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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. employer identification number)
9410 Key West Avenue, Rockville, Md. 20850-3338
(address of principal executive offices and zip code )
(301) 309-8504
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding on January 31,
2000 was 51,517,828.
As of January 31, 2000, the aggregate market value of the common stock held by
non-affiliates of the registrant based on the closing price reported on the
National Association of Securities Dealers Automated Quotations System was
approximately $ 2,901,856,000.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Annual Report.
*Excludes 21,907,056 shares of common stock deemed to be held by officers and
directors, and stockholders whose ownership exceeds five percent of the shares
outstanding at January 31, 2000. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. Our
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this Annual Report on Form 10-K.
OVERVIEW
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 February
25, 2000, we had isolated and characterized thousands of full-length genes and
purified more than 375 potential proteins for the treatment of human disease. We
have recently expanded our use of antibodies and other technologies to increase
the opportunities created by our genomic database.
STRATEGY
We have a two-pronged commercialization strategy:
- Product Development and Commercialization. We use our internal
capabilities to research and develop proteins that can be produced on a
large scale and used as drugs to treat diseases. Generally, our strategy
is to develop potential products to a late stage of testing in the
laboratory or an early stage of studies in humans, and then to
collaborate with pharmaceutical or biotechnology companies for further
development and commercialization of our products.
- Corporate Collaborations. We increase our capabilities by collaborating
with pharmaceutical companies for the development and commercialization
of new products. We believe that these arrangements enable us to focus
our internal resources on a select number of product candidates while
still exploiting the broader product opportunities created by our
genomic database.
PRODUCTS IN DEVELOPMENT
We have produced three drugs that have been studied 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, ovarian, and lung
cancer in November 1998.
- Keratinocyte Growth Factor-2, known as KGF-2 or repifermin, is a protein
designed to speed the repair of damage to the cells lining the mouth,
throat, the gastrointestinal tract and related tissues and to heal
serious chronic wounds to the skin. Repifermin 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 repifermin for the
treatment of venous ulcers, a type of chronic wound, in February 1999.
We recently began the second phase of human studies of repifermin for
the treatment of mucositis, a type of inflammation caused by some
cancer treatments.
- 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
were conducted through Vascular Genetics Inc., a joint venture in which
we hold a substantial interest. These studies were halted in February
2000 in response to questions raised by the FDA. Three Phase II studies
of VEGF-2 were
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completed prior to the halt. A fourth Phase II study cannot be completed and
further studies cannot be initiated until approved by the FDA.
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, and could lead to improved treatment of immune
deficiency disorders and certain types of leukemia and lymphoma. We are
currently engaged in testing of BLyS in the laboratory.
INTELLECTUAL PROPERTY
We vigorously pursue patents to protect our intellectual property. As of
February 25, 2000, we had 116 issued U.S. patents covering 91 full-length human
genes and had filed U.S. patent applications covering more than 7,500 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 DEVELOPMENTS
Financing Transactions. In December 1999 we completed a private placement of
$200,000,000 aggregate principal amount of 5% Convertible Subordinated Notes Due
2006. We received net proceeds of approximately $193.8 million.
In December 1999 we offered the holders of our $125,000,000 aggregate
principal amount of 5 1/2 % Convertible Subordinated Notes Due 2006 $180 per
$1,000 principal amount of notes, payable in shares of our common stock, in
order to induce them to convert their notes into our common stock. An aggregate
of $118,285,000 principal amount of these notes were tendered for conversion and
not withdrawn. In connection with the offer, in January 2000, we issued
4,786,104 shares of our common stock (including 254,122 shares of our common
stock as an inducement) and paid approximately $200,000, representing accrued
interest and fractional shares. As a result of the offer, we recorded a one-time
charge to earnings of approximately $21.0 million, or $0.41 per share, based on
the weighted average shares outstanding during the month ended January 31, 2000.
An aggregate of $6,715,000 principal amount of 5 1/2% Convertible Subordinated
Notes Due 2006 remain outstanding.
In January 2000 our board of directors approved a two-for-one stock split,
payable in the form of a stock dividend. The stock dividend was paid on January
28, 2000 to stockholders of record as of January 14, 2000. Unless otherwise
noted, all share and per share data have been restated to give effect to the
stock split.
In February 2000 we completed a private placement of $225,000,000 aggregate
principal amount of 5% Convertible Subordinated Notes Due 2007. We received net
proceeds of approximately $217.5 million.
