,000. Tangible Net Worth of Tenant
shall not include the tangible net worth of
any consolidated subsidiary of Tenant. In the
event that the market value of such Tangible
Net Worth falls below $50,000,000, Tenant
shall pledge to Landlord, as security for
Tenant's obligations under this Lease, in
addition to the pledge described in the
Collateral Pledge Agreement, cash and/or
marketable securities acceptable to the Bank,
as the assignee of Landlord, in its sole
discretion and margined as required by the
Bank, as the assignee of Landlord, with a
market value at all times equal to at least
$5,000,000. In the event that Tangible Net
Worth falls below $25,000,000, Tenant shall
pledge to Landlord, as security for Tenant's
obligations under this Lease, in addition to
any other pledge theretofore made to Landlord,
cash and/or marketable securities acceptable
to the Bank, as the assignee of Landlord, in
its sole discretion and margined as required
by the Bank, as the assignee of Landlord, with
a market value at all times equal to at least
$5,000,000. Any cash and/or marketable
securities pledged hereunder shall be held by
the Bank. Monthly, Tenant shall deposit with
the Bank, as the assignee of Landlord,
additional cash and/or marketable securities
acceptable to the Bank, as the assignee of
Landlord, in its sole discretion and margined
as required by the Bank, as the assignee of
Landlord, whenever the market value of each
additional pledge hereunder falls below
$5,000,000 to make up
55
<PAGE>
the deficiency. Whenever the market value of
any cash and/or marketable securities pledged
to Landlord (margined as required by the Bank,
as assignee of Landlord), exceeds the required
amount, i.e., $5,000,000 or $10,000,000, as
the case may be, quarterly, the Bank, as
assignee of Landlord, shall release from the
pledge cash and/or marketable securities equal
to such excess. Tangible Net Worth shall mean
shareholder's equity less all intangible
assets such as, but not limited to, good will,
licenses, trademarks, patents, copyrights or
consulting agreements.
(iii) Any pledge of cash and/or marketable
securities made pursuant to either clause (i)
or (ii) above shall satisfy the requirements
of the other clause.
(iv) Any investment earnings on the cash and/or
marketable securities pledged by Tenant
pursuant to clause (i) or (ii) above shall be
distributed quarterly by the Bank, as the
assignee of Landlord, to Tenant.
(v) If Tenant pledges cash and/or marketable
securities to Landlord to satisfy the
requirements of either clause (i) or (ii)
above and thereafter for a period of two
consecutive fiscal quarters Tenant returns to
compliance with the requirements which
necessitated such pledge, the Bank, as the
assignee of Landlord, shall release such cash
and/or marketable securities from such pledge.
By way of illustration, if the market value of
Tenant's Tangible Net Worth (as calculated
pursuant to clause (ii) above) falls below
$25,000,000 and Tenant has pledged $10,000,000
of cash and/or marketable securities to
Landlord and thereafter the market value of
Tenant's Tangible Net Worth is greater than
$25,000,000 but less than $50,000,000 for two
consecutive fiscal quarters the Bank, as the
assignee of Landlord, shall release from such
pledge $5,000,000 of cash and/or marketable
securities.
(vi) Notwithstanding the foregoing provisions of
56
<PAGE>
this subparagraph 26(j), the amount of cash
and/or marketable securities required to be
pledged to Landlord at any time shall not
exceed the Stated Amount of the Credit
Facility (as defined in the Credit Facility).
(k) Cooperate in connection with any appraisal of the Leased
Premises conducted by or at the request of Landlord, the Credit Facility
Provider, the State or MIDFA.
27. Negative Covenants of Tenant. Until all of Tenant's obligations
under this Lease have been paid and performed in full (other than any
indemnities which survive the termination of this Lease), without the prior
written consent of Landlord, Tenant shall not, directly or indirectly:
(a) Declare any dividends (other than dividends payable in
capital stock of Tenant) on any shares of any class of its capital stock (other
than preferred stock outstanding on the Closing Date) or apply any of its
property or assets to the purchase, redemption or other retirement of, or set
apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, any shares of any class of capital stock
of Tenant unless (i) there is no Event of Default which has occurred and is
continuing, and (ii) the amount of the dividend does not exceed Tenant's
accumulated earnings at that time.
