<PAGE> 1
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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1999 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, Maryland 20850-3331
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrant's telephone Number)
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
----- -----
The number of shares of the registrant's common stock outstanding on June 30,
1999 was 22,979,179.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six months
ended June 30, 1999 and 1998................................................. 3
Balance Sheets at June 30, 1999 and December 31, 1998.............................. 4
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998................................................. 5
Notes to Financial Statements...................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................ 10
Item 6. Exhibits and Reports on Form 8-K................................................... 10
Signatures......................................................................... 11
Exhibit Index...................................................................... Exhibit Volume
</TABLE>
2
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PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---------------- ---------------- ---------------------------------------
(dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development
collaborative contracts................. $ 14,798 $ 13,936 $ 16,220 $ 15,927
------------ -------------- --------------- ---------------
Costs and expenses:
Research and development.................. 14,896 11,502 28,270 22,357
General and administrative................ 4,181 3,370 6,967 7,055
--------------- ----------------- ------------------ ------------------
Total costs and expenses............ 19,077 14,872 35,237 29,412
--------------- ----------------- ------------------ ------------------
Income (loss) from operations.............. (4,279) (936) (19,017) (13,485)
Interest income............................ 2,396 2,817 4,908 5,667
Interest expense........................... (140) (33) (167) (67)
Equity in income (loss) of joint venture -0- (400) -0- (400)
--------------- ----------------- ------------------ ------------------
Income (loss) before taxes................. (2,023) 1,448 (14,276) (8,285)
Provision for income taxes................. 225 225 225 225
--------------- ----------------- ------------------ ------------------
Net income (loss).......................... $ (2,248) $ 1,223 $ (14,501) $ (8,510)
=============== ================= ================== ==================
Net income (loss) per share, basic......... $ (0.10) $ 0.05 $ (0.63) $ (0.38)
=============== ================= ================== ==================
Net income (loss) per share, diluted....... $ (0.10) $ 0.05 $ (0.63) $ (0.38)
=============== ================= ================== ==================
Weighted average shares outstanding,
basic...................................... 22,931,478 22,375,666 22,879,116 22,359,698
=============== ================= ================== ==================
Weighted average shares outstanding,
diluted.................................... 22,931,478 22,934,244 22,879,116 22,359,698
=============== ================= ================== ==================
</TABLE>
See accompanying notes to financial statements.
3
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
ASSETS (dollars in thousands)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 91,761 $ 16,139
Short-term investments............................................................ 163,858 165,628
Prepaid expenses and other current assets......................................... 13,189 5,374
--------------- ----------------
Total current assets........................................................ 268,808 187,141
Long-term investment.................................................................... 18,152 27,228
Property, plant and equipment (net of accumulated depreciation)......................... 22,930 20,965
Restricted investments.................................................................. 6,894 6,749
Other assets............................................................................ 7,254 2,164
--------------- ----------------
TOTAL ASSETS................................................................ $ 324,038 $ 244,247
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt................................................. $ 444 $ 444
Accounts payable and accrued expenses............................................. 5,816 4,642
Accrued payroll and related taxes................................................. 3,384 2,400
Deferred revenues................................................................. 4,020 5,265
--------------- ----------------
Total current liabilities................................................... 13,664 12,751
Long-term debt, net of current portion.................................................. 101,780 1,780
Deferred revenues....................................................................... 19,259 20,543
Other liabilities....................................................................... 307 325
--------------- ----------------
Total liabilities........................................................... 135,010 35,399
--------------- ----------------
Stockholders' Equity:
Common stock...................................................................... 230 228
Additional paid-in capital........................................................ 290,635 285,535
Unearned portion of compensatory stock............................................ (87) (110)
Retained earnings (deficit)....................................................... (93,206) (78,704)
Accumulated other comprehensive income (deficit).................................. (8,544) 1,899
--------------- ----------------
Total stockholders' equity.................................................. 189,028 208,848
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 324,038 $ 244,247
=============== ================
</TABLE>
See accompanying notes to financial statements.
