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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-92209
HUMAN GENOME SCIENCES, INC.
Offer to Convert
5 1/2% Convertible Subordinated Notes Due 2006
For Additional Shares of Common Stock
----------------------
We hereby offer, upon the terms and subject to the conditions described in
this prospectus and the accompanying letter of transmittal, to convert all our
outstanding 5 1/2% Convertible Subordinated Notes Due 2006 for shares of our
common stock, $0.01 par value per share. Holders who tender their Notes for
conversion on or prior to Wednesday, January 12, 2000 will receive for each
$1,000 principal amount a total of:
- 19.1571 shares of common stock issuable on conversion of the Notes in
accordance with their terms;
- $180.00 payable in shares of our common stock based upon the average of
the closing prices on the three days prior to the last day of the offer;
and
- accrued interest from January 1, 2000 payable in cash.
An aggregate principal amount of $125,000,000 of Notes is outstanding. See
"The Offer."
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY,
JANUARY 12, 2000, UNLESS THE OFFER IS EXTENDED.
SEE RISK FACTORS BEGINNING ON PAGE 7 FOR A DISCUSSION OF FACTORS YOU SHOULD
CONSIDER IN EVALUATING OUR OFFER.
Our common stock is listed on the Nasdaq National Market under the symbol
"HGSI." The last reported bid price of our common stock on December 10, 1999 was
$114.563 per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The Dealer Manager for the Offer is:
CREDIT SUISSE FIRST BOSTON
Prospectus dated December 13, 1999
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TABLE OF CONTENTS
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PAGE
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SUMMARY......................... 1
RATIO OF EARNINGS TO FIXED
CHARGES......................... 6
RISK FACTORS.................... 7
PRICE RANGE OF COMMON STOCK..... 19
DIVIDEND POLICY................. 19
USE OF PROCEEDS................. 19
CAPITALIZATION.................. 20
SELECTED FINANCIAL DATA......... 21
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................... 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE OFFER....................... 21
CERTAIN UNITED STATES FEDERAL
TAX CONSIDERATIONS............ 28
DESCRIPTION OF OUR CAPITAL
STOCK......................... 30
LEGAL MATTERS................... 33
EXPERTS......................... 33
WHERE YOU CAN FIND MORE
INFORMATION................... 34
INCORPORATION BY REFERENCE...... 34
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO
SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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SUMMARY
This summary highlights information about Human Genome Sciences, Inc.
Because this is a summary, it may not contain all the information you should
consider before deciding whether to accept our offer and convert your Notes into
our common stock. You should read this entire prospectus carefully.
HUMAN GENOME SCIENCES, INC.
We research and develop novel compounds for treating and diagnosing human
diseases based on the discovery and understanding of the medical usefulness of
genes. The sequence in which chemicals appear in a gene controls the function of
the gene. We have used automated, high speed technology to discover the
sequences of chemicals in genes and generate a large collection of partial human
gene sequences. We believe that our collection includes most of the genes
responsible for producing proteins in the human body. We also possess one of the
largest databases of the genes of humans and microbes, which we refer to as our
"genomic database." We believe we have created a broad base of product
opportunities based on our genomic database.
We began our work in the genetics industry by identifying and cataloging
genes. We have since focused primarily on the research and development of
proteins for the treatment of human disease. We use our advanced computer system
to identify the most promising product candidates. We are able to analyze
partial gene sequences, identify the genes corresponding to partial and
full-length gene sequences and the proteins made by those genes. As of November
30, 1999, we had isolated and characterized thousands of full-length genes and
purified more than 300 potential proteins for the treatment of human disease.
PRODUCTS IN DEVELOPMENT
We have produced three drugs currently undergoing studies in humans. We
believe these drugs are among the pharmaceutical industry's first
genomics-derived drugs to reach the stage of testing on humans.
- Myeloid Progenitor Inhibitory Factor-1, known as MPIF-1, is a protein
designed to protect cells that develop into blood cells from the toxic
effects of several chemotherapy drugs. We began the second phase of human
studies of MPIF-1 for the treatment of breast and ovarian cancer in
November 1998.
- Keratinocyte Growth Factor-2, known as KGF-2, is a protein designed to
speed the repair of damage to the mouth, throat and related tissues and
to heal serious chronic wounds to the skin. KGF-2 may also be useful in
treating a number of other conditions involving injury to skin cells. We
began the second phase of human studies of KGF-2 for the treatment of
venous ulcers, a type of chronic wound, in February 1999.
- Vascular Endothelial Growth Factor-2, known as VEGF-2, is a gene-therapy
drug designed to regenerate the blood vessels of, or revascularize, the
heart and limbs. The first and second phases of human studies of VEGF-2
for the treatment of insufficient circulation in limbs and heart disease
are ongoing. These trials are being conducted through Vascular Genetics
Inc., a joint venture in which we hold a substantial interest.
We have discovered several other drugs that are in various stages of
testing in the laboratory, including:
- B Lymphocyte Stimulator, known as BLyS, a novel immune stimulant that we
believe could have significant impact on the treatment and prevention of
infectious diseases,
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and could lead to improved treatment of immune deficiency disorders and types of
leukemia and lymphoma. We are currently engaged in testing BlyS in the
laboratory.
INTELLECTUAL PROPERTY
We vigorously pursue patents to protect our intellectual property. As of
November 30, 1999, we had 102 issued U.S. patents covering 83 full-length human
genes and had filed U.S. patent applications covering more than 7,400 human
genes and the proteins they make. In addition, we have filed patent applications
with respect to a substantial number of the large collection of partial gene
sequences we have discovered.
RECENT EVENTS
We expect to close on December 14, 1999 an offering of $150 million
principal amount of 5% Convertible Subordinated Notes Due 2006 pursuant to an
exemption from registration under the Securities Act of 1933. The notes will
mature on December 15, 2006. The notes will be convertible into our common stock
at a conversion price of $143.25 per share, which is equivalent to a conversion
rate of 6.9808 shares of our common stock per $1,000 principal amount of notes.
The initial purchaser of the notes will have an option to purchase an additional
$50 million of notes on or prior to January 8, 2000. We have agreed to file a
registration statement for the resale of the notes and the shares of common
stock issuable upon their conversion within 60 days after closing the offering.
-------------------------
We are a Delaware corporation. Our headquarters are located at 9410 Key
West Avenue, Rockville, Maryland 20850-3338. Our telephone number is (301)
309-8504.
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OFFER
We present below a summary of this offer:
The Offer....................... We are offering, upon the terms and subject
to the conditions described in this
prospectus and in the accompanying letter of
transmittal, additional shares of our common
stock to holders who convert our 5 1/2%
Convertible Subordinated Notes Due 2006.
Holders who tender their Notes for conversion
on or prior to Wednesday, January 12, 2000
will receive for each $1,000 principal amount
a total of:
- 19.1571 shares of common stock issuable on
conversion of the Notes in accordance with
their terms;
- $180.00 payable in shares of our common
stock based upon the average of the closing
prices on the three days prior to the last
day of the offer; and
- accrued interest from January 1, 2000
payable in cash.
We will accept for conversion all Notes
validly tendered and not withdrawn on or
prior to Wednesday, January 12, 2000, on the
terms and conditions of the offer described
in this prospectus. We will pay cash in lieu
of issuing fractional shares.
As of the date of this prospectus,
$125,000,000 in aggregate principal amount of
Notes was outstanding. As of December 10,
1999, all the Notes were registered in the
name of Cede & Co., Inc., which held the
Notes for its participants. See "The
Offer -- Terms of the Offer."
Purpose and Effects............. The offer will encourage Note holders to
convert their Notes before the expiration of
the offer. Conversion of the Notes will
improve our capitalization by increasing our
outstanding equity base and reducing our
indebtedness, which we consider to be
particularly important in light of our
expected private placement of $150,000,000 of
5% Convertible Subordinated Notes Due 2006.
We believe that improving our capitalization
will provide us with enhanced access to the
capital markets and expand our opportunities
for future growth.
Note holders participating in the offer will
receive more shares of common stock per
$1,000 in principal amount of Notes than they
would otherwise receive upon conversion
outside of the offer. Therefore,
participating Note holders have an
opportunity to share in any long-term
appreciation in the value of our common stock
to a greater extent than non-participating
holders.
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January 1, 2000 Interest
Payment......................... Tendering Note holders will receive the
January 1, 2000 interest payment on the Notes
in accordance with the terms of the Notes.
Expiration Date................. 5:00 p.m., New York City time, on Wednesday,
January 12, 2000. We may extend the
expiration date. See "The Offer -- Expiration
Date; Extensions; Amendments."
Termination of the Offer........ We reserve the right to terminate the offer
at any time prior to the completion of the
offer. See "The Offer -- Termination of the
Offer."
Procedures for Tendering
Notes........................... Holders of Notes wishing to accept the offer
must complete and sign the Letter of
Transmittal as described in the instructions
included in it and forward or hand deliver
the Letter of Transmittal and any other
documents required by the Letter of
Transmittal to the Exchange Agent at the
address listed on the Letter of Transmittal.
See "The Offer -- Procedures for Tendering
Notes."
Guaranteed Delivery
Procedures...................... Holders of Notes who wish to tender their
Notes and (1) whose Notes are not immediately
available or (2) who cannot deliver their
Notes or any other documents required by the
Letter of Transmittal or any other related
document to the Exchange Agent prior to the
Expiration Date (or complete the procedure
for book-entry transfer on a timely basis),
may tender their Notes according to the
guaranteed delivery procedures described in
the Letter of Transmittal. See "The Offer --
Guaranteed Delivery Procedures."