(b) Fail to notify Landlord of any change in the officers
(within the meaning of Section 240.16a-1 of the Regulations under the Securities
Exchange Act of 1934, as amended) of Tenant.
(c) (i) Restate or amend any Plan established and maintained
by Tenant or any Commonly Controlled Entity and subject to the requirements of
ERISA, in a manner designed to disqualify such Plan and its related trusts under
the applicable requirements of the Code; (ii) permit any officers of Tenant or
any Commonly Controlled Entity to materially adversely affect the qualified
tax-exempt status of any Plan or related trusts of Tenant or any Commonly
Controlled Facility under the Code; (iii) engage in or permit any Commonly
Controlled Entity to engage in any Prohibited Transaction; (iv) incur or permit
any Commonly Controlled Entity to incur any Accumulated Funding Deficiency,
whether or not waived, in connection with any Plan; (v) take or permit any
Commonly Controlled Entity to take any
57
<PAGE>
action or fail to take any action which causes a termination of any Plan in a
manner which could result in the imposition of a lien on the property of Tenant
or any Commonly Controlled Entity pursuant to Section 4068 of ERISA; (vi) fail
to notify the Credit Facility Provider that notice has been received of a
"termination" (as defined in ERISA) of any Multiemployer Plan to which Tenant or
any Commonly Controlled Entity has an obligation to contribute; (vii) incur or
permit any Commonly Controlled Entity to incur a "complete withdrawal" or
"partial withdrawal" (as defined in ERISA) from any Multiemployer Plan to which
Tenant or any Commonly Controlled Entity has an obligation to contribute; or
(viii) fail to notify the Credit Facility Provider that notice has been received
from the administrator of any Multiemployer Plan to which Tenant or any Commonly
Controlled Entity has an obligation to contribute that any such Plan will be
placed in "reorganization" (as defined in ERISA).
28. Non-Recourse. Anything contained herein to the contrary
notwithstanding, any claim based on or in respect of any liability of Landlord
under this Lease shall be enforced only against Landlord's interest in the
Leased Premises, subject to the lien of the Deeds of Trust, and the Collateral
Pledge Agreement, and not against any other assets, properties or funds of
Landlord or against any assets, properties or funds of (i) any general partner
or limited partner of Landlord, or any employee or agent of Landlord (or any
director, officer, legal representative, successor, or assign of any thereof),
or (ii) any other Person affiliated with any of the foregoing, including without
limitation, the State of Maryland or any department, agency or instrumentality
thereof.
29. Separability. Each and every covenant and agreement contained in
this Lease is, and shall be construed to be, a separate and independent covenant
and agreement, and the breach of any such covenant or agreement by Landlord
shall not discharge or relieve Tenant from any of its obligations under this
Lease. If any term or provision of this Lease or the application thereof to any
Person or circumstances shall to any extent be invalid and unenforceable, the
remainder of this Lease, or the ------------ application of such term or
provision to persons or circumstances other than those as to which it is invalid
or unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and shall be enforced to the extent permitted by Law.
58
<PAGE>
30. Subordination.
(a) This Lease is subject and subordinate to the lien,
provisions, operation and effect of the Deeds of Trust or other security
instruments which may now or hereafter encumber the Improvements or the Land or
any interest therein (collectively, "Encumbrances"), to all funds and
indebtedness intended to be secured thereby, and to all renewals, extensions,
modifications, recastings or refinancings thereof. The holder of any Encumbrance
to which this Lease is subordinate shall have the right (subject to any required
approval of the holders of any superior Encumbrance) at any time to declare this
Lease to be superior to the lien, provisions, operation and effect of such
Encumbrance, and Tenant shall execute, acknowledge and deliver all documents
required by such holder in confirmation thereof. Simultaneous with the execution
hereof, Landlord, Tenant, the Credit Facility Provider and the State shall
execute the Assignments. In the event that the Improvements and/or the Land
become subject to an Encumbrance after the date hereof, Landlord agrees to
obtain a non-disturbance agreement from the holder of such Encumbrance, in such
holder's standard form, provided that Tenant shall pay or reimburse Landlord for
any costs associated with such efforts and agrees to execute such agreement in
order to confirm the subordination of this Lease to the Encumbrance, if
requested by the holder of such Encumbrance.