On March 2, 2000, we announced the call of our $200,000,000 aggregate
principal amount of 5% Convertible Subordinated Notes Due 2006 for redemption on
March 22, 2000. In lieu of redemption, holders may convert their notes into our
common stock at any time on or prior to March 21, 2000. Based upon the current
market price of our common stock, we expect that holders will convert their
notes into common stock rather than accept redemption. Holders of the notes
would receive $1,000 in cash per $1,000 principal amount of notes, plus accrued
interest, or may convert their notes into our common stock. The notes may be
converted into our common stock at a price of $71.625 per share, which is
equivalent to 13.9616 shares of common stock per $1,000 principal amount of
notes. In addition, we will make a "make-whole" payment of $150 per $1,000
principal amount of notes, whether redeemed or converted, which will result in a
one-time charge to earnings of $30 million, or $0.55 per share, based on the
weighted pro forma average shares outstanding during the month ended January 31,
2000.
In March 2000 we completed a private placement of $300,000,000 aggregate
principal of 3 3/4% Convertible Subordinated Notes Due 2007. We received net
proceeds of approximately $291.2 million.
VEGF-2. On February 29, 2000, Vascular Genetics announced that it will not
enroll or treat additional patients in its clinical trials of VEGF-2 in response
to an FDA hold on testing. Four clinical trials of VEGF-2 had been ongoing.
Vascular Genetics announced the completion of three of these clinical trials --
one for the treatment of heart disease and two trials for the treatment of
insufficient circulation in limbs -- because enrollment and treatment were
complete. In a fourth trial, a study of catheter-based delivery of VEGF-2 for
heart disease, Vascular Genetics enrolled and treated the majority of the
enrollment target. During the hold period, Vascular Genetics will provide the
FDA with results which are being compiled from the clinical trials, in addition
to providing measurements of the amount of the VEGF-2 protein in patient blood
samples using new assay methodology which has been developed. Vascular Genetics
believes that the existing data from the Phase I/II trials, together with the
results of the additional data analysis now in progress, should allow it to
address the FDA's questions and support the initiation of new trials. Vascular
Genetics must receive approval of the FDA before the fourth trial can be
completed or additional trials initiated. There are several factors that could
negatively affect the progress of these trials.
Cambridge Antibody Technology. On February 29, 2000, we announced an
agreement with Cambridge Antibody Technology plc. The ten-year agreement
provides us with rights to use CAT technology to develop and sell an unlimited
number of fully human antibodies for therapeutic and diagnostic purposes. We
also have rights to use CAT antibody technology for the use and sale of research
tools, for which we will pay to CAT a share of revenues received. We will also
pay CAT clinical development milestones and royalties based on product sales. We
and CAT also plan to combine our resources to develop and sell a significant
number of therapeutic antibody products. CAT has the right to select up to
twenty-four of our proprietary antigens for laboratory development. We have the
option to share clinical development costs and to share the profits equally with
CAT on up to eighteen such products. CAT has rights to develop six such products
on its own. We are entitled to clinical development milestones and royalty
payments on the products developed by CAT.
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Under the agreement, we will also buy 1,670,000 ordinary shares of CAT for
the sterling equivalent of approximately $55.0 million, giving us an initial
equity stake of approximately six percent in CAT. We paid an additional $12.0
million in licensing fees to CAT, which includes research support at CAT to help
them to develop our human antibody products. A portion of the equity investment
is subject to approval by CAT's shareholders. The equity investment is expected
to close in April 2000.
BUSINESS
GENOME SCIENCE
Genome science refers to the characterization of the entire set of genetic
information of any organism, including humans. All cells contain DNA, a complex
material containing all the genetic information necessary to govern a cell's
biological processes. In humans, approximately 3-5% of DNA consists of segments
called genes. The entire human genome is believed to contain at least 100,000
genes, of which only several thousand were known to have been identified at the
time we started our operations. Each gene consists of a linear sequence of
nucleotides, the basic structural units of DNA. Sequencing genes involves
determining the order of nucleotides in the gene, which permits identification
of the gene and the protein it produces.
Genes act as the fundamental blueprint for all the physiological attributes
of an individual. Each gene contains the information required to produce, or
"express," a gene product, generally a protein. Proteins are expressed by a gene
according to a set of genetic instructions encoded in the DNA and are the
principal determinants of an organism's characteristics. A typical cell of
higher animals, such as humans, contains thousands of different proteins
essential to cellular structure, growth and function. The aberrant expression
within a cell by even a single gene can severely alter the cell's normal
function and result in a disease condition.
When a gene is expressed in a cell, the order of different nucleotides in
the gene is copied into RNA in a duplication process called transcription. A
splicing process within the cell then removes the introns, or non-coding gene
segments, from the transcript, thereby creating a messenger RNA, called "mRNA,"
which contains only the exons, or coding regions, of the transcribed gene. The
mRNA then directs the production of a protein in a process called translation.