Acceptance of Notes and Delivery
of Shares of Common Stock....... When the registration statement of which this
prospectus is a part is declared effective by
the SEC and the offer is completed, we will,
subject to the terms and conditions described
in this prospectus, accept all Notes that are
properly tendered in the offer prior to 5:00
p.m., New York City time, on Wednesday,
January 12, 2000. The shares of common stock
issued as part of the offer and cash payment
for any accrued interest will be delivered
promptly after we accept the Notes. See "The
Offer -- Acceptance of Notes for Conversion;
Delivery of Shares of Common Stock."
Withdrawal Rights............... Holders may withdraw the Notes they have
tendered at any time prior to 5:00 p.m., New
York City time, on Wednesday, January 12,
2000. See "The Offer -- Withdrawal Rights."
Federal Income Tax
Consequences.................... We expect that tendering Note holders will
not recognize gain or loss for federal income
tax purposes when they convert their Notes
solely into that number
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of shares of common stock provided for under
the original conversion right, other than
cash received in lieu of fractional shares.
We believe, and intend to take the position,
that such nonrecognition treatment would
extend to the additional shares of common
stock received as a result of accepting the
offer. It is possible, however, that the
Internal Revenue Service could contend that
those holders who accept the offer should
recognize income equal to the fair market
value of the common stock received in excess
of the number of shares received pursuant to
the original conversion right. For a
discussion of the federal income tax
consequences of conversion of the Notes, see
"Certain United States Federal Tax
Considerations."
Market Price and Trading........ On December 10, 1999, the last reported bid
price for our common stock on the Nasdaq
National Market was $114.563 per share. The
Notes are not currently traded on an
exchange. On December 10, 1999, the last
reported bid price for the Notes was 237.50%
of par, as reported by Credit Suisse First
Boston Corporation, which makes a market in
the Notes.
The Exchange Agent.............. The Bank of New York is the exchange agent.
In this capacity, we refer to The Bank of New
York in this prospectus as the Exchange
Agent. The address and telephone number of
the Exchange Agent are listed in "The
Offer -- The Exchange Agent; Assistance" and
the back cover of this prospectus. The Bank
of New York is also the trustee for the
Notes.
The Information Agent........... Georgeson Shareholder Communications Inc. is
the Information Agent. The address and
telephone numbers of the Information Agent
are listed on the back cover of this
prospectus.
Questions....................... Any questions regarding the offer, including
the procedure for tendering Notes in the
offer, should be directed to the Information
Agent or the Dealer Manager at the addresses
and telephone numbers listed on the back
cover of this prospectus.
Fees and Expenses............... We will pay all expenses we incur in
connection with the offer. See "The
Offer -- Fees and Expenses."
Brokerage Commissions........... None.
Transfer Taxes.................. None, if the shares of common stock we issue
pursuant to the offer are issued to the
registered holders of the Notes converted.
Rights of Non-Tendering
Holders......................... Holders who do not tender their Notes
pursuant to the offer will have no appraisal
rights under applicable state law or
otherwise. They will continue to have the
same rights under the Notes as they are
entitled to today.
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RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
We present below the ratio of our earnings to our fixed charges. Earnings
consist of net income (loss) plus fixed charges. Fixed charges consist of
interest expense, including amortization of debt issuance costs, and that
portion of rental expense we believe to be representative of interest. The "pro
forma" information for the nine months ended September 30, 1999 reflects the
original issuance of the 5 1/2% Convertible Subordinated Notes Due 2006 and the
issuance of our $150 million of 5% Convertible Subordinated Notes Due 2006, as
if these events had occurred as of January 1, 1999. The "pro forma" information
for the year ended December 31, 1998 reflects these same events as if they had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 1999
(PRO FORMA) (ACTUAL) 1998
----------- -------- --------
<S> <C> <C> <C>
Deficiency of earnings available to cover
fixed charges.............................. $(33,637) $(23,989) $(10,412)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
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1998 1998
(PRO FORMA) (ACTUAL) 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
(Deficiency) excess of
earnings available to
cover fixed charges... $(38,082) $(22,957) $(21,148) $(7,559) $(32,719) $9,740
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before deciding whether to accept our offer and
convert your Notes into our common stock.
BECAUSE OUR BUSINESS STRATEGY IS UNTESTED, WE DO NOT KNOW WHETHER WE WILL BE
ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS AND GENERATE REVENUE
We do not know whether we can implement our business strategy successfully
because we are in the early stages of development. We try to find as many genes
as possible and then use this information to develop potential products. We use
automated high speed gene sequencing technology to:
- rapidly identify and obtain proprietary rights to a substantial number of
genes; and
- select from those genes promising candidates to develop compounds for
treating and diagnosing human diseases.
Other companies target particular diseases and then try to find cures
through gene-based therapies. Nobody has tested our strategy. If our strategy
does not result in the development of products that we can sell profitably, we
will be unable to generate revenue.
IF WE ARE UNABLE TO IDENTIFY GENES WITH POTENTIAL VALUE, THEN WE MAY NOT
BE ABLE TO RECOVER OUR INVESTMENT IN OUR GENE DISCOVERY EFFORT
Our success depends on our ability and that of our collaborators to
determine which genes have potential value. To select potential product
candidates, we invest significant time and resources to isolate and sequence
full-length genes, test and analyze the genes, and determine their functions. We
devote an increasing portion of our resources to identifying and developing
proteins for the treatment of human disease. We have recently made substantial
capital expenditures and hired additional personnel to foster these activities.
Before we can commercialize a product, we must extensively test the product in
the laboratory and complete several phases of study of its effects on humans. We
incur expenses for testing and study before we know whether we can sell a
product successfully. We will incur additional costs to continue these
activities. Ultimately, we may not be successful in identifying genes which we
can develop commercially.
BECAUSE WE ARE AN EARLY STAGE COMPANY, WE DO NOT KNOW WHETHER WE CAN DEVELOP OUR
BUSINESS AND ACHIEVE PROFITABILITY
We expect to incur continued and increasing losses and may not become
profitable. We are in the early stages of development, and it will be a number
of years, if ever, before we are likely to receive revenue from product sales or
royalties. We expect to continue to incur substantial expenses relating to
research and development efforts. We anticipate that we will increase these
efforts as we focus on the laboratory testing and studies in humans that are
required before we can sell a product. The development of our products requires
significant further research, development, testing and regulatory approvals. We
may not succeed in developing products that will be commercially successful and
that will generate revenue in excess of the cost of development.
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BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW TECHNOLOGIES, WE DO NOT
KNOW WHETHER OUR EFFORTS WILL BE SUCCESSFUL
To date, companies have developed and commercialized relatively few
products based on genes. Commercialization involves risks of failure inherent in
the development of products based on innovative technologies and the risks
associated with drug development generally. These risks include the possibility
that:
- these technologies or any or all of the products based on these
technologies will be ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances;
- the products, if safe and effective, will be difficult to manufacture on
a large scale or uneconomical to market;
- proprietary rights of third parties will prevent us or our collaborators
from marketing products;
- third parties will market superior or equivalent products; and
- we may not be able to obtain gene sequencing machines using new and
superior technology which could render obsolete the gene sequencers we
use.
BECAUSE WE HAVE LIMITED EXPERIENCE IN DEVELOPING PRODUCTS, WE MAY BE
UNSUCCESSFUL IN OUR EFFORTS TO DEVELOP PRODUCTS
Our ability to develop and commercialize products based on proteins and, in
the future, other products to which we have retained commercial rights, will
depend on our ability to:
- develop products internally;
- complete laboratory testing and human studies;
- obtain necessary regulatory approvals;
- deploy sales and marketing resources effectively; and
- enter into arrangements with third parties to provide these functions.
Although we have started human studies with respect to potential products,
we have limited experience with these activities and may not be successful in
developing or commercializing these or other products.
BECAUSE WE DEPEND ON REVENUE FROM OUR COLLABORATION PARTNERS, WE MAY NOT BECOME
PROFITABLE IF WE LOSE THE REVENUE FROM ANY COLLABORATION PARTNER
To date, we have received substantially all of our revenue from payments
made under our collaboration agreements with SmithKline Beecham and, to a lesser
extent, from other collaboration, option and licensing agreements. We expect
that we will receive most of our revenue for the foreseeable future from
payments under our existing collaboration agreements. Unless renewed,
substantially all of these collaboration agreements will expire in 2000 and
2001. We cannot assure you that these collaboration agreements will be renewed
or that we will be able to enter into additional collaboration agreements. We
may not receive expected milestone or royalty payments under our collaboration
agreements. We may not become profitable in a timely manner, or at all, if our
collaborators fail to:
- develop marketable products;
- obtain regulatory approvals for products; or
- successfully market products based on the genes we identify.
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IF OUR RELATIONSHIP WITH ANY OF OUR COLLABORATORS PREVENTS US FROM ENTERING INTO
OTHER COLLABORATIVE AGREEMENTS, THEN WE MAY HAVE LIMITED OPPORTUNITIES FOR
PRODUCT DEVELOPMENT AND REVENUE GROWTH
Our collaboration agreements generally restrict our ability to enter into
collaboration agreements with additional collaboration partners. Our
collaborators may prevent us from obtaining the additional revenue and
assistance that additional collaborators could provide. Because our existing
collaboration partners may force us to rely on them, these partners may be able
to exercise a greater degree of control over our business.
IF ONE OF OUR COLLABORATORS PURSUES A PRODUCT THAT COMPETES WITH OUR PRODUCTS,
THEN THEY MAY HAVE A CONFLICT OF INTEREST AND WE MAY NOT RECEIVE THE MILESTONE
PAYMENTS OR ROYALTY REVENUE THAT WE EXPECT
Each of our collaborators conducts multiple product development efforts.