(b) Tenant shall at Landlord's request promptly execute any
requisite or appropriate document confirming such subordination. Tenant waives
the provisions of any Law now or hereinafter in effect which may give or purport
to give Tenant any right to terminate or otherwise adversely affect this Lease
and Tenant's obligations hereunder in the event any foreclosure proceeding is
prosecuted or completed or in the event the Improvements, the Land or Landlord's
interest therein is transferred by foreclosure, by deed in lieu of foreclosure
or otherwise. At the request of such transferee, Tenant shall attorn to such
transferee and shall recognize such transferee as the Landlord under this Lease.
Tenant agrees that upon any such attornment, such transferee shall not be (i)
bound by any payment of Basic Rent or Additional Rent more than one month in
advance, except prepayments in the nature of security for the performance by
Tenant of its obligations under this Lease, but only to the extent such
prepayments have been delivered to such transferee, (ii) bound by any amendment
of this Lease made without the consent of the holder of each Encumbrance
existing as of the date of such amendment, (iii) liable for damages for any
breach, act or omission of any prior landlord, or (iv) subject to any offsets or
defenses which Tenant might have against any prior landlord; provided, however,
that after succeeding to Landlord's interest under this Lease, such transferee
shall agree to perform in
59
<PAGE>
accordance with the terms of this Lease all obligations of Landlord arising
after the date of transfer. Within five days after the request of such
transferee, Tenant shall execute, acknowledge and deliver any requisite or
appropriate document submitted to Tenant confirming such attornment.
(c) If any prospective or current holder of an Encumbrance
requires that modifications to this Lease be obtained, and provided that such
modifications (i) are reasonable, (ii) do not adversely affect in a material
manner Tenant's use of the Leased Premises for the Permitted Use, (iii) do not
increase the rent and other sums to be paid by Tenant, (iv) do not change
Tenant's affirmative or negative covenants set forth herein, or (v) affect
Tenant's option to purchase the Leased Premises as provided in Paragraph 6(b),
then Landlord may submit to Tenant an amendment to this Lease incorporating such
required modifications, and Tenant shall execute, acknowledge and deliver such
amendment to Landlord within five days after Tenant's receipt thereof.
31. Binding Effect. All of the covenants, conditions and obligations
contained in this Lease shall be binding upon and inure to the benefit of the
respective successors and assigns of Landlord and Tenant to the same extent as
if each successor and assign were in each case named as a party to this Lease.
This Lease may not be changed, modified or discharged except by a writing signed
by Landlord and Tenant and consented to by the Credit Facility Provider, the
State and MIDFA.
32. Heading. The headings to the various paragraphs of this Lease have
been inserted for convenient reference only and shall not to any extent have the
effect of modifying, amending or changing the expressed terms and provisions of
this Lease.
33. Environmental Matters.
(a) As used in this Paragraph 33, the following items shall
have meanings set forth below:
(i) "CAA" - shall mean the Clean Air Act, codified at
42 U.S.C. " 7401, et seq., as amended.
(ii) "CERCLA" - shall mean the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, codified at 42
U.S.C. " 9601, et seq., as amended.
(iii) "CWA" - shall mean the Clean Water Act,
codified at 33 U.S.C. 1251; et seq., as amended.
(iv) "Environmental Laws" - shall mean CERCLA, HMTA,
RCRA, CAA, CWA, TSCA, RHA and the Right-to-Know Act and all
60
<PAGE>
other federal, local and municipal laws, statutes, ordinances and codes,
guidelines and standards relating to health, safety, sanitation, and the
protection of the environment or governing the use, storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Materials, including, without limitation, laws and regulations
regarding the discharge of water or other materials or fluids into waterways,
and the rules, regulations, guidelines, decisions, orders and directives of
federal, local and municipal governmental agencies, authorities and courts with
respect thereto presently in effect or hereafter enacted, promulgated or
implemented.