4
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
------------ -----------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ (14,501) $ (8,510)
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..................... 407 791
Depreciation and amortization.................................................... 3,395 3,222
Loss (gain) on disposal of fixed assets.......................................... -0- 9
Compensation expense related to stock options.................................... 23 36
Changes in operating assets and liabilities:
Prepaid expenses and other current assets................................... (7,806) (8,540)
Other assets................................................................ (2,089) 689
Accounts payable and accrued expenses....................................... 1,095 (769)
Accrued payroll and related taxes........................................... 984 510
Deferred revenues........................................................... (2,529) 24,758
Other liabilities........................................................... (19) (2)
------------- -------------
Net cash provided by (used in) operating activities.............................. (21,040) 12,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment.................................. (5,281) (3,979)
Purchase of short-term investments and marketable securities.......................... (48,560) (86,269)
Purchase of long-term investment...................................................... -0- (25,678)
Proceeds from sales and maturities of investments and marketable
securities......................................................................... 48,547 113,003
------------- -------------
Net cash provided by (used in) investing activities.............................. (5,294) (2,923)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted investments................................................................ (146) 9
Payments on capital lease obligations................................................. -0- (223)
Proceeds from issuance of long term debt (net of expenses)............................ 97,000 -0-
Proceeds from issuance of common stock (net of expenses).............................. 5,102 1,337
------------- -------------
Net cash provided by (used in) financing activities.............................. 101,956 1,123
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 75,622 10,394
Cash and cash equivalents - beginning of period............................................ 16,139 44,346
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD.................................................. $ 91,761 $ 54,740
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................................... $ 36 $ 84
Income taxes..................................................................... 75 50
</TABLE>
See accompanying notes to financial statements.
5
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 1999
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Human Genome
Sciences, Inc. ( the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of the Company's management, the
financial statements reflect all adjustments necessary to present
fairly the results of operations for the three and six month periods
ended June 30, 1999 and 1998, the Company's financial position at
June 30, 1999, and the cash flows for the six month periods ended
June 30, 1999 and 1998. These adjustments are of a normal recurring
nature.
Certain notes and other information have been condensed or omitted
from the interim financial statements presented in this Quarterly
Report on Form 10-Q. Therefore these financial statements should be
read in conjunction with the Company's 1998 Annual Report on Form
10-K.
The results of operations for the three and six month periods ended
June 30, 1999 are not necessarily indicative of future financial
results.
NOTE 2. COMPREHENSIVE INCOME (LOSS)
During the three and six months ended June 30, 1999 and 1998, total
comprehensive income (loss) amounted to:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (2,248) $ 1,223 $ (14,501) $ (8,510)
Unrealized loss on short-term investments (1,091) (15) (1,367) (44)
Unrealized loss on long-term investments (3,985) -0- (9,076) -0-
------------------------------------------------------
Total comprehensive income (loss) $ (7,324) $ 1,208 $ (24,944) $ (8,554)
======================================================
</TABLE>
NOTE 3. LONG-TERM DEBT
The Company completed the private placement of $100.0 million of
5 1/2% Convertible Subordinated Notes ("Notes") due 2006 during the
quarter ended June 30, 1999. The Notes are convertible into common
stock at $52.20 per share. Subsequent to June 30, 1999, an
additional $25.0 million of Notes were sold. Debt issuance costs for
the total $125 million of Notes amounted to $4 million.
NOTE 4. RECLASSIFICATION
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current year's presentation.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998.
RESULTS OF OPERATIONS
Revenues. The Company had revenues of $14.8 million for the three months
ended June 30, 1999 compared with revenues of $13.9 million for the three months
ended June 30, 1998. Revenues for the three months ended June 30, 1999 and June
30, 1998 consisted primarily of $7.5 million in annual license fees and research
payments from Schering Corporation and Schering-Plough Ltd. (collectively "SP")
pursuant to collaboration agreements entered into July 28, 1996 and $4.5 million
in annual license fees and research payments from Synthelabo, S.A. pursuant to
collaboration agreements entered into June 30, 1996. For the six months ended
June 30, 1999, revenues were $16.2 million compared to $15.9 million for the six
months ended June 30, 1998. Revenues for the six months ended June 30,
1999, consisted of $12.0 million in annual license fees and research payments
from collaborations with SP and Synthelabo and $4.2 million in license fees and
milestone payments from other collaborators including the recognition of $1.3
million from Transgene, S.A. Revenues for the six months ended June 30, 1998,
consisted of $12.0 million in annual license fees and research payments from
collaborations with SP and Synthelabo and $3.9 million in license fees and
milestone payments from other collaborators including the recognition of $1.3
million from Transgene, S.A. The Company expects that its revenues may be
limited to annual license fees and research payments from SP, Synthelabo and
Merck KGaA over the next three years, interest income, payments under existing
collaboration agreements which are contingent on meeting certain product
milestones, license fees, proceeds 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.