Our collaborators may pursue existing or alternative technologies instead of
products they are developing in collaboration with us. Additionally, our
collaborators may develop products that are similar to or compete with products
they are developing in collaboration with us. If our collaborators pursue these
other products instead of our products, we may be unable to achieve our payment
milestones or our royalty revenue may decrease.
BECAUSE WE MAY DEPEND ON OUR COLLABORATORS AND OTHER THIRD PARTIES TO CONDUCT
LABORATORY TESTING AND HUMAN STUDIES, WE MAY ENCOUNTER DELAYS IN OR LOSE SOME
CONTROL OVER OUR EFFORTS TO DEVELOP PRODUCTS
We may rely in large part on our collaboration partners and third party
research organizations to design and conduct our laboratory testing and human
studies. If we are unable to contract for any necessary testing activities on
acceptable terms, we may not complete our product development efforts in a
timely manner. If we rely on collaborators and third parties for laboratory
testing and human studies, we may lose some control over these activities and
become too dependent upon these parties. Collaborators and third parties may not
complete testing activities on schedule or when we request.
BECAUSE OF OUR SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO ADJUST TO MEET
CHANGING CONDITIONS IN THE FUTURE
At September 30, 1999, we had outstanding total indebtedness of
approximately $127.2 million. For the nine months ended September 30, 1999, our
fixed charges exceeded our earnings by approximately $24.0 million. We expect to
close on December 14, 2000 a private placement of $150 million of 5% Convertible
Subordinated Notes Due 2006. If we had issued all of these 5% notes and the
Notes as of January 1, 1999, our fixed charges for the nine months ended
September 30, 1999 would have exceeded our earnings by approximately $33.6
million.
A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate
sufficient cash flow in the future to enable us to meet our anticipated fixed
charges, including our debt service requirements. Our substantial leverage will
have several important consequences for our future operations. For instance:
- we will dedicate a significant portion of our cash flow to pay interest
on, and principal of, our indebtedness;
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- we may be unable to obtain additional financing in the future for capital
expenditures, acquisitions, debt servicing or general corporate purposes;
- we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and
- we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise.
WE MAY BE REQUIRED TO REGISTER THE SHARES OF SOME OF OUR STOCKHOLDERS UPON
EVENTS LIKE THE FILING OF A SHELF REGISTRATION STATEMENT
We may agree, pursuant to a registration rights agreement with the initial
purchaser of additional convertible notes, for the benefit of the holders of the
notes and the common stock issuable upon their conversion, that we will, at our
cost:
- as promptly as practicable, but in no event more than 60 days following
the initial issuance of the notes, file a registration statement on Form
S-3, or shelf registration statement, covering resales of the notes and
the common stock issuable upon their conversion pursuant to Rule 415
under the Securities Act;
- use our best efforts to cause this shelf registration statement to be
declared effective under the Securities Act no later than 120 days after
the initial issuance of the notes; and
- use our best efforts to keep this shelf registration statement effective
after its effective date for as long as shall be necessary to enable a
non-affiliate holder of notes purchased in this offering to sell the
notes under Rule 144(k) under the Securities Act.
We will agree to the rights described above with the purchasers of our 5%
Convertible Subordinated Notes Due 2006. In addition, some of our stockholders
may be entitled to demand registration rights with respect to their shares of
common stock, as well as incidental registration rights with respect to their
shares if we propose to file certain registration statements. The proposal to
file the shelf registration statement may trigger the rights of these
stockholders to have their shares registered for resale. These stockholders may
choose to exercise their registration rights, which could result in additional
shares of our common stock being offered for sale in the public market.
BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE
MARKET PRICE OF THE COMMON STOCK MAY BE LOWER THAN YOU EXPECTED
Our stock price and the stock prices of emerging and biotechnology
companies like us have historically been highly volatile. During the past year,
the market price of our common stock has been as low as $28.75 per share and as
high as $133.00 per share. The market price of the common stock could fluctuate
substantially because of:
- future announcements about our company or our competitors, including the
results of testing, technological innovations or new commercial products;
- changes in government regulations;
- regulatory actions;
- announcements relating to healthcare reform;
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- our failure to acquire or loss of proprietary rights to the gene
sequences we discover or the products we develop;
- litigation; and
- public concern as to the safety of our products.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many emerging
and biotechnology companies. These fluctuations have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
cause the market price of the common stock to be lower than you expected.
BECAUSE MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER CAPABILITIES AND
RESOURCES, THEY MAY BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS BEFORE US
We are in a race to identify, establish uses for and patent as many genes
as possible and to bring to market the products we develop. Many of our
potential competitors have substantially greater research and product
development capabilities and financial, scientific, marketing and human
resources. We believe that companies conducting genomic research, like us, have
identified the majority of genes in the human genome and will identify virtually
all of these genes within several years. We face competition from entities using
high speed gene sequencers to discover genes. We also face competition from
entities using more traditional methods to discover genes related to particular
diseases. We expect that competition in our field will intensify.
Our competitors include parties conducting research to identify genes and
human genome research similar to or competing with our focus on gene discovery,
including:
- institutes, like the U.S. government and the governments of Great
Britain, France, Germany and Japan;
- small laboratories associated with universities or other not-for-profit
organizations;
- pharmaceutical and biotechnology companies; and
- government-financed programs.
These competitors may:
- succeed in identifying genes or developing products earlier than we do;
- obtain approvals from the U.S. FDA or other regulatory agencies for
products more rapidly than we do;
- develop treatments or cures that are more effective than those we propose
to develop; or
- acquire similar gene sequencing machines and engage in the automated
sequencing of genes.
The other risks of competition include the following:
- research and development by others may make our products, or the products
we and our collaborators may develop, obsolete or uneconomical;
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- consumers may prefer existing or newly developed technologies to any
product we develop; and
- other companies use the same gene sequencing machines we use, in some
cases for business purposes that compete with our business.
IF PATENT LAWS OR THE INTERPRETATION OF PATENT LAWS CHANGE, OUR COMPETITORS MAY
BE ABLE TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions that will determine who has the
right to develop a particular product. 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
partial gene sequences and full-length genes. There have also been proposals for
review of the appropriateness of patents on genes and partial gene sequences.
The biotechnology patent situation outside the U.S. is even more uncertain and
is currently undergoing review and revision in many countries. These proposals
and other changes in patent laws in the U.S. and other countries may result in
changes in, or different interpretations of, the patent laws which might allow
others to use our discoveries or develop and commercialize our products.
IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, THEN OUR COMPETITORS
MAY OBTAIN RIGHTS TO AND COMMERCIALIZE THE DISCOVERIES WE ATTEMPTED TO PATENT
Our pending applications covering full-length genes and their corresponding
proteins may not result in the issuance of any patents. As of November 30, 1999,
we had filed patent applications for:
- more than 7,400 human genes and their corresponding proteins; and
- all or portions of genomes of eight infectious microorganisms and one
non-infectious microorganism.
As of that date, we had only 102 U.S. patents issued covering 83
full-length human genes. Our disclosures in our applications may not be
sufficient to meet the statutory requirements for patentability in all cases.
Additionally, our patent applications may cover many genes. As a result, we
cannot predict what issues may arise in connection with our patent applications
or the timing of the grant of patents with respect to genes covered by our
patent applications.
BECAUSE PATENT APPLICATIONS FOR PARTIAL HUMAN GENE SEQUENCES MAY BE LEGALLY
INSUFFICIENT, WE MAY BE UNABLE TO OBTAIN ISSUED PATENTS FOR MANY OF OUR PATENT
APPLICATIONS, AND OTHERS MAY OBTAIN RIGHTS TO OUR DISCOVERIES
We have filed U.S. patent applications claiming more than 300,000 partial
human gene sequences. The Patent and Trademark Office may not grant patents on
these applications because they may be insufficient. 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 derived products and
uses. These applications do not contain any data from laboratory testing or
human studies. Some court decisions indicate that disclosure of a partial
sequence may not be sufficient to support the patentability of a full-length
sequence. We believe that these court decisions and the uncertain position of
the Patent and Trademark Office present a
12
<PAGE> 15
significant risk that the Patent and Trademark Office will not issue patents
based on patent disclosures limited to partial gene sequences. Finally, we are
uncertain about the scope of the coverage, enforceability and commercial
protection provided by any patents issued on the basis of partial gene
sequences.
IF INFORMATION ABOUT THE GENES WE DISCOVER IS PUBLISHED BY OTHERS BEFORE WE
APPLY FOR PATENT PROTECTION, THEN WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION,
WHICH WOULD ENABLE OTHERS TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES
Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, The Institute for Genomic Research, or TIGR, in
collaboration with the National Center for Biological Information, disclosed
full-length DNA sequences which are reportedly in excess of 35,000 sequences
that were assembled from partial gene sequences available in publicly accessible
databases or sequenced at TIGR. This public disclosure might limit the scope of
our claims or make unpatentable subsequent patent applications on full length
genes we file.
In July 1994, we reached an agreement with TIGR and SmithKline Beecham to
contribute a number of partial copies of DNA sequences to a database. Under the
agreement, only academic scientists and researchers at non-profit institutions
that sign agreements could access the database. In October 1996, TIGR notified
us that it was terminating this agreement according to its terms, effective in
April 1997. The termination of this agreement eliminated limits on publication
of sequences in the database on that date. In addition, the termination
eliminated previous restrictions on TIGR's ability to publish sequence
information. This publication may prevent us from obtaining patent protection
for some genes in which we may have an interest.