(v) "Environmental Permits" - shall mean all permits,
licenses, approvals, authorizations, consents or registrations required by any
applicable Environmental Laws, on either an individual or group basis, in
connection with the construction, ownership, use or operation of the Land or the
Improvements, or the storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Materials related to the Land.
(vi) "Hazardous Materials" - shall mean, without
limitation, flammables, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum or petroleum
based or related substances, hydrocarbons or like substances and their additives
or constituents, and any substances now or hereafter defined as "hazardous
substances," "extremely hazardous substances," "hazardous wastes" or "toxic
chemicals" in CERCLA, HMTA, RCRA, CAA, CWA, TSCA, RHA, the Right-To-Know Act, or
any so-called "superfund" or "superlien" law or the regulations promulgated
pursuant thereto, or any other applicable federal, state or local law, common
law, code, rule, regulation, order, or ordinance, presently in effect or
hereafter enacted, promulgated or implemented.
(vii) "HMTA" - shall mean the Hazardous Materials
Transportation Act, codified at 49 U.S.C. " 1801, et seq., as amended.
(viii) "RCRA" - shall mean the Resource Conservation
and Recovery Act of 1976, codified at 42 U.S.C. " 6901, et seq., as amended.
(ix) "Release" - shall have the same meaning as given
to that term in CERCLA, as amended, and the regulations promulgated thereunder.
(x) "RHA" shall mean the Rivers and Harbors
Appropriation Act, codified at 33 U.S.C. " 401, et seq., as amended.
61
<PAGE>
(xi) "Right-To-Know Act" - shall mean the Emergency
Planning and Community Right-To-Know Act, codified at 42 U.S.C. " 11001, et
seq., as amended.
(xii) "TSCA" - shall mean the Toxic Substances
Control Act, codified at 15 U.S.C. " 2601, et seq., as amended.
(b) Tenant shall comply at all times and in all respects with
the provisions of all Environmental Laws and Environmental Permits, and shall
not commit any actions or omissions that result in the incurrence of any
liability under such Environmental Laws or Environmental Permits. Tenant will
not allow, cause or permit any Hazardous Materials to be deposited on or under
the Land, or otherwise Released or threatened to be Released from or on the
Land, or otherwise Released or threatened to be Released from or on the Land or
the Improvements, by any Person whatsoever except as normally and properly used
in the construction and operation of the Improvements and in compliance with all
Environmental Laws. Tenant shall conduct all of its activities on the Land and
Improvements, including, without limitation, the off-site disposal of any
Hazardous Materials originating on or from the Land or Improvements, in
compliance with all Environmental Laws. Tenant shall obtain, whenever necessary
and in its own name, appropriate Environmental Permits for its operations and
shall comply in all respects with the requirements of such Environmental
Permits.