The order of nucleotides in the mRNA determines the protein that is made. By
isolating mRNA from cells, our scientists can analyze primarily the coding
regions of a gene. However, mRNA is unstable and therefore is difficult to
analyze directly. To sequence the mRNA, it is preferable to copy or transcribe
the mRNA back into DNA. This process produces a DNA copy, called "cDNA," which
contains only the exons, or coding regions, of the expressed gene. This process
avoids examination of the majority of human DNA, as approximately 95-97% of the
human genome consists of long stretches of nucleotides, which do not code for
protein. By focusing on the mRNA, we examine the portion of the genome which we
believe to be the most important, that is, the portion which makes protein.
Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of most drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens.
Proteins themselves can also be used as drugs. Two examples of protein drugs on
the market are erythropoietin, which stimulates the production of red blood
cells, and insulin, which regulates sugar metabolism. The identification of
genes that code for proteins that may be missing or defective can enable the
development of therapeutics for genetic diseases. In addition, identification of
genes that may predispose a person to a particular disease may enable the
development of diagnostic tests for the disease.
TECHNOLOGY AND RESEARCH
THE HUMAN GENE ANATOMY PROJECT
We have focused our gene discovery activity on our human gene anatomy
project. The goal of this project is to identify virtually all human genes, to
catalogue the relative abundance of expressed genes by organ, tissue and cell of
origin and to identify changes in gene expression associated with the normal
processes of development, differentiation and activation, as well as abnormal
changes in gene expression associated with the development of disease. We
believe our human gene anatomy project approach is substantially different from
most other genomic research projects which seek either to isolate a single copy
of each gene, determine the sequence of large regions of human chromosomes or
determine the chromosome location of genes responsible for inherited genetic
diseases. While these other approaches will provide information valuable for the
creation of some new gene-based pharmaceutical products, we believe that our
human gene anatomy project provides a much broader opportunity to discover genes
of potential medical use.
The first component of our human gene anatomy project is the isolation and
preparation of a set of cDNA libraries from most normal human tissues. A library
is comprised of cDNA derived from samples of mRNA expressed in a particular
tissue. Our more than 800 libraries reflect the relative abundance of the
various mRNAs expressed in each tissue. We isolate and purify individual cDNA
fragments from each library for sequence analysis to identify the structure and
possible function of genes. We sequence a portion of each cDNA, which we believe
is often sufficient to identify the expressed gene and represents the best
method for rapid gene discovery.
Our gene sequencing efforts now focus principally on comparing genes
expressed in normal, abnormal and developmental tissues. We use such information
to analyze changes in gene expression associated with development,
differentiation and disease processes, such as tumors of the prostate, breast,
colon and ovary. Additional areas of planned research include changes in gene
expression that occur during the processes of atherosclerosis, asthma,
emphysema, restenosis, osteoporosis, psoriasis, arthritis and a number of
neurological diseases.
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THE FUNCTIONAL GENOMICS PROGRAM
In our functional genomics program we use our knowledge of new genes to
identify and develop product opportunities. This program makes full use of the
power of modern computers, automated laboratory instruments and advances in
biology to discover new genes and to understand their potential medical
applications. The program begins with the discovery of new human genes and
extends to human clinical trials of the new drugs. We attribute our success in
translating genomic information into new drug candidates to this discovery
process. Our functional genomics program includes the following:
- Gene Isolation. Our scientists have isolated mRNAs from more than 95% of
all human genes. Of these, between 75% and 80% are fully functional as
they contain the instructions needed to produce the corresponding
protein.
- Secreted Protein Identification. Our scientists believe they have
identified approximately 9,000 newly discovered genes that encode for
signaling proteins. We believe that this collection represents the
majority of human signaling proteins and that only approximately 500 of
the newly discovered proteins are closely related to previously studied
proteins.
- Expression Profiling and Mapping. To analyze gene expression profiles in
a wide variety of tissues and cells, our scientists are aided by gene
chips and proprietary methods. They also use a variety of techniques to
map chromosome location, which generally allow our scientists to map any
gene within two or three weeks.
- Proteomics. The physical property of each signaling protein is
characterized in this step. The goal is to determine the molecular
weight, amino acid composition and amino acid sequence of the majority
of the newly discovered signaling proteins.
- Antibodies. Antibodies to signaling proteins can be used to determine
the location of protein in tissues and to block the effects of proteins.
We have initiated a program to produce antibodies to many of the newly
discovered secreted proteins.
- High-Throughput Biological Screening. We have developed a reliable
high-throughput robotic cloning method to produce small amounts of each
newly discovered signaling protein for biological studies. To date, more
than 9,000 proteins have been cloned into expression vectors.
- Biological Activity and Specificity. Our scientists are able to measure
changes in the expression of about 100 representative genes at a time
through the use of an automated, high-throughput biological screening
system. The activity of the proteins on a wide variety of different
types of cells is assessed in order to gain an understanding of their
specificity of action. We select only those proteins that are highly
specific in their activity for further development.