IF OTHERS FILE SIMILAR PATENT APPLICATIONS OR OBTAIN SIMILAR PATENTS, THEN THE
PATENT AND TRADEMARK OFFICE MAY DENY OUR PATENT APPLICATIONS OR OTHERS MAY
RESTRICT THE USE OF OUR DISCOVERIES
Other companies or institutions may have filed patent applications or may
file patent applications in the future which attempt to patent genes similar to
our patent applications. Others have filed patent applications that cover genes
for which we have filed patent applications, including applications based on our
potential products. The Patent and Trademark Office would decide the priority of
competing patent claims in an interference proceeding. Any patent application
filed by a third party may have priority over patent applications we filed, in
which event the third party may require us to stop pursuing a potential product
or to negotiate a royalty arrangement to pursue the potential product.
IF OUR POTENTIAL PRODUCTS CONFLICT WITH PATENTS THAT COMPETITORS, UNIVERSITIES
OR OTHERS HAVE OBTAINED, THEN WE MAY BE UNABLE TO COMMERCIALIZE THOSE PRODUCTS
Our potential products may give rise to claims that they infringe the
patents of others. This risk will increase as the biotechnology industry expands
and as other companies obtain more patents and attempt to discover genes through
the use of high speed sequencers. Other persons could bring legal actions
against us to claim damages or to stop our manufacturing and marketing of the
affected products. If any of these actions are successful, in addition to any
potential liability for damages, these persons may require us to obtain a
license in order to continue to manufacture or market the affected products. We
believe that there will
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<PAGE> 16
continue to be significant litigation in our industry regarding patent and other
intellectual property rights. If we become involved in litigation, it could
consume a substantial portion of our resources.
BECAUSE ISSUED PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, OUR COMPETITORS
MAY BE ABLE TO COMMERCIALIZE PRODUCTS SIMILAR TO THOSE COVERED BY OUR ISSUED
PATENTS
Issued patents may not provide commercially meaningful protection against
competitors. Any issued patent may not provide us with competitive advantages.
Others may challenge our patents or independently develop similar products which
could result in an interference proceeding in the Patent and Trademark Office.
Others may be able to design around our issued patents or develop products
providing effects similar to our products. In addition, others may discover uses
for genes or proteins other than those uses covered in our patents, and these
other uses may be separately patentable. The holder of a patent covering the use
of an invention as to which we have a patent claim could exclude us from selling
a product for a use covered by their patent.
BECAUSE THE U.S. DEPARTMENT OF ENERGY FUNDED SOME OF OUR RESEARCH, IT MAY GRANT
LICENSES UNDER OUR PATENTS THAT WOULD ENABLE OTHERS TO USE OUR DISCOVERIES
We identified a small percentage of sequences covered by our patent filings
through research funded by grants from the U.S. Department of Energy. The
Department of Energy has a statutory right to grant to other parties licenses
under patents which may be issued based on research funded by the Department of
Energy. The Department of Energy may exercise this right in the event of:
- lack of action 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.
IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, THEN OTHERS MAY BE ABLE TO USE
OUR SECRETS TO COMPETE MORE EFFECTIVELY
We may not be able to meaningfully protect our trade secrets. We rely on
trade secret protection to protect our confidential and proprietary information.
We believe that we have developed proprietary procedures for making libraries of
DNA sequences and genes. We have not sought patent protection for these
procedures. Additionally, we have developed a substantial database concerning
genes we have identified. While we have entered into confidentiality agreements
with employees and academic collaborators, we may not be able to prevent their
disclosure of these data or materials. Others may independently develop
substantially equivalent information and techniques. In addition, TIGR has
developed or possesses specific trade secrets important to our business,
including information about sequencing procedures and genes identified by TIGR.
14
<PAGE> 17
IF WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL, WE MAY EXPERIENCE DELAYS IN OUR
PRODUCT DEVELOPMENT EFFORT
We depend on our senior executive officers as well as key scientific and
other personnel. Although we have entered into employment agreements with some
of our executives, the employment agreements are for a limited period of time,
and not all key personnel have employment agreements. Our employment agreement
with Dr. William A. Haseltine, our Chairman of the Board and Chief Executive
Officer, expires in February 2000. Although Dr. Haseltine's employment agreement
automatically extends for additional one year terms, either party can terminate
the agreement four months prior to the end of the applicable term. If Dr.
Haseltine decides to terminate his employment with us, this termination could
delay the commercialization of our products or prevent us from becoming
profitable. Further, we have not purchased key-man life insurance on any of our
executive officers or key personnel, and therefore may not have adequate funds
to find an acceptable replacement if Dr. Haseltine or other valuable executives
die. Competition among pharmaceutical and biotechnology companies for qualified
employees is intense, and the loss of qualified employees, or an inability to
attract, retain and motivate additional highly skilled employees required for
the expansion of our activities, could hinder our ability to complete human
studies successfully and develop marketable products.
IF WE DO NOT OBTAIN SIGNIFICANT ADDITIONAL FUNDS ON ACCEPTABLE TERMS, THEN WE
MAY NOT BE ABLE TO CONTINUE TO GROW OUR BUSINESS AND GENERATE ENOUGH REVENUE TO
RECOVER OUR INVESTMENT IN OUR PRODUCT DEVELOPMENT EFFORT
Since inception, we have expended, and expect to continue to expend,
substantial funds to continue our research and development programs. If we incur
unanticipated expenses or delays in receipt of revenue, we may require
additional financing to fund our operating expenses and capital requirements. We
may not be able to obtain additional financing on acceptable terms. If we raise
additional funds by issuing equity securities, the new securities may dilute the
interests of our existing stockholders.
BECAUSE WE ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT REGULATORY
REQUIREMENTS, WE MAY BE ABLE TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS IN A
TIMELY MANNER
Our products are subject to an extensive and uncertain regulatory approval
process by the FDA and comparable agencies in other countries. The regulation of
new products is extensive, and the required process of laboratory testing and
human studies is lengthy and expensive. We may not obtain FDA approvals in a
timely manner, or at all. We and our collaborators may encounter significant
delays or excessive costs in our efforts to secure necessary approvals or
licenses. Even if we obtain FDA regulatory approvals, the FDA extensively
regulates manufacturing, labeling, distributing, marketing, promotion and
advertising after product approval. Moreover, several areas in which we or our
collaborators may develop products involve relatively new technology and have
not been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures remain
uncertain. In addition, these products may be subject to substantial review by
foreign governmental regulatory authorities which could prevent or delay
approval in those countries. Regulatory requirements ultimately imposed on our
products could limit our ability to test, manufacture and, ultimately,
commercialize our products.
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<PAGE> 18
BECAUSE WE ARE SUBJECT TO ENVIRONMENTAL PROTECTION LAWS, WE MAY BE UNABLE TO
CONDUCT OUR BUSINESS IN THE MANNER WE CURRENTLY INTEND
State and federal laws regarding environmental protection and hazardous
substances control affect our business. We cannot predict the impact that these
laws or any changes in these laws may have on our future operations. Federal and
state agencies and congressional committees have expressed interest in further
regulating biotechnology. We cannot estimate the extent and impact of regulation
in the biotechnology field, including genetic testing, resulting from any future
federal, state or local legislation or administrative action.
BECAUSE WE DEPEND ON A SINGLE SUPPLIER FOR GENE SEQUENCING MACHINES AND
CHEMICALS, WE MAY BE UNABLE TO IDENTIFY ADDITIONAL GENES IF WE LOSE THAT
SUPPLIER
We currently depend on a single supplier, Applied Biosystems, a division of
PE Corporation, formerly Perkin-Elmer Corporation, to provide all of our gene
sequencing machines and the chemicals we require in connection with our gene
sequencing process. If we are unable to obtain additional machines or an
adequate supply of these chemicals or other ingredients at commercially
reasonable rates, we may be unable to continue to identify genes through gene
sequencing. PE Corporation has recently created Celera Genomics Corporation, an
entity that is sequencing the human genome and could potentially be one of our
competitors. While other gene sequencing machines are available, we do not
believe that other machines are as efficient as the machines we currently use.
Gene sequencing machines or chemicals may not remain available in commercial
quantities at acceptable costs.
BECAUSE WE CURRENTLY HAVE A LIMITED MANUFACTURING CAPACITY AND RELY ON THIRD
PARTIES TO MANUFACTURE OUR PRODUCTS FOR STUDIES AND SALE, WE MAY BE UNABLE TO
OBTAIN NECESSARY PRODUCTS ECONOMICALLY
We do not currently have any manufacturing facilities licensed to supply
materials suitable for clinical trials or for commercial sale or any experience
in manufacturing materials suitable for human studies or for commercial sale. We
depend on third parties to comply with current good manufacturing practices,
known as cGMPs, and other regulatory requirements and to deliver materials on a
timely basis. These third parties may not perform adequately. Any failures by
these third parties may delay our development of products or their submission
for regulatory approval.
During 1997 and 1998, we designed and the Maryland Economic Development
Corporation constructed a process development and production facility for the
preparation of quantities of our proteins for human studies. The FDA must
validate and inspect this facility to determine compliance with cGMP
requirements. A delay in validation of the facility could delay or increase the
cost of human studies and could delay submission of our products for regulatory
approval. Construction of an expansion of this facility has begun. We intend to
lease the expansion on terms comparable to the lease of our existing facility,
although we cannot assure you that we will be able to obtain a lease on
comparable terms, or at all. We may not be able to successfully establish
manufacturing capabilities and manufacture our products economically or in
compliance with cGMPs and other regulatory requirements.