(c) Tenant hereby agrees to indemnify, hold harmless and
defend Landlord, the Trustee, the Credit Facility Provider, the State and MIDFA,
and their partners, officers, directors, lenders, agents and employees from and
against any and all claims, losses, damages, liabilities, penalties, costs,
assessments, expenses, demands, fines or liabilities of whatever kind or nature,
including, without limitation, costs, expenses (including expense of posting a
bond) and liabilities imposed upon Landlord pursuant to any indenture or other
document, in any way relating to or arising out of:
(i) The Release or threat of Release of any Hazardous
Materials in, on, above, from or under the Land or Improvements during the Term
hereof;
(ii) Any activity by any party on, off or within the
Land or Improvements in connection with the use, handling, treatment,
monitoring, removal, storage, decontamination, clean up, testing, transportation
or disposal of any Hazardous Materials located at any time on, within or under
the Land or the Improvements and introduced onto the Land or the Improvements at
62
<PAGE>
any time on or after the commencement of the Term and prior to the expiration or
other termination of this Lease
(iii) The use, handling, treatment, monitoring,
removal, storage, decontamination, clean-up, testing, transportation or disposal
of any Hazardous Materials on, under or within the Land or the Improvements
which were introduced onto the Land or into the Improvements at any time on or
after the commencement of the Term and prior to the expiration or other
termination of this Lease;
(iv) The performance by Tenant or any other Person
acting on behalf of Tenant during the Term of any inspection, investigation,
audit, study, sampling, testing, removal, containment or other remedial action
or other clean-up related to Hazardous Materials on, above, within, related to,
or affected by, the Land or the Improvements;
(v) The imposition, recording or filing of any lien
(including, without limitation, a so-called "superlien") against the Land or the
Improvements as a result of the incurrence by any party of any claims, expenses,
demands, losses, costs, fines or liabilities of whatever kind or nature with
respect to any actual, suspected or threatened Release of Hazardous Materials or
environmental condition, on, above, within, related to, or affected by, the Land
or the Improvements at any time after the Lease Commencement Date and prior to
the expiration or other termination of this Lease; or
(vi) The violation by Tenant of any applicable
Environmental Laws or Environmental Permits with respect to the Land or the
Improvements. The provisions of this subparagraph (c) shall survive the
expiration or any other termination of this Lease.
(d) Landlord has delivered to Tenant an undated "Phase I"
environmental report referred to as "Phase I Environmental Assessment Results
Belward Research Campus, Parcel A, Montgomery County, MD", prepared in June/July
1997 by ManTech Environmental Corporation, as supplemented by the reliance
letter from ManTech Environmental Corporation dated as of December 23, 1997 and
the letter from Apex Environmental, Inc. dated as of December 23, 1997,
indicating any presence of any Hazardous Materials on, above or below the Land,
or of the Release or threat of Release of any Hazardous Materials existing prior
to the commencement of the Term.
(e) Unless Tenant purchases the Leased Premises as provided in
Paragraph 6(b), no less than nine months prior to the expiration of the Term
hereof, Tenant shall cause to be prepared,
63
<PAGE>
by an environmental consultant reasonably acceptable to Landlord, an
environmental assessment of the Land and the Improvements (the "Assessment"),
which shall identify the presence or probable presence of any Hazardous
Materials on, above or below the Land or the Improvements, or the Release or
threat of Release of any Hazardous Materials or any violation of any
Environmental Laws with respect to the Land and the Improvements or Tenant's
operations thereon or therein. To the extent that the Assessment identifies any
such Hazardous Materials, Releases or threatened Releases or violations, Tenant
shall take all such measures, including, without limitation, any and all such
measures as shall be recommended by such environmental consultant, to remove,
remedy and/or cure such condition, so that, by the end of the Term hereof, no
Hazardous Materials shall be present on, above, within or under the Land or the
Improvements, no Release or threat of Release of Hazardous Materials exists, and
no violation of Environmental Laws shall exist with respect to the Land or the
Improvements or Tenant's operations thereon or therein. Any such response
actions undertaken by Tenant shall comply fully with all applicable
Environmental Laws. If Tenant fails to provide the Assessment to Landlord by the
date that is nine months prior to the expiration of the Term, or fails to take
such recommended measures and to remove any Hazardous Materials and comply with
all Environmental Laws as aforesaid, Landlord may, but shall not be obligated
to, have such Assessment prepared and such removal and/or remedial measures
undertaken at the expense of Tenant, the costs of which shall be considered
Additional Rent hereunder. The foregoing provisions of this subparagraph (e)
shall survive the expiration or any other termination of this Lease and shall
not be construed to relieve Tenant in any way of its continuing obligations
throughout the Term to comply with the provisions of subparagraph (b) above.