- Animal Models. The activity of proteins with high specificity of action
is tested with animal models of human disease. Where possible, the
results for each test protein are compared to the best available
therapy. Proteins demonstrated to be active in these models are then
selected for extensive preclinical toxicology and pharmacology studies.
The results of these studies form the basis of an Investigational New
Drug Application to the FDA.
- Human Clinical Trials and Manufacturing. Clinical study protocols are
developed in this step, based on extensive preclinical toxicology and
pharmacokinetic studies. Methods to measure blood and tissue levels of
each protein must also be developed, to enable measurements within human
subjects. Manufacturing methods for large-scale production of each
protein must be developed. We lease a newly constructed 84,000 square
foot process development and manufacturing facility to support Phase I,
II and III human clinical studies and the North American launch of novel
protein and gene products. A 43,000 square foot expansion of this
facility is currently under construction.
DEVELOPMENT OF PRODUCT OPPORTUNITIES
We created an advanced proprietary bioinformatics system to facilitate the
selection of genes with potential medical utility. Bioinformatics refers to the
use of computers to process, analyze, store and retrieve biological information.
We believe we have one of the largest sets of human gene sequences, and also use
our computer system to access publicly available gene sequences. Our high
capacity computer system has been designed for ease of use by research
scientists, who readily access the system through desktop computers. Our data
are also available to scientists at SmithKline Beecham, Takeda, Schering-Plough,
Synthelabo and Merck through bioinformatics systems created by us and SmithKline
Beecham. See "-- Collaborative Arrangements."
We believe that our proprietary bioinformatics system is an important asset
for the identification and creation of gene-based product opportunities. Our
bioinformatics system has several capabilities that facilitate identification of
genes with potential medical utility, including gene similarity detection,
sequence motif identification, sequence assembly and differential gene
expression analysis.
Our primary focus has progressed from identification of genes having
potential medical utility to the creation of proprietary product opportunities.
Specifically, we are now engaged in the identification and development of
product candidates, including the isolation and characterization of full-length
cDNAs, the purification of proteins encoded by cDNAs of interest, the creation
of cell lines that express specific receptors of interest, the mapping of genes
of interest, the creation of polyclonal and monoclonal antibodies, the testing
of the effects of purified proteins in cell and tissue-based in vitro assays,
the study of the effects of purified proteins in small laboratory animals, and
the initiation of human clinical trials.
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RESEARCH AND DEVELOPMENT
Our research and development efforts have been organized into the following
divisions:
Gene Discovery Division. Our Gene Discovery Division is responsible for
preparing biological samples, extracting and amplifying DNA, performing
sequencing reactions, managing production information and monitoring sequencing
quality. This division manages the operation of 39 automated sequencing machines
along with a variety of laboratory robots and other instruments. The division
has developed technologies that streamline our efforts to fully sequence genes
of interest in a high-throughput fashion.
Molecular Biology Division. Our Molecular Biology Division seeks to identify
and evaluate genes that may be useful for the creation of therapeutic protein
drugs, small molecule drugs, gene therapy, antisense treatments and diagnostic
products. This division is comprised of the following groups:
- Protein-Therapeutics Group. The Protein Therapeutics group identifies
and evaluates genes, which encode proteins, which may be useful as
therapeutic protein drugs or for gene therapy or antisense applications.
This group also identifies genes that may be useful for diagnostic
purposes. When comparative analysis indicates that a gene encodes a
potential therapeutic protein, this group isolates the corresponding
full-length cDNA, determines its pattern of tissue expression and its
entire coding sequence. We have commenced a program to identify from our
database what we believe to be full-length cDNAs likely to encode
potential therapeutic proteins. To date, we have identified what we
believe to be several thousand secreted proteins. We are expressing and
evaluating these proteins and assessing their activity using in vitro
and in vivo models covering different therapeutic areas.
In addition to efforts relating to the identification of potential
therapeutic proteins, the Protein Therapeutics group characterizes genes and
proteins that may serve as targets for small molecule drug discovery,
principally to support the work of our collaborators. The group isolates
full-length cDNAs, performs experiments to determine the tissue and cell
type in which the genes are expressed and determines the complete sequence
of the cDNA corresponding to each candidate gene. The group has identified
several hundred genes, which encode
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proteins that may be targets for small molecule drug screening. Full-length
cDNAs corresponding to many of these genes have been isolated and fully
sequenced, and tissue distribution and chromosomal location of most of these
full-length genes have been determined.
- Exploratory Research Group. Our Exploratory Research group focuses on
development and implementation of new technologies useful in the
identification of medically relevant gene candidates. Responsibilities
of this group include new methodologies for cDNA library construction,
chromosome mapping, optimization of full-length gene cloning and
development of new methods for gene analysis. This group is also
currently responsible for efforts in microbiology, including
construction and analysis of microbial genome libraries and selection of
candidate genes which may be useful in vaccine and immunotherapeutic
programs.