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<PAGE> 19
BECAUSE WE CURRENTLY HAVE NO MARKETING CAPABILITY AND RELY ON THIRD PARTIES TO
MARKET OUR PRODUCTS, WE MAY BE UNABLE TO COMMERCIALIZE OUR PRODUCTS
We do not have any products that can be marketed. In the future, we
generally expect to rely on collaborators or on third parties that we may
contract with to market any products that we may develop. Our collaborators or
other third parties may not be successful in marketing our products. To date, we
have collaborated with SmithKline Beecham, Schering-Plough and others. However,
we may also co-promote or retain U.S. marketing rights to our products. If we
decide to market products directly, we will incur significant additional
expenditures and commit significant additional management resources to develop
an external sales force and implement our marketing strategy. We may not be able
to establish a successful marketing force.
IF THE HEALTHCARE SYSTEM OR REIMBURSEMENT POLICIES CHANGE, THEN THE PRICES OF
OUR POTENTIAL PRODUCTS MAY FALL OR OUR POTENTIAL SALES MAY DECLINE
In recent years, officials have made numerous proposals to change the
healthcare system in the U.S. These proposals included measures that would limit
or eliminate payments for certain medical procedures and treatments or subject
the pricing of pharmaceuticals to government control. Government and other
third-party payors increasingly attempt to contain healthcare costs by limiting
both coverage and the level of reimbursement of newly approved healthcare
products. In some cases, they may also refuse to provide any coverage of uses of
approved products for disease indications other than those for which the FDA has
granted marketing approval. Governments may adopt future legislative proposals
and federal, state or private payors for healthcare goods and services may take
action to limit their payments for goods and services. Any of these events could
limit our ability to commercialize our products successfully.
WE MAY BE AFFECTED BY YEAR 2000 PROBLEMS
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. Failure to achieve Y2K compliance could lead to system failure or
miscalculations, causing disruptions of operations, reductions in revenues and
increases in expenses.
We have always used four-digit date entries in our internally developed
databases, and we believe the majority of our purchased computer systems,
operating systems, and database management systems are Y2K compliant. However,
we cannot guarantee the Y2K-readiness of our suppliers, electrical power, voice
and data communications, shipping, and government agencies and other third
parties on which we rely. We cannot be certain that all of our critical internal
systems will perform properly in the new millennium. If they do not, we may be
forced to spend substantial amounts to fix or replace them, and we may face
substantial operating difficulties. If our efforts to address Y2K issues are
ineffective, or if third parties with whom we do business do not successfully
address this issue, we could experience system failures beyond our control. This
could cause prolonged computer, telecommunications or electrical failure, which
would make it difficult or impossible for us to conduct business.
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<PAGE> 20
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD DEPRESS OUR STOCK
PRICE
Sales of substantial amounts of our common stock in the public market
following this offer, or the appearance that a large number of shares is
available for sale, could adversely affect the market price for our common
stock. In connection with the offer to you, we expect to issue additional shares
of our common stock. The number of additional shares of common stock we issue is
based on the average of the closing prices on the three consecutive trading days
immediately prior to, but not including, the day this offer expires, Wednesday,
January 12, 2000. These shares will be in addition to the aggregate of 2,394,636
shares of our common stock otherwise deliverable upon conversion of the Notes
under the indenture. All of these shares will be freely tradable if the offer is
completed. In addition, our expected private placement of $150 million of 5%
Convertible Subordinated Notes Due 2006 may result in the issuance of additional
shares of our common stock upon their conversion.
BECAUSE THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, IT MAY NOT PROVE TO
BE ACCURATE
This prospectus, including the documents we incorporate by reference,
contains forward-looking statements and information relating to our company. We
generally identify forward-looking statements using words like "believe,"
"intend," "expect," "may," "should," "plan," "project," "contemplate,"
"anticipate" or similar statements. We base these statements on our beliefs as
well as assumptions we made using information currently available to us. Because
these statements reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Actual results may
differ significantly from the results discussed in these forward-looking
statements. We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.
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<PAGE> 21
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "HGSI" since December 2, 1993. The high and low closing prices of our
common stock, as reported by the Nasdaq National Market, are shown below.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1997
First Quarter............................ $ 48.000 $32.500
Second Quarter........................... $ 39.250 $30.750
Third Quarter............................ $ 43.500 $30.500
Fourth Quarter........................... $ 45.250 $38.125
1998
First Quarter............................ $ 45.125 $35.750
Second Quarter........................... $ 43.250 $35.000
Third Quarter............................ $ 40.000 $23.313
Fourth Quarter........................... $ 36.250 $25.563
1999
First Quarter............................ $ 36.750 $29.625
Second Quarter........................... $ 46.000 $34.938
Third Quarter............................ $ 89.500 $40.875
Fourth Quarter (through December 10,
1999).................................. $129.313 $74.188
</TABLE>
The last reported bid price of our common stock on the Nasdaq National
Market on December 10, 1999 was $114.563 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We do not anticipate
declaring or paying cash dividends for the foreseeable future. Instead, we will
retain our earnings, if any, for the future operation and expansion of our
business.
USE OF PROCEEDS
We will not receive any proceeds from the conversion of the Notes into
common stock.
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<PAGE> 22
CAPITALIZATION
The following table shows our current assets and long-term investments and
capitalization at September 30, 1999 (1) on an actual basis, (2) as adjusted to
give effect to the expected private placement of, and the application of the
estimated net proceeds from, $150,000,000 of our 5% Convertible Subordinated
Notes Due 2006 and (3) as further adjusted to give effect to the assumed
conversion of $125,000,000 aggregate principal amount of 5 1/2% Convertible
Subordinated Notes Due 2006 in response to the offer made by this prospectus.
You should also refer to our financial statements and the related notes included
in our filings with the SEC.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
----------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED(2)(3)
--------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 62,493 $ 207,793 $ 207,567
Short-term investments..................... 219,156 219,156 219,156
Prepaid expenses and other current
assets.................................. 5,940 5,940 5,940
--------- --------- ---------
Total current assets............... $ 287,589 $ 432,889 $ 432,663
========= ========= =========
Long-term investments........................ $ 20,144 $ 20,144 $ 20,144
========= ========= =========
Long-term obligations, net of current
portion:
Other long-term debt, net of current
portion................................. $ 1,780 $ 1,780 $ 1,780
5 1/2% Convertible Subordinated Notes Due
2006.................................... 125,000 125,000 --
5% Convertible Subordinated Notes Due
2006.................................... -- 150,000 150,000
--------- --------- ---------
Total long-term obligations, net of
current portion.................. 126,780 276,780 151,780
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000
shares authorized, 23,133,092 shares
issued and outstanding, actual and as
adjusted, 25,722,673 shares issued and
outstanding as further adjusted(1)(2)... 231 231 257
Additional paid-in capital................. 294,828 294,828 442,302
Unearned portion of compensatory stock..... (383) (383) (383)
Retained deficit(3)........................ (102,918) (102,918) (129,568)
Accumulated other comprehensive income
(deficit)............................... (6,272) (6,272) (6,272)
--------- --------- ---------
Total stockholders' equity......... 185,486 185,486 306,336
--------- --------- ---------
Total capitalization............... $ 312,266 $ 462,266 $ 458,116
========= ========= =========
</TABLE>
- -------------------------
(1) Excludes the shares of common stock issuable upon conversion of the new
notes and 5,152,164 shares of our common stock reserved for issuance under
our stock option plans, pursuant to which options to purchase 3,444,089
shares were outstanding on September 30, 1999.
(2) The "as further adjusted" column assumes that all of our 5 1/2% Convertible
Subordinated Notes Due 2006 will be tendered, resulting in the issuance of
an aggregate of 2,589,581 shares of our common stock, based on the average
of the closing prices of the common stock for the three trading days ended
December 10, 1999 which was $115.417, and the payment of accrued interest
from January 1, 2000 to January 12, 2000.
(3) The "as further adjusted" column reflects a charge of approximately $22.5
million to our statements of operations for the fair market value of the
additional common stock consideration we will pay if all of the Notes are
tendered.
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<PAGE> 23
SELECTED FINANCIAL DATA
See "Selected Financial Data" and the related financial statements included
in our most recent annual report on Form 10-K and quarterly report on Form 10-Q.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our most recent annual report on Form 10-K and
quarterly report on Form 10-Q.
THE OFFER
PURPOSE AND EFFECT
The offer will encourage holders of our 5 1/2% Convertible Subordinated
Notes Due 2006 to convert their Notes before the expiration of the offer.
Conversion of the Notes will improve our capitalization by increasing our
outstanding equity base and reducing our indebtedness, which we consider to be
particularly important in light of our expected private placement of
$150,000,000 of 5% Convertible Subordinated Notes Due 2006. In addition,
conversion reduces our interest expense and allows us to conserve cash for use
in our business. We expect that it will improve our ability to issue new notes
at attractive rates and beneficial terms, which may lower our long-term capital
costs. We believe that improving our capitalization will provide us with
enhanced access to the capital markets and expand our opportunities for future
growth.
Note holders participating in the offer will receive more shares of common
stock per $1,000 in principal amount of Notes than they would otherwise receive
upon conversion outside of the offer. Therefore, participating Note holders have
an opportunity to share in any long-term appreciation in the value of our common
stock to a greater extent than non-participating holders.
CONSEQUENCES OF FAILURE TO TENDER NOTES
Following the expiration of the offer, the liquidity of the market for a
holder's Notes could be adversely affected if a significant number of holders
elect to participate in the offer. Furthermore, after expiration of the offer,
holders of the Notes who convert will receive only the number of shares of
common stock issuable on conversion of the Notes under the indenture governing
the Notes. Holders who do not convert their Notes will continue to be entitled
to interest payments in accordance with the terms of the indenture governing the
Notes.