(f) Unless Tenant purchases the Leased Premises as provided in
Paragraph 6(b), as a condition of any termination of this Lease, Tenant shall
cause to be prepared, by an environmental consultant reasonably acceptable to
Landlord, an Assessment which shall identify the presence or probable presence
of any Hazardous Materials on, above or below the Land or the Improvements, or
the Release or threat of Release of any Hazardous Materials or any violation of
any Environmental Laws with respect to the Land and the Improvements or Tenant's
operations thereon or therein. To the extent that the Assessment identifies any
such Hazardous Materials, Releases or threatened Releases or violations, Tenant
shall take all such measures, including, without limitation, any and all such
measures as shall be recommended by such environmental consultant, to remove,
remedy and/or cure such condition, so that, as soon as practicable after the
termination of this Lease, no Hazardous Materials shall be present on, above,
within or under the Land or the Improvements, no Release or threat
64
<PAGE>
of Release of Hazardous Materials exists, and no violation of Environmental Laws
shall exist with respect to the Land or the Improvements or Tenant's operations
thereon or therein. Any such response actions undertaken by Tenant shall comply
fully with all applicable Environmental Laws. If Tenant fails to engage an
environmental consultant to provide the Assessment to Landlord within fifteen
(15) days of the event which causes or permits termination of this Lease, or
fails to take such recommended measures and to remove any Hazardous Materials
and comply with all Environmental Laws as aforesaid, Landlord may, but shall not
be obligated to, have such Assessment prepared and such removal and/or remedial
measures undertaken at the expense of Tenant, the costs of which shall be
considered Additional Rent hereunder. The foregoing provisions of this
subparagraph (f) shall survive the expiration or any other termination of this
Lease and shall not be construed to relieve Tenant in any way of its continuing
obligations throughout the Term to comply with the provisions of subparagraph
(b) above.
34. Quiet Enjoyment. So long as no Event of Default exists hereunder,
and subject to the terms of this Lease, the Deeds of Trust, any Encumbrance, and
any other matters of record, Landlord warrants peaceful and quiet occupation and
enjoyment of the Leased Premises by Tenant, free of hindrance by Landlord or
anyone claiming by or through Landlord.
35. Miscellaneous.
(a) This Lease may be executed in any number of counterparts,
each of which shall be an original, but all of which shall together constitute
one and the same instrument.
(b) References to the masculine shall include the feminine and
neuter and the plural shall include the singular, as the context may require.
(c) This Lease shall be construed and enforced in accordance
with the Law of the State of Maryland.
(d) Time is of the essence with respect to each and every
provision of this Lease.
(e) With respect to any provision of this Lease which requires
Landlord to not unreasonably withhold its consent or approval, if in connection
therewith Landlord is obligated under the Deeds of Trust, the Credit Facility
Documents, the Bond Documents, the State Loan Documents or applicable Law to
obtain the consent or approval of MIDFA, the Trustee, the Credit Facility
Provider, the State or any other third party, then Landlord's failure to provide
consent or failure to otherwise act in a
65
<PAGE>
reasonable manner because of its inability to obtain the consent or approval of
Landlord, MIDFA, the Credit Facility Provider, the State or other third party
shall not be deemed unreasonable, so long as Landlord has made a good faith
effort to obtain such consent.
(f) Upon the satisfaction of the Deeds of Trust, references in
this Lease to the Credit Facility Provider, the Trustee, MIDFA, the State, the
Credit Facility, the Credit Facility Agreement, the Deeds of Trust and the
Credit Facility Documents shall be ineffective, and Tenant shall no longer be
obligated to comply with the covenants contained in Paragraphs 26(g), (h), (i)
or (j) and in Paragraph 27.