Bioinformatics Division. Our Bioinformatics Division develops systems for
high-volume data capture and analysis to support our research and collaborative
efforts. The division applies advanced sequence data analysis techniques to
identify candidate genes for biological screening and drug development.
Bioinformatics manages database systems for tracking samples and reagents during
experimental procedures and sample storage. The division supports collaborative
relationships with the delivery of software, databases, training and support.
The division also is implementing systems for clinical trial data management and
analysis, preparation of drug applications and process control of manufacturing
operations.
Protein Development Division. Our Protein Development Division provides
proteins in a form suitable for in vitro and in vivo testing. This division uses
bacterial, insect and mammalian expression systems that have been engineered to
express abundant amounts of proteins. Our therapeutic protein production
facilities include 15 bioreactors ranging in capacity from 2 to 100 liters. This
division also purifies potential therapeutic proteins, enzymes that may be
useful in the discovery of small molecule drugs and bacterial proteins that may
be useful as vaccine components. In addition, this division oversees the
contract production of cGMP materials by third parties for preclinical
qualification and Phase I and II clinical studies and the operation of a process
development and manufacturing facility, which we lease from the Maryland
Economic Development Corporation.
Through February 25, 2000, we have produced and purified more than 375 novel
human proteins in amounts sufficient to test for activity. In some cases, we
have also provided highly purified proteins to our collaborators for further
analysis.
Cell Biology Division. Our Cell Biology Division determines the activities
of purified therapeutic protein candidates on cells in tissue culture. This
division uses over 75 in vitro assays to evaluate biological activities of
therapeutic protein candidates, many of which are used to determine whether such
candidates have biological activities relevant to serious unmet medical needs.
Examples of such in vitro tests include assays that detect proteins that have an
anti-viral effect, proteins that are capable of prolonging the life of neurons
and of promoting neural cell growth, proteins that have anti-cancer activity and
proteins that affect the growth and differentiation of hematopoietic cells.
High-Throughput Screening Division. We established our High-Throughput
Screening Division in early 1998. This group is responsible for the development
and validation of high-throughput screens to assess the activity of our
therapeutic protein candidates. This division is also responsible for generation
of cell-based supernatants that currently represent several thousand individual
genes encoding potential secreted proteins. This group works closely with our
Gene Discovery and Bioinformatics Divisions in the development of laboratory
information management systems useful for instrumentation control and analysis
of test results.
Pharmacology Division. Our Pharmacology Division tests for in vitro and in
vivo activity of therapeutic protein candidates and is also responsible for
safety studies. This division is responsible for preclinical animal testing of
our therapeutic protein product candidates and employs a number of standard
assays for determining biological function. This division has also developed
several specialized assays to test biological function of specific therapeutic
proteins. We have recently expanded this division to increase our efforts to
develop therapeutic protein product candidates, and we expect to continue to
expand the division as necessary to support preclinical and clinical
development. We intend to utilize contract research organizations to conduct
toxicology and pathology tests on our leading therapeutic protein product
candidates.
Medical and Regulatory Affairs Divisions. Our Medical and Regulatory Affairs
Divisions manage all activities necessary for the preparation and submission of
regulatory documentation including investigational new drug applications,
biologics license applications and new drug applications. The divisions are
responsible for developing and implementing clinical and regulatory strategies
that will ensure submissions meet U.S. and international regulatory requirements
to initiate clinical trials and obtain marketing approvals for products
developed by us.
Our Quality Assurance staff, within Regulatory Affairs, is supporting the
establishment of current good manufacturing practices or cGMPs, for our leased
process development and manufacturing facility. The Quality Assurance staff
provides guidance and assists in creation and implementation of standard
operating procedures,
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assures cGMP training for facility employees and maintains documentation of
these activities. The Quality Assurance staff participates in cGMP audits of
contract vendors.
Investigational new drug applications are currently active for two
therapeutic protein product candidates -- MPIF-1 and KGF-2. Physicians and
investigators have been identified and consulted in connection with the
discovery of possible new drug indications and the optimization of clinical
trial designs related to investigating prevention of chemotherapy-induced damage
to myeloid precursors, treatment of surgical and dermal wounds and mucositis.
Clinical investigators have been selected from this group to conduct the
clinical trials sponsored by us. The data from these studies will be entered
into an electronic database and analyzed by our medical, regulatory, and
statistical staffs. Formal reports of clinical and non-clinical data then will
be submitted to the FDA. If these clinical trial data show that the
investigational drug is safe and effective for the specified use, we intend to
submit a biologics license or new drug application to the FDA for marketing
approval.