Expenses. Research and development expenses were $14.9 million for the
three months ended June 30, 1999 and $11.5 million for the three months ended
June 30, 1998. For the six months ended June 30, 1999, research and development
expenses increased to $28.3 million from $22.4 million for the six months ended
June 30, 1998. The increase is due primarily to operational costs related to the
start up of the Company's new leased 80,000 square foot process development and
production facility.
General and administrative expenses increased to $4.2 million for the three
months ended June 30, 1999 from $3.4 million for the three months ended June 30,
1998 and decreased from $7.1 million for the six months ended June 30, 1998 to
$7.0 million for the six months ended June 30, 1999. The increase for the three
months ended June 30, 1999 resulted generally from higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins discovered by the Company and increased other
general and administrative expenses in support of the Company's expanding
activities. The second quarter increase in expenses was offset by a decrease in
first quarter general and administrative expenses that resulted from the
resignation of the Company's President in late 1998 and the assumption of his
duties by the Chairman and Chief Executive Officer and non-recurring consulting
expenses incurred in the quarter ended March 31, 1998. Interest income decreased
for the three and six months ended June 30, 1999 compared to the three and six
months ended June 30, 1998 due to lower cash balances.
Net Income. The Company recorded a net loss of $2.2 million, or $0.10 per
share, for the three months ended June 30, 1999 compared to net income of $1.2
million, or $0.05 per share, for the three months ended June 30, 1998. For the
six months ended June 30, 1999, the Company reported a net loss of $14.5
million, or $0.63 per share, compared to a net loss of $8.5 million, or $0.38
per share, for the six months ended June 30, 1998. The difference in results for
the three and six months ended June 30, 1999 and 1998 is primarily due to higher
operating expenses described above for the three and six months ended June
30,1999.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $255.1 million at June 30,
1999 as compared to $174.4 million at December 31, 1998. The increase
resulted from the placement of $100.0 million of 5 1/2% Convertible
Subordinated Notes due 2006 partially offset by the net loss
generated during the six month period and capital expenditures.
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.
The Company expects that its existing funds, the additional
$25.0 million of Notes sold after the quarter end, interest income,
and committed license fees and research payments from 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, the magnitude of those programs, the ability of
the Company to establish additional collaborative and licensing
arrangements, the cost involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and competing technological
and market developments.
The Company's funds are currently invested in U.S. Treasury
and government agency obligations, high grade corporate debt
securities and commercial paper. Such investments reflect the
Company's policy regarding the investment of liquid assets, which is
to seek a reasonable rate of return consistent with an emphasis on
safety, liquidity and preservation of capital.
YEAR 2000
Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a
result, many companies' software and computer systems may need to be
upgraded or replaced in order to become Year 2000, or "Y2K",
compliant. Because the Company was founded in 1992, most if not all
of the Company's computer equipment and software adopt modern design
principles. The Company believes the majority of purchased computer
systems, operating systems, and database management systems are
ready for Y2K based on in-house testing and information supplied by
vendors. For internal systems development, the Company uses
four-digit entries for all date items in the databases. Because
these date representations have been built into systems from their
inception, the Company believes they should be fully Y2K compliant.
The Company utilizes third-party equipment and software that may not
be Y2K compliant.