(g) The parties hereto acknowledge that the provisions of this
Lease have been tailored to specific financing accommodations provided by
Landlord, the Credit Facility Provider, MIDFA and the State, including the Bonds
and the Credit Facility pursuant to the terms of the Bond Documents and the
Credit Facility Documents. In the event it becomes necessary to replace all or
any portion of these accommodations, Landlord shall exert good faith efforts to
obtain financing on the best terms available. Landlord and Tenant agree to
negotiate in good faith to amend this Lease to re-tailor this Lease to suit such
replacement financing, upon terms mutually agreeable to Landlord, Tenant and the
financial institution providing or participating in such financing and it is
acknowledged and agreed that Tenant's rental obligations hereunder will be
restructured to provide for the payment of all interest and all related expenses
of such replacement financing in the event such interest and related expenses
under the replacement financing are not identical to those payable under the
Bonds and the Credit Facility Documents and the State Loan Documents. The
parties hereto also acknowledge that in the event it becomes necessary to obtain
replacement financing for any reason other than (i) Landlord's misappropriation
of funds or (ii) a default by Landlord hereunder or under the Bond Documents or
the Credit Facility Documents not caused directly or indirectly by the act or
omission of Tenant, all expenses incurred by Landlord in connection with such
replacement financing shall be paid by Tenant as Additional Rent.
(h) Landlord and Tenant hereby agree and consent that any
action or proceeding arising out of or brought to enforce the provisions of this
Lease may be brought in any appropriate court in Montgomery County, Maryland or
Baltimore City, Maryland, and by the execution of this Lease Landlord and Tenant
irrevocably consent to the jurisdiction of each such court.
(i) If for any reason Landlord or Tenant should become not
qualified to do business in the State, Landlord and Tenant
66
<PAGE>
hereby agree to designate and appoint, without power of revocation, an agent for
service of process within the State, as the agent for Landlord or Tenant, as
applicable, upon whom may be served all process, pleadings, notice or other
papers which may be served upon Landlord or Tenant, as applicable, as a result
of any of Landlord's or Tenant's, as applicable, obligations under this Lease.
(j) Landlord and Tenant covenant that throughout the Term, if
a new agent for service of process within the State is designated pursuant to
the terms of subparagraph (i) above, Landlord or Tenant, as applicable, will
immediately file with the other party hereto the name and address of such new
agent and the date on which such appointment is to become effective.
(k) Landlord and Tenant hereby jointly waive trial by jury in
any action or proceeding to which Landlord and Tenant may be parties, arising
out of or in any way pertaining to this Lease. This waiver is knowingly,
willingly and voluntarily made by Landlord and Tenant, each of which hereby
represents that no representations of fact or opinion have been made by any
individual to induce this waiver of trial by jury or to in any way modify or
nullify its effect. Each of Landlord and Tenant further represents that it has
been represented in the signing of this Lease and in the making of this waiver
by independent legal counsel, selected of its own free will, and that it has had
the opportunity to discuss this waiver with counsel.
(l) Landlord has issued the Bonds to, inter alia, fund the
costs of construction of the Improvements, and has created with the Trustee the
Facility Fund to pay for construction and other construction and Bond related
expenses. The Facility Fund is to be invested per Landlord's instructions in
accordance with the Indenture. In addition, with respect to the Bonds, Landlord
agrees that Landlord, upon Tenant's request, shall agree to procure a substitute
Credit Facility upon terms and conditions mutually satisfactory to Landlord and
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
signed on their behalf, under seal, by their respective signatories thereunto
duly organized as of the date first above written.
WITNESS/ATTEST: MARYLAND ECONOMIC DEVELOPMENT
CORPORATION, Landlord
By: (SEAL)
- ----------------------------------------- -----------------------------
Hans F. Mayer
Executive Director
67
<PAGE>
HUMAN GENOME SCIENCES, INC.,
Tenant
By: (SEAL)
- ----------------------------------------- -----------------------------
Steven C. Mayer
Senior Vice President
and Chief Financial Officer
68
<PAGE>
EXHIBIT A
---------
DESCRIPTION OF LAND
-------------------
Lot Number 1, in Block A in the subdivision known as "Lots 1 & 2, Block
A, Lot 1, Block B, Lots 1 & 2, Block C, THE JOHNS HOPKINS BELWARD RESEARCH
CAMPUS", as per plat thereof duly recorded in the Land Records of Montgomery
County, Maryland in Plat Book 186 at Plat 20556.