AREAS OF PRODUCT DEVELOPMENT
We believe that the genes we identify have the potential to be valuable for
the development of a wide range of healthcare products in some or all of the
following areas:
Therapeutic Proteins. Therapeutic proteins are recombinant human proteins
that in native or modified form exert medically useful physiologic or
pharmacologic activity. By discovering and isolating genes, we may be able to
cause the genes that code for therapeutic proteins to express those proteins.
Therapeutic proteins may be useful for the treatment of diseases, including
inflammatory and autoimmune diseases, neurodegenerative diseases,
cardio-pulmonary diseases and other diseases caused by insufficient or defective
proteins resulting from a missing or defective gene. Therapeutic proteins
currently in clinical use include interferon, insulin, human growth hormone,
tPA, DNAse, G-CSF, GM-CSF and erythropoietin.
We have been involved in conducting or have conducted preclinical and
clinical development studies on a number of potential therapeutic proteins,
including Myeloid Progenitor Inhibitory Factor-1, or MPIF-1, Keratinocyte Growth
Factor-2, or KGF-2, Vascular Endothelial Growth Factor-2, or VEGF-2, and B
Lymphocyte Stimulator, or BLyS.
MPIF-1 is a member of the chemokine family. We have shown that MPIF-1 in in
vitro and in vivo studies inhibits the differentiation and growth of bone marrow
cells. Myeloid progenitor cells are destroyed by many forms of cancer
chemotherapy resulting in severe leukopenia, thrombocytopenia and anemia. By
preventing the growth of myeloid progenitor cells during aggressive cancer
chemotherapy, it may be possible to reduce the destruction of these cells and
allow the more rapid repopulation of red and white blood cells in the
circulation. This, in turn, may reduce the incidence of serious infection,
anemia and coagulation disorders associated with cancer chemotherapy. We
initiated MPIF-1 clinical trials in humans. A Phase I study to evaluate MPIF-1
safety in healthy volunteers was completed in 1998. Two Phase II studies have
begun to evaluate MPIF-1 in shielding myeloid progenitor cells from the harmful
effects of chemotherapy. These studies will test various doses of MPIF-1 in
cancer patients undergoing adjuvant chemotherapy treatment for various cancers.
Trials are being conducted at leading cancer research centers in the U.S.
KGF-2, also known as repifermin, is a member of the Fibroblast Growth Factor
superfamily. We have shown in in vivo tests that repifermin stimulates the
growth of epithelial cells. The protein has potential for use in the topical
treatment of skin ulcers, burns, surgical and other wounds, and possibly other
conditions affecting epithelial cells. In addition, repifermin may be useful in
the treatment of mucositis, frequently a toxicity of cancer chemotherapy, and/or
acute renal failure. Two Phase I studies to evaluate the safety of topical and
systematic administration of repifermin in healthy volunteers were completed in
1998. Phase II studies were initiated in February 1999 to evaluate repifermin in
chronic wounds. These studies will test various doses of repifermin in patients
with active disease. Phase II studies have also been initiated to evaluate
repifermin in the treatment of mucositis. The trials are being conducted at
leading research centers in the U.S.
VEGF-2 is a member of the vascular endothelial/platelet-derived growth
factor superfamily. We have shown in in vitro studies that VEGF-2 promotes the
growth of certain subsets of vascular endothelial cells. In in vivo animal
models performed in collaboration with Dr. Jeffrey Isner at the St. Elizabeth's
Medical Center of Boston, VEGF-2 protein and DNA encoding the VEGF-2 gene had
been shown to reduce the severity of ischemia in a rabbit hind limb ischemia
model. Vascular Genetics has initiated clinical trials on the use of VEGF-2 DNA
in the treatment of critical limb ischemia and coronary artery disease. These
studies were halted in February 2000 in response to questions raised by the FDA.
Three Phase II studies of VEGF-2 were completed prior to the halt. A fourth
Phase II study cannot be completed and further studies cannot be initiated until
approved by the FDA.
BLyS is a novel immune stimulant. We have shown in in vitro studies that
BLyS stimulates B lymphocytes to produce high levels of antibodies. BLyS has the
potential to improve treatments for certain immune deficiency syndromes and
certain forms of leukemia and lymphoma. In addition, BLyS could boost immune
systems depleted
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by organ transplantation, chemotherapy and bone-marrow transplantation. BLyS
could also improve the performance of traditional vaccines.
In June 1996, we obtained from SmithKline Beecham the right to designate a
limited number of therapeutic protein candidates at any one time for exclusive
development and commercialization by us, with the right to add additional
proteins as products enter clinical trials, are outlicensed or dropped.
Schering-Plough and SmithKline Beecham have certain co-development rights with
respect to these product candidates.