The Company is concerned about the impact of the Y2K problem on
suppliers, government agencies, electrical power, voice and data
communications, shipping and other services required. The Company
initiated a comprehensive program in October 1998 to identify risks,
validate essential systems, confirm that vendor products are Y2K
ready, and develop contingency plans to deal with problems that may
arise. A task force representing various departments in the Company
has been formed to carry out the Company's Y2K program and is
currently performing a comprehensive inventory of computer
equipment, software and other devices that may have embedded
microprocessors and software and is leading efforts to confirm that
essential systems and suppliers are tested for correct Y2K behavior.
The Company's contingency plans to address its concerns include
building an inventory of key supplies and assuring that critical
equipment has emergency backup power available. The task force
reports to the Chief Information Officer on a regular basis. The
task force has confirmed or received confirmation that all internal
mission critical systems are Y2K compliant. To date the task force
has tested approximately 70% of its less critical systems and found
only minimal internal non-compliant systems which have or will be
updated through the purchase of compliant software upgrades. The
task force plans to substantially complete its Y2K assessment before
September 30, 1999.
8
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The Company does not believe that the cost of identification
and correction of any Y2K compliance problems, estimated to be less
than $100,000, will have a material adverse effect on the Company's
business, financial condition or operating results. However, there
can be no assurance that a failure of the Company's internal
computer systems, third-party equipment, software used by the
Company, systems maintained by the Company's suppliers, or utility
systems such as electricity, gas, water, and telecommunications, to
be Y2K compliant, will not have a material adverse effect on the
Company's business, financial condition or operating results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Certain statements contained in "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 degree of success of the Company's collaboration
partners in identification, research, development and marketing of
products based on the Company's technology; the extent to which the
Company engages in clinical development of products on its own; the
degree of success of the Company in using its technology and data
base to select viable product opportunities; the ability of the
Company to develop or arrange for marketing and sales initiatives
with respect to products under development; the success of the
Company in raising additional capital and satisfying liquidity needs
in the future; the scope and results of pre-clinical testing and
clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs and uncertainties involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims;
competing technological and market developments; whether conditions
to milestone payments are met and the timing of such payments; and
other risks and uncertainties detailed in the Company's filings with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not have operations subject to risks of
foreign currency fluctuations, nor does it use derivative financial
instruments in its operations or investment portfolio. The Company
does not have significant exposure to market risks associated with
changes in interest rates related to its corporate debt securities
held as of June 30, 1999. The Company believes that any market
change related to its U.S. securities held as of June 30, 1999 is
not material to its financial statements. As of June 30, 1999, the
carrying value of the Company's equity investment in Transgene was
approximately $18.2 million. The Company's investment in Transgene
is subject to equity market risk.
9
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders, held on May 19, 1999,
the following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld
--------------------- -------------------
TERMS EXPIRING IN 2002
<S> <C> <C>
Max Link, Ph.D. 16,206,184 21,362
Craig Rosen, Ph.D. 16,206,184 21,362
Beverly Sills Greenough 16,201,439 26,107
</TABLE>
The following proposals were approved at the Company's Annual meeting of
Shareholders:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
----------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C>
1 Ratification of the selection of
Ernst & Young, LLP as the
Company's independent auditors 16,202,114 17,057 8,375
for the fiscal year ending
December 31, 1999.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
-----------------------------------
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 28, 1999,
announcing the completion of a private placement of $100.0 million
aggregate principle amount of 5 1/2% Convertible Subordinated Notes due
2006.
10
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SIGNATURES
Pursuant to the requirements 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 & Chief Executive Officer
BY: /s/ Steven C. Mayer
-----------------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: August 16, 1999
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Page Number
-----------
<S> <C>
27.1 Financial data schedule.
</TABLE>
- ------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 91,761
<SECURITIES> 163,858
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 268,808
<PP&E> 46,072
<DEPRECIATION> 23,142
<TOTAL-ASSETS> 324,038
<CURRENT-LIABILITIES> 13,664
<BONDS> 101,780
0
0
<COMMON> 230
<OTHER-SE> 188,798
<TOTAL-LIABILITY-AND-EQUITY> 324,038
<SALES> 0
<TOTAL-REVENUES> 14,798
<CGS> 0
<TOTAL-COSTS> 14,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> (2,023)
<INCOME-TAX> 225
<INCOME-CONTINUING> (2,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,248)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