A-1
<PAGE>
EXHIBIT B
---------
LIST OF CONSTRUCTION CONTRACTS
------------------------------
1. Construction Management Agreement dated August 27, 1997, between
Gilbane Building Company and MEDCO (captioned "Agreement Between Owner and
Construction Manager where the Construction Manager is also the Constructor").
2. Engineering and Procurement Services Agreement dated August 11,
1997, between Fluor Daniel, Inc. and MEDCO, as amended by Contract Amendment No.
1, dated August 20, 1997, and Contract Amendment No. 2, dated as of October 13,
1997.
3. Site Development Contract dated as of July 24, 1997, between Manekin
Corporation and MEDCO (captioned "Abbreviated Form of Agreement Between Owner
and Contractor for Construction Project of Limited Scope where the Basis of
Payment is a Stipulated Sum").
B-1
<PAGE>
EXHIBIT C
---------
LIST OF TENANT'S EQUIPMENT
--------------------------
C-1
<PAGE>
EXHIBIT D
---------
SCHEDULE OF OPTION PURCHASE PRICES
----------------------------------
D-1
<PAGE>
EXHIBIT E
---------
NOTICE AND PAYMENT ADDRESSES
----------------------------
If to Landlord:
Notices: Maryland Economic Development
Corporation
36 South Charles Street
Suite 2410
Baltimore, Maryland 21202
Attention: Hans F. Mayer,
Executive Director
with a copy to:
S. Nelson Weeks, Esquire
Ballard Spahr Andrews & Ingersoll
300 East Lombard Street
19th Floor
Baltimore, Maryland 21202
George W. Liebmann, Esquire
8 West Hamilton Street
Baltimore, Maryland 21201
Payments: Basic Rent
By Electronic Transfer:
The First National Bank of Maryland
Baltimore, Maryland 21203
Account No. 191 1047 0
By Mail:
MEDCO
36 South Charles Street
Suite 2410
Baltimore, Maryland 21202
Attention: Hans F. Mayer
Executive Director
E-1
<PAGE>
If to Tenant:
Notices: Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
Attention: Steven C. Mayer
Senior Vice President
and Chief Financial Officer
with a copy to:
James H. Davis
Senior Vice President and General
Counsel and Secretary
Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
If to the Bank:
Notices: If by mail:
The First National Bank of Maryland
6303 Ivy Lane
Suite 200
Greenbelt, Maryland 20770
Attention: Joseph C. LeMense
Vice President
The First National Bank of Maryland
International Operations
P.O. Box 17086
Mail Code 101-492
Baltimore, Maryland 21203
Attention: Phyllis Malekiania
Otherwise:
The First National Bank of Maryland
6303 Ivy Lane
Suite 200
Greenbelt, Maryland 20770
Attention: Joseph C. LeMense
Vice President
The First National Bank of Maryland
International Operations
25 South Charles Street
15th Floor
Baltimore, Maryland 21201
E-2
<PAGE>
Attention: Phyllis Malekiania
with a copy to:
John A. Stalfort, Esquire
Miles & Stockbridge, a Professional
Corporation
10 Light Street, 8th Floor
Baltimore, Maryland 21202
E-3
<PAGE>
If to MIDFA:
Notices: Maryland Industrial Development
Financing Authority
217 East Redwood Street
Redwood Tower, 22nd Floor
Baltimore, Maryland 21202
Attention: Executive Director
If to State:
Notices: Department of Business and Economic
Development
217 East Redwood Street, 22nd Floor
Baltimore, Maryland 21202
Attention: Director of Community
Financing Group Programs
E-4
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-79020) pertaining to the 1994 Stock Option Plan of Human Genome
Sciences, Inc. of our report dated February 23, 1998, with respect to the
financial statements of Human Genome Sciences, Inc. included in the Form 10-K
for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Vienna, Virginia
March 27, 1998
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-79022) pertaining to the 1993 Incentive and Non-Qualified Stock
Option Plan of Human Genome Sciences, Inc. of our report dated February 23,
1998, with respect to the financial statements of Human Genome Sciences, Inc.
included in the Form 10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Vienna, Virginia
March 27, 1998