None of our therapeutic protein product candidates have progressed beyond
preclinical testing or the relatively early stages of human clinical testing.
Accordingly, the results of testing to date may not be indicative of results
that will be obtained in further preclinical trials or in clinical trials, as
applicable. As further results of tests are received, we may abandon particular
projects. Additionally, there can be no assurance that clinical trials as to any
particular product candidate, if commenced, will be successful, or that any
product can be successfully commercialized.
Small Molecule Drugs. We believe that more complete knowledge of genes and
the proteins they express will enable pharmaceutical companies to design and
screen pharmaceutical products in a more efficient fashion by providing logical
specific targets for discovering drugs. The discovery of new drugs often
involves screening a large family of synthetic and natural products to determine
their impact on proteins expressed by genes. Increasingly, automated biochemical
assays that test the ability of proteins to bind to and modify the activity of
purified proteins are used to test the efficacy and selectivity of new drugs. A
drug's selectivity is its ability to affect only the desired protein targets and
not other proteins expressed in the human body. The undesired binding of a drug
to other proteins not detected by a screening assay can result in toxicity or
other undesirable side effects. We believe that the genes we discover may
contribute to screening assays by permitting more complete sets of target
proteins to be assembled for an assay. SmithKline Beecham and our other
collaboration partners are currently using proteins expressed by genes
identified by us in a number of screening assays used to identify new drugs.
Diagnostics. We believe that the genetic data obtained by us could lead to
the development of diagnostic tests for diseases. These diagnostic tests would
likely be focused on the following four areas:
- The comparative analysis of genes expressed during the progression of
tissues from normal to fully diseased states may permit more accurate
staging of diseases, thereby facilitating the diagnosis and treatment of
the disease. Proteins expressed by "marker" genes associated with a
specific disease can be a starting point in the synthesis of antibodies,
the principal components in many diagnostic systems.
- Our genetic data may enable the development of methods to determine
individual predisposition to disease.
- Tests could be designed to detect inherited diseases in fetal cells.
- We believe that the genetic data obtained from the sequencing of
disease-causing microorganisms may allow for the rapid determination of
the presence and activity of a particular microorganism in an infected
person.
The development of diagnostic tests based on human genes identified by us is
part of SmithKline Beecham's field under our collaboration agreements with
SmithKline Beecham.
Antimicrobial Agents and Vaccines. Analysis of the total genome of a
microorganism should provide a complete picture of all genes encoded by the
microorganism. With this information, we believe it may be possible to choose
protein candidates that may be useful as vaccine components or antigens required
for the development of immunotherapeutics. We also believe that a
high-throughput approach of gene identification may identify new genes capable
of producing antibiotics and other useful secondary metabolites.
We, either alone or in collaboration with The Institute for Genomic
Research, have completed sequencing pathogenicity islands of Escherichia coli
and the majority of the DNA comprising the genome of the bacteria of the
Staphylococcus aureus, Streptococcus pneumoniae, Enterococcus faecalis,
Helicobacter pylori, Borrelia burgdorferi, Haemophilus influenzae, Mycoplasma
genitalium and Methanococcus jannaschii. We have entered into agreements with
MedImmune, Hoffmann-La Roche and Pharmacia & Upjohn, to create vaccines,
immunotherapeutic products, and new anti-infectives and antibiotics based on the
genomes of many of these organisms. See "-- Collaborative Arrangements." We have
filed patent applications on these genomes.
Gene Therapy. We believe that our gene discovery technology may identify
genes that can be introduced into the body through the use of gene therapy
techniques. Many diseases result when specific proteins are produced in
inappropriate quantities, in a defective manner, or not at all. Gene therapy is
a novel approach to the treatment of disease in which genes are inserted into a
patient's cells for the purpose of inducing these cells to produce therapeutic
proteins or to replace defective or missing genes. In other applications, we
believe that gene therapy may induce cells to secrete proteins that enhance the
immune system's ability to recognize and attack a specific disease. Gene therapy
might also allow localized delivery of proteins that cannot reach the
appropriate site through
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conventional methods of administration. There are currently no gene therapy
products on the market, although a number are undergoing clinical trials. We
have entered into agreements with Schering-Plough, Vascular Genetics, Transgene
and Vical granting them the right to use our technologies for gene therapy. See
"-- Collaborative Arrangements."
COLLABORATIVE ARRANGEMENTS
Agreements with SmithKline Beecham. In May 1993, we entered into
collaboration agreements with SmithKline Beecham pursuant to which we granted
SmithKline Beecham certain exclusive rights to develop and commercialize
therapeutic and diagnostic products within SmithKline Beecham's field based on
human genes discovered by us. SmithKline Beecham's field is the field of human
and animal healthcare, including gene therapy vaccines, but excluding other gene
therapy products, antisense products and the use of genes for synthesizing drugs
that were known at the time our SmithKline Beecham collaboration agreements were
originally executed. Pursuant to these collaboration agreements, SmithKline
Beecham has paid to us an aggregate of $125 million, of which $55 million was
allocated to the purchase of an aggregate of 2,703,476 shares of our common
stock.