TERMS OF THE OFFER
We are offering, upon the terms and subject to the conditions described in
this prospectus and in the accompanying Letter of Transmittal, to convert all of
the outstanding Notes for shares of our common stock. Holders who tender their
Notes for conversion on or
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<PAGE> 24
prior to Wednesday, January 12, 2000 will receive for each $1,000 principal
amount a total of:
- 19.1571 shares of common stock issuable on conversion of the Notes in
accordance with their terms;
- $180.00 payable in shares of our common stock based upon the average of
the closing prices on the three days prior to the last day of the offer;
and
- accrued interest from January 1, 2000 payable in cash.
The number of additional shares to be issued per $1,000 principal amount of
Notes will be determined by dividing $180.00 by the average of the closing price
of the common stock on the Nasdaq National Market on the three trading days
immediately preceding, but not including, the last day of the offer. We will not
issue fractional shares of our common stock to a holder in connection with this
offer. In lieu of issuing fractional shares, we will pay a cash adjustment based
upon the closing price of the common stock on the last day of the offer. Tenders
of the Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on Wednesday, January 12, 2000.
Holders may only tender Notes in multiples of $1,000. Holders of Notes may
tender less than the aggregate principal amount of Notes held by them, provided
that they appropriately indicate this fact on the Letter of Transmittal
accompanying the tendered Notes (or so indicate pursuant to the procedures for
book-entry-transfer).
As of the date of this prospectus, $125,000,000 in aggregate principal
amount of the Notes are outstanding. As of December 10, 1999, there was one
registered holder of the Notes, Cede & Co., Inc., which held the Notes for its
participants. Only a holder of the Notes (or the holder's legal representative
or attorney-in-fact) may participate in the offer. We believe that, as of the
date of this prospectus, no holder of Notes is an affiliate (as defined in Rule
405 under the Securities Act).
We will accept Notes as validly tendered Notes when, as and if we have
given oral or written notice of acceptance to the Exchange Agent. The Exchange
Agent will act as agent for the tendering holders of Notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date will be Wednesday, January 12, 2000 at 5:00 p.m., New
York City time, unless we, in our sole discretion, extend the offer, in which
case the Expiration Date shall be the latest date and time to which the offer is
extended.
We expressly reserve the right in our sole discretion at any time or from
time to time, to extend the period of time during which the offer is open, and
thereby delay acceptance for conversion of any Notes, by giving oral or written
notice of such extension to the Exchange Agent.
The offer, the Letter of Transmittal and other relevant materials are being
mailed to record holders of Notes and furnished to brokers, dealers, commercial
banks, trust companies and similar persons whose names, or the names of whose
nominees, appear on the Note holder list or, if applicable, who are listed as
participants in a clearing agency's security position listing, for subsequent
transmittal to beneficial owners of Notes.
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<PAGE> 25
If we make a material change in the terms of the offer or the information
concerning the offer, or if we waive a material condition of the offer, we will
extend the offer consistent with Rule 13e-4 under the Exchange Act. The SEC has
taken the position that the minimum period during which an offer must remain
open following material changes in the terms of the offer or information
concerning the offer (other than a change in price or a change of more than two
percent in percentage of securities sought, for which an extension of ten
business days is required) will depend upon the facts and circumstances,
including the relative materiality of the terms or information. For purposes of
the offer, a "business day" means any day other than a Saturday, Sunday or
federal holiday, and consists of the time period from 12:01 a.m. through 12:00
Midnight, New York City time.
We also expressly reserve the right (1) to delay acceptance for conversion
of any Notes tendered pursuant to the offer, regardless of whether any such
Notes were previously accepted for conversion, and (2) at any time, or from time
to time, to amend the offer in any manner which would not adversely affect the
holders of Notes. Our reservation of the right to delay conversion of Notes that
we have accepted for payment is limited by Rule 13e-4 under the Exchange Act,
which requires that a bidder must pay the consideration offered or return the
securities deposited by or on behalf of security holders promptly after the
termination or withdrawal of any offer. Any extension, delay in payment, or
amendment will be followed as promptly as practicable by public announcement
thereof, such announcement in the case of an extension to be issued no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. Without limiting the manner in which we
may choose to make any public announcement, we will have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by issuing a release to the Dow Jones News Service.
TERMINATION OF THE OFFER
We reserve the right to terminate the offer at any time prior to completion
of the offer.
ACCOUNTING TREATMENT
The accounting for the conversion of the Notes to common stock will result
in a reclassification of the original aggregate principal amount of the Notes to
the stockholders' equity section of our balance sheet and the recognition of
ordinary expense for the fair value of any additional consideration paid to
induce the conversion. Fair value is measured and recognized as of the date the
offer is accepted.
PROCEDURES FOR TENDERING NOTES
The tender of a holder's Notes described below and the acceptance of
tendered Notes by us will constitute a binding agreement between the tendering
holder and us upon the terms and conditions described in this prospectus and in
the accompanying Letter of Transmittal. Except as described below, a holder who
wishes to tender Notes for conversion in response to the offer must deliver the
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by the Letter of
Transmittal, to the Exchange Agent at the address listed on the back cover page
of this prospectus prior to 5:00 p.m., New York City time, on Wednesday, January
12, 2000. All Notes not converted in response to the offer, will be returned to
the tendering Note holders at our expense as promptly as practicable following
the Expiration Date.
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THE METHOD OF DELIVERY OF NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Any financial institution that is a participant in a Book-Entry Transfer
Facility may make book-entry delivery of the Notes by causing the Book-Entry
Transfer Facility to transfer the Notes into the Exchange Agent's account in
accordance with that facility's procedures for the transfer. In connection with
a book-entry transfer, a Letter of Transmittal need not be transmitted to the
Exchange Agent, as long as the book-entry transfer procedure is complied with
prior to 5:00 p.m., New York City time, on the Expiration Date and an Agent's
Message (as defined below) is received by the Exchange Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Term "Agent's Message" means a
message, transmitted by a Book-Entry Transfer Facility to, and received by, the
Exchange Agent, which states that (1) the Book-Entry Transfer Facility has
received an express acknowledgement from the participant in the Book-Entry
Transfer Facility tendering Notes, (2) the participant has received and agrees
to be bound by the terms of the Letter of Transmittal and (3) we may enforce the
agreement against the participant.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed, unless the Notes surrendered for conversion
with that Letter of Transmittal are tendered (1) by a registered holder of the
Notes who has not completed either the box entitled "Special Conversion
Instructions" or the box entitled "Special Delivery Instructions" in the Letter
of Transmittal, or (2) for the account of a financial institution (including
most commercial banks, savings and loan associations and brokerage houses) that
is a participant in the Security Transfer Agent Medallion Program, the New York
Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program, known as an Eligible Institution. In the event that a
signature on a Letter of Transmittal or a notice of withdrawal, as the case may
be, is required to be guaranteed, the guarantee must be by an Eligible
Institution. If the Letter of Transmittal is signed by a person other than the
registered holder of the Notes, the Notes surrendered for conversion must either
(1) be endorsed by the registered holder, with the signature guaranteed by an
Eligible Institution, or (2) be accompanied by a bond power, in satisfactory
form as determined by us in our sole discretion, duly executed by the registered
holder, with the signature guaranteed by an Eligible Institution. The term
"registered holder" as used in this paragraph with respect to the Notes means
any person in whose name the Notes are registered on the books of the Registrar
for the Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Notes tendered for conversion will be
determined by us in our sole discretion. Our determination will be final and
binding. We and the Exchange Agent reserve the absolute right to reject any and
all Notes not properly tendered and to reject any Notes the acceptance of which
might, in our judgment or in the judgment of the Exchange Agent or their
counsel, be unlawful. We and the Exchange Agent also reserve the absolute right
to waive any defects or irregularities or conditions of the offer as to
particular Notes either before or after the Expiration Date (including the right
to waive the ineligibility of any holder who seeks to tender Notes in the
offer). The interpretation of the terms and conditions of the offer (including
the Letter of Transmittal and the instructions) by us will be final and binding
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on all parties. Unless waived, any defects or irregularities in connection with
tenders of Notes for conversion must be cured within the period of time we
determine. We and the Exchange Agent will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Notes for
conversion but will not incur any liability for failure to give the
notification. We will not deem Notes tendered until irregularities have been
cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, the signatory should so indicate when signing, and, unless waived by
us, submit proper evidence of the person's authority to so act, which evidence
must be satisfactory to us in our sole discretion.
Any beneficial owner of the Notes whose Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Notes in the offer should contact the registered holder promptly and
instruct the registered holder to tender on the beneficial owner's behalf. If
the beneficial owner wishes to tender directly, the beneficial owner must, prior
to completing and executing the Letter of Transmittal and tendering Notes, make
appropriate arrangements to register ownership of the Notes in the beneficial
owner's name. Beneficial owners should be aware that the transfer of registered
ownership may take considerable time.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (1) whose Notes are not
immediately available or (2) who cannot deliver their Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Notes according to the guaranteed delivery
procedures described in the Letter of Transmittal. According to those
procedures: (1) the tender must be made by or through an Eligible Institution
and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal)
must be signed by the holder, (2) on or prior to the Expiration Date, the
Exchange Agent must have received from the holder and the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number or numbers of the tendered Notes, and the
principal amount of tendered Notes, stating that the tender is being made
thereby and guaranteeing that, within three business days after the date of
delivery of the Notice of Guaranteed Delivery, the tendered Notes, a duly
executed Letter of Transmittal or an Agent's Message, and any other required
documents will be deposited by the Eligible Institution with the Exchange Agent,
and (3) the properly completed and executed documents required by the Letter of
Transmittal and the tendered Notes in proper form for transfer (or confirmation
of a book-entry transfer of such Notes into the Exchange Agent's account at a
Book-Entry Transfer Facility and the receipt of an Agent's Message) must be
received by the Exchange Agent within three business days after the date of
delivery of the Notice of Guaranteed Delivery. Any holder who wishes to tender
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery relating to
the Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF NOTES FOR CONVERSION; DELIVERY OF SHARES OF COMMON STOCK
When all the conditions to the offer are satisfied or waived, we will
accept any and all Notes that are properly tendered in the offer prior to 5:00
p.m., New York City time, on the
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Expiration Date. The shares of common stock issued as part of the offer will be
delivered promptly after acceptance of the Notes. For purposes of the offer and
cash payment for accrued interest we will be deemed to have accepted validly
tendered Notes, when, as, and if we have given oral or written notice of our
acceptance of the Notes to the Exchange Agent.
In all cases, issuances of shares of common stock for Notes that are
accepted for conversion pursuant to the offer will be made only after timely
receipt by the Exchange Agent of the Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents (or of
confirmation of a book-entry transfer of the Notes into the Exchange Agent's
account at a Book-Entry Transfer Facility and the receipt of an Agent's
Message). We reserve the absolute right to waive any defects or irregularities
in the tender or conditions of the offer. If any tendered Notes are not accepted
for any reason, those unaccepted Notes will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the offer.
WITHDRAWAL RIGHTS
Tenders of the Notes may be withdrawn by delivery of a written notice to
the Exchange Agent, at its address listed on the back cover page of this
prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any notice of withdrawal must (1) specify the name of the
person having deposited the Notes to be withdrawn, (2) identify the Notes to be
withdrawn (including the certificate number or numbers and principal amount of
the Notes, as applicable) and (3) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which the Notes were
tendered and must be guaranteed by an Eligible Institution. Any questions as to
the validity, form and eligibility (including time of receipt) of notices of
withdrawal will be determined by us, in our sole discretion. The Notes so
withdrawn will be deemed not to have been validly tendered for conversion for
purposes of the offer. Any Notes which have been tendered for conversion but
which are withdrawn will be returned to their holder without cost to the holder
as soon as practicable after withdrawal. Properly withdrawn Notes may be
retendered by following one of the procedures described under "The
Offer -- Procedures for Tendering Notes" at any time on or prior to the
Expiration Date.
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THE EXCHANGE AGENT; ASSISTANCE
The Bank of New York is the Exchange Agent. All tendered Notes, executed
Letters of Transmittal and other related documents should be directed to the
Exchange Agent as follows:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
BY MAIL, OVERNIGHT OR HAND DELIVERY:
<S> <C> <C>
The Bank of New York
101 Barclay Street
Reorganization
Floor 7 East
New York, New York 10286
Attention: Tolutope Adeyoju
</TABLE>
By Facsimile Transmission:
(For Eligible Institutions Only)
(212) 815-6339
Confirm by Telephone:
(212) 815-3738
THE INFORMATION AGENT; ASSISTANCE
Georgeson Shareholder Communications Inc. is the Information Agent. All
questions regarding the offer, including requests for additional copies of this
prospectus, the Letter of Transmittal and other related documents, should be
addressed to the Information Agent at its address and telephone numbers listed
on the back cover of this prospectus.
FEES AND EXPENSES
All expenses incident to completing the offer will be borne by us,
including: (1) all registration and filing fees (including, without limitation,
fees and expenses of compliance with state securities or Blue Sky laws), (2)
printing expenses (including, without limitation, expenses of printing
certificates for the shares of common stock in a form eligible for deposit with
The Depository Trust Company and of printing prospectuses), (3) messenger,
telephone and delivery expenses, (4) fees and disbursements of our counsel, (5)
fees and disbursements of independent certified public accountants, (6) our
internal expenses (including all salaries and expenses of our officers and
employees, performing legal or accounting duties), and (7) fees and expenses
incurred in connection with the listing of the shares of common stock on a
securities exchange.
We have retained Credit Suisse First Boston Corporation to act as Dealer
Manager in connection with the offer. Additionally, Credit Suisse First Boston
Corporation is acting as the initial purchaser in connection with our expected
private placement of 5% Convertible Subordinated Notes Due 2006. Credit Suisse
First Boston Corporation is also acting as our financial advisor and, as such,
is advising us with respect to, among other things, the terms and timing of this
offer. In its capacity as Dealer Manager, Credit Suisse First Boston Corporation
may contact holders of beneficial interests in the Notes regarding the offer and
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<PAGE> 30
may request brokers, dealers and other nominees to forward this prospectus and
related materials to beneficial owners of shares of the Notes. Questions and
requests for assistance may be directed to the Dealer Manager at its address and
telephone number listed on the back cover of this prospectus.
We have agreed to pay Credit Suisse First Boston Corporation reasonable and
customary fees for its services as Dealer Manager and financial advisor in
connection with this offer. In addition, we will reimburse the Dealer Manager
for its reasonable out-of-pocket expenses, including attorneys' fees, and has
agreed to indemnify Credit Suisse First Boston Corporation against certain
liabilities and expenses in connection with the offer. Other than as described
above, we will not make any payments to brokers, dealers or others for
soliciting acceptance of the offer.
In the ordinary course of its business, Credit Suisse First Boston
Corporation engages in securities trading, market making and brokerage
activities and may, at any time, hold long or short positions and may trade or
otherwise effect transactions in our securities.
We will pay all transfer taxes, if any, applicable to the conversion of
Notes in response to this offer. If, however, a transfer tax is imposed for any
reason other than the conversion of Notes in response to the offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income
tax considerations relevant to converting the Notes pursuant to the offer. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended, existing and proposed Treasury regulations promulgated
under the Code and administrative and judicial interpretations, all as presently
in effect or proposed and all of which are subject to change, possibly with
retroactive effect, or different interpretations.
This discussion does not deal with all aspects of U.S. federal income
taxation that may be important to holders of the Notes, and it does not include
any description of the tax laws of any state, local or foreign government. This
discussion is limited to beneficial owners who hold the Notes as capital assets
within the meaning of Section 1221 of the Code. This discussion is for general
information only and does not address all of the U.S. federal income tax
consequences that may be relevant to particular purchasers. Some purchasers may
be subject to special rules.
For the purpose of this discussion, a "U.S. holder" refers to a beneficial
owner of a Note who or which is:
- a citizen or resident of the U.S. for U.S. federal income tax purposes;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the U.S. or political subdivision of
the U.S.;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
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- a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. fiduciaries have
authority to control all substantial decisions of the trust; or
- otherwise subject to U.S. federal income tax on a net income basis in
respect of its worldwide taxable income.
The term "non-U.S. holder" refers to any beneficial owner of Note who or
which is not a U.S. holder.
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE CONVERSION OF
THE NOTES INTO SHARES OF COMMON STOCK PURSUANT TO THE OFFER, AND THE EFFECT THAT
THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON THESE TAX CONSEQUENCES.
Conversion of Notes. A holder of Notes generally will not recognize gain
or loss on converting the Notes solely into that number of shares of common
stock provided for under the original conversion right, other than cash received
in lieu of fractional shares. We believe, and intend to take the position, that
such nonrecognition treatment would extend to the additional shares of common
stock received as a result of accepting the offer. It is possible, however, that
the Internal Revenue Service could contend that those holders who accept the
offer should recognize income equal to the fair market value of the common stock
received in excess of the number of shares received pursuant to the original
conversion right. Holders should consult their own tax advisors regarding the
consequences to them if the IRS were successfully to contend that the conversion
of the Notes into common stock pursuant to the offer (the "Overall Transaction")
were partially taxable in this manner. Assuming that the Overall Transaction is
entirely tax-free for U.S. federal income tax purposes, the holder's tax basis
in the shares of common stock received upon conversion of the Notes will be
equal to the holder's aggregate tax basis in the Notes converted, less any
portion allocable to cash received in lieu of a fractional share; and the
holding period of the shares of common stock received by the holder upon
conversion of Notes generally will include the period during which the holder
held the Notes prior to the conversion.
Cash received in lieu of a fractional share of common stock should be
treated as a payment in exchange for the fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of
fractional shares generally will equal the difference between the amount of cash
received and the amount of tax basis allocable to the fractional share
exchanged. Cash received for accrued interest should be taxable to holders as
ordinary interest income.
Special Considerations for Non-U.S. Holders. A non-U.S. holder generally
will not be subject to U.S. federal income tax on gain recognized upon the
receipt of cash in lieu of a fractional share unless:
- the gain is, or is treated as, effectively connected with the conduct of
a trade or business within the U.S. by the non-U.S. holder; or
- in the case of non-U.S. holder who is a nonresident alien individual and
holds the common stock as a capital asset, the holder is present in the
U.S. for 183 or more days in the taxable year.
If the common stock received by a non-U.S. holder in excess of the number of
shares provided for under the original conversion right were treated as income,
then this income
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could be subject to a tax at the rate of 30% or such lower rate as may be
prescribed under an applicable treaty.
Backup Withholding. Certain non-corporate Note holders may be subject to
backup withholding at a 31% rate on cash payments received in lieu of fractional
shares. Backup withholding will not apply, however, to a holder that (1)
furnishes a correct taxpayer identification number and certifies that the holder
is not subject to backup withholding on the substitute Form W-9 included in the
Letter of Transmittal, (2) provides a certification of foreign status on a Form
W-8 or W-8BEN or successor form or (3) is otherwise exempt from backup
withholding.
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share, and 1,000,000 shares of preferred stock, par value
$0.01 per share. We have called a special meeting of our stockholders for
December 16, 1999 to approve an increase in our capital stock to 250,000,000
shares of common stock and 20,000,000 shares of preferred stock. The following
is a description of our capital stock.
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock. Each
stockholder of record is entitled to one vote for each outstanding share of our
common stock owned by that stockholder on every matter properly submitted to the
stockholders for their vote. After satisfaction of the dividend rights of
holders of preferred stock, holders of common stock are entitled to any dividend
declared by the board of directors out of funds legally available for this
purpose. After the payment of liquidation preferences to holders of any
outstanding preferred stock, holders of our common stock are entitled to
receive, on a pro rata basis, all our remaining assets available for
distribution to the stockholders in the event of our liquidation, dissolution,
or winding up. Holders of our common stock do not have any preemptive right to
become subscribers or purchasers of additional shares of any class of our
capital stock. The rights, preferences and privileges of holders of our common
stock are subject to, and may be injured by, the rights of the holders of shares
of any series of preferred stock that we may designate and issue in the future.
PREFERRED STOCK
Our certificate of incorporation allows us to issue without stockholder
approval preferred stock having rights senior to those of our common stock. Our
board is authorized, without further stockholder approval, to issue up to
1,000,000 shares of preferred stock in one or more series and to fix and
designate the rights, preferences, privileges and restrictions of the preferred
stock, including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption; and
- liquidation preferences.
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Our board may fix the number of shares constituting any series and the
designations of these series. We have issued rights that are in some cases
exercisable for shares of junior participating preferred stock. See "-- Rights
Agreement."
Our issuance of preferred stock may have the effect of delaying or
preventing a change in control. Our issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
our common stock or could adversely affect the rights and powers, including
voting rights, of the holders of our common stock. The issuance of preferred
stock could have the effect of decreasing the market price of our common stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will not be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our bylaws provide for the indemnification of our directors and officers to
the fullest extent authorized by the Delaware General Corporation Law, except
that we will indemnify a director or officer in connection with an action
initiated by that person only if the action was authorized by our board of
directors. The indemnification provided under our certificate of incorporation
and bylaws includes the right to be paid expenses in advance of any proceeding
for which indemnification may be had. We may pay these expenses in advance of
the final disposition of a proceeding only if the director or officer agrees to
repay these amounts if it is ultimately determined that the director or officer
is not entitled to be indemnified. If we do not pay a claim for indemnification
within 60 days, the claimant may bring an action to recover the unpaid amount of
the claim and, if successful, the director or officer will be entitled to be
paid the expense of prosecuting the action to recover these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request for another entity, against any
liability asserted against the person or incurred by the person in any of these
capacities, and related expenses, whether or not we would have the power to
indemnify the person against the claim under the provisions of the Delaware
General Corporation Law.
POSSIBLE ANTI-TAKEOVER EFFECTS
Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors. In addition, provisions of Delaware
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law may hinder or delay an attempted takeover of our company other than through
negotiation with our board of directors. These provisions could discourage
attempts to acquire us or remove our management even if some or a majority of
our stockholders believe this action to be in their best interest, including
attempts that might result in our stockholders' receiving a premium over the
market price of their shares of our common stock.
Classified Board of Directors; Removal, Vacancies. Our certificate of
incorporation provides that our board of directors will be divided into three
classes of directors serving staggered three-year terms. The classification of
directors has the effect of making it more difficult for stockholders to change
the composition of our board of directors in a relatively short period of time.
Our certificate of incorporation provides that directors may be removed only for
cause. In addition, vacancies and newly created directorships resulting from any
increase in the size of our board of directors may be filled only by the
affirmative vote of a majority of the directors then in office, a quorum or by a
sole remaining director. These provisions would prevent stockholders from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Special Stockholders' Meetings. Our certificate of incorporation and
bylaws provide that, special meetings of stockholders, unless otherwise required
by statute, may be called only:
- by the board of directors or by our chairman or president; or
- by the holders of at least majority of our securities outstanding and
entitled to vote generally in the election of directors.
Section 203 of Delaware Law. In addition to these provisions of our
certificate of incorporation and bylaws, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of our company or reducing the price that certain investors might be
willing to pay in the future for shares of our common stock.
RIGHTS AGREEMENT
Our board of directors has adopted a rights plan. As a result, we issued
one preferred share purchase right for each outstanding share of common stock.
One preferred share purchase right will be issued for each additional share of
common stock that we issue, including shares issuable upon conversion of the
Notes and in connection with this offer. The rights become exercisable ten days
after a person or group acquires 15%, or 20% in the case of some of our
stockholders, or more of the outstanding common stock or commences or announces
a tender or exchange offer which would result in such ownership. Each right that
becomes exercisable entitles the registered holder to purchase one
one-thousandth of a share of junior participating preferred stock, par value
$.01 per share, at a price of $250.00 per one one-thousandth of a share, subject
to adjustment.
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If, after the rights become exercisable, we were to be acquired through a
merger or other business combination transaction or 50% or more of our assets or
earning power were sold, each right would permit the holder to purchase, for the
exercise price, common stock of the acquiring company having a market value of
twice the exercise price. In addition, if any person acquires 15%, or 20% in the
case of some of our stockholders, or more of our outstanding common stock, each
right not owned by such person would permit the purchase, for the exercise
price, of common stock having a market value of twice the exercise price.
The rights expire on May 20, 2008, unless earlier redeemed or exchanged by
us. The purchase price payable and the shares of preferred stock issuable upon
exercise of the rights are subject to adjustment as described in the rights
agreement. In addition, our board of directors retains the authority to redeem,
at $0.001 per right, or replace the rights with new rights at any time. Our
board of directors may not redeem the rights after a person or group acquires
15% or more of our outstanding common stock.
Shares of this preferred stock, when issued upon exercise of the rights,
will be non-redeemable and will rank junior to all series of any other class of
preferred stock. Each share of this preferred stock will be entitled to a
cumulative preferential quarterly dividend payment equal to the greater of
$250.00 per share or 1,000 times the dividend declared per share of common
stock. In the event of liquidation, the holders of shares of this preferred
stock will be entitled to a preferential liquidation payment equal to the
greater of $1,000 per share or 1,000 times the payment made per share of common
stock. Each share of this preferred stock will entitle the holder to 1,000
votes, voting together with the common stock. Finally, in the event of any
merger, consolidation or other transaction in which common stock is exchanged,
each share of this preferred stock will be entitled to receive 1,000 times the
amount received per share of common stock. These rights are subject to
anti-dilution adjustments.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
LEGAL MATTERS
Piper Marbury Rudnick & Wolfe LLP will provide us with an opinion as to
legal matters in connection with the common stock offered by this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 1998, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, as amended, with respect to the shares of common stock
to be issued in this offer. This prospectus, which is a part of the registration
statement, omits certain information contained in the registration statement and
reference is made to the registration statement and the exhibits and schedules
for further information with about us and the shares of our common stock. We are
subject to the reporting requirements of the Exchange Act and file reports and
other information with the SEC. You may read and copy any document we file at
the following SEC public reference rooms: 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, 14th Floor, Chicago, Illinois 60661. You may obtain
information on the operation of the public reference room in Washington, D.C. by
calling the SEC at 1-800-SEC-0330. Our SEC filings are also available from the
SEC's Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers that file
electronically. Our common stock is listed on the Nasdaq National Market under
the symbol "HGSI." You may read and copy our SEC filings and other information
at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" certain documents we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information in the documents incorporated
by reference is considered to be part of this prospectus, and information in
documents that we file later with the SEC will automatically update and
supersede information in this prospectus. We incorporate by reference the
documents listed below and any future filings we will make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Reports on Form 10-Q for the three months ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- Description of Common Stock contained in Form 8-A filed pursuant to the
Exchange Act; and
- Current Reports on Form 8-K filed on June 28, 1999 and December 6, 1999.
We will provide a copy of the documents we incorporate by reference, at no
cost, to any person who receives this prospectus. To request a copy of any or
all of these documents, you should write or telephone us at: 9410 Key West
Avenue, Rockville, Maryland 20850-33389, (301) 309-8504, Attention: Senior Vice
President and Chief Financial Officer.
-------------------------
We furnish our stockholders with annual reports that contain audited
financial statements and quarterly reports for the first three quarters of each
year that contain unaudited interim financial information.
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<PAGE> 37
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. The Letter of Transmittal and any other required documents should be
sent or delivered by each Note holder or the Note holder's broker, dealer,
commercial bank, trust company or other nominee to the Exchange Agent at the
address set forth below.
The Exchange Agent for the Offer is:
THE BANK OF NEW YORK
By Mail, Overnight or Hand Delivery:
The Bank of New York
101 Barclay Street
Floor 7 East
New York, New York 10286
Attention: Tolutope Adeyoju
By Facsimile Transmission:
(For Eligible Institutions Only)
(212) 815-6339
Confirm by Telephone:
(212) 815-3738
Questions and requests for assistance or additional copies of this
prospectus, the Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Information Agent or the Dealer Manager at their respective
telephone numbers and locations listed below. You may also contact your broker,
dealer, commercial bank, trust company or other nominee for assistance
concerning this offer.
The Information Agent for the Offer is:
GEORGESON SHAREHOLDER COMMUNICATIONS INC.
17 State Street
10th Floor
New York, New York 10004
Bankers and brokers call collect: (212) 440-9800
All others call toll-free: (800) 223-2064
The Dealer Manager for the Offer is:
CREDIT SUISSE FIRST BOSTON CORPORATION
Eleven Madison Avenue
New York, New York 10010-3629
Call Toll Free (800) 646-4543