In June 1996, we amended our collaboration agreements with SmithKline
Beecham. This amendment allowed us and SmithKline Beecham together to enter into
collaboration agreements with additional pharmaceutical companies in SmithKline
Beecham's field, other than diagnostics and animal healthcare in which
SmithKline Beecham has generally retained exclusive rights. In addition, the
amendment provides that we and SmithKline Beecham can independently designate
potential therapeutic proteins for exclusive development and commercialization
provided that the designating entity is the first among us, SmithKline Beecham
and our additional collaboration partners to select the protein and certain
research requirements are met prior to designation. Under the amendment, we can
designate six therapeutic protein candidates for our exclusive development and
commercialization at any one time. Subject to certain limitations, we may
substitute additional proteins for any of the six proteins designated by us:
- which have been licensed by us to third parties in accordance with the
SmithKline Beecham amendment;
- which are the subject of clinical studies by us; or
- the rights to which we have surrendered.
SmithKline Beecham's right to select therapeutic protein candidates during
the initial research term of the SmithKline Beecham collaboration agreements is
not limited.
In addition, the amendment provides that each of us and SmithKline Beecham
may independently:
- research, develop and commercialize antibody products directed against
antigens derived from the human genome database created by us; and
- identify and use novel molecular targets derived from our human genome
database to discover and develop small molecule pharmaceutical products,
provided that we could not initiate screening of such targets before
July 1999 and cannot use certain targets subject to agreements with
third parties, subject to certain other restrictions.
The amendment restricts us from entering into collaborations with third
parties in SmithKline Beecham's field other than additional collaboration
partners and Takeda pursuant to our collaboration agreements with SmithKline
Beecham:
- during the initial research term, except with repsect to products for
which we have exclusive development right; and
- during the initial research term and for a period thereafter with
respect to certain products which are the subject of research plans
submitted by SmithKline Beecham or an additional collaboration partner
or Takeda prior to the expiration of the initial research term.
The amendment provides that we and SmithKline Beecham will share equally in
any license fees and product development milestone payments paid under
additional collaboration partner agreements, and that we will receive all
royalties and research support payments under such additional collaboration
partner agreements. Our collaboration agreements with SmithKline Beecham provide
for payments to us of royalties on net sales of products based on our patents or
technologies within SmithKline Beecham's field sold by SmithKline Beecham, or
its licensees, and milestone payments in connection with the development of
these products. We have an option to co-promote those products sold by
SmithKline Beecham, on a country-by-country basis, in the U.S., Canada, Mexico
and Europe, subject to certain limitations as to rights granted to Takeda and
other parties. If we develop and market or outlicense a product in the
SmithKline Beecham field pursuant to our rights under our agreements with
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SmithKline Beecham, SmithKline Beecham will generally be entitled to royalties
or to share in milestone payments and license fees received by us from licensees
with respect to such products.
Our additional collaboration partner agreement with Schering-Plough includes
an option for Schering-Plough to co-develop and co-commercialize up to two
products in SmithKline Beecham's field to which we have exclusive development
and commercialization rights under our collaboration agreements with SmithKline
Beecham. Our collaboration agreements with SmithKline Beecham include an option
for SmithKline Beecham to co-develop and co-commercialize products in SmithKline
Beecham's field to which we have exclusive development and commercialization
rights under our collaboration agreements with SmithKline Beecham and for which
Schering-Plough has not exercised its option to co-develop and co-commercialize.
SmithKline Beecham will also be entitled to royalties on and an option to
co-promote products outside SmithKline Beecham's field sold by us which are
based on or incorporate patents or information developed by SmithKline Beecham
based on our human gene technology.
The initial research term under our collaboration agreements with SmithKline
Beecham continues through June 2001. After expiration of the initial research
term, we will have all rights to our human gene technology, except that
SmithKline Beecham will retain rights to our human gene technology pursuant to
research plans meeting certain specified criteria submitted prior to expiration
of the initial term, Takeda will retain rights granted to it under a license
agreement prior to expiration of the initial research term and additional
collaboration partners will retain rights granted to them under additional
collaboration partner agreements. See "-- Other Collaboration Agreements in the
SmithKline Beecham Field." SmithKline Beecham has the right to extend the
research term for up to five additional years by making certain payments, which
would extend the time for submitting research plans as to therapeutic products
other than antibody products and therapeutic protein products.
We have agreed that we will make available 35 gene sequencers and related
personnel and reagents to sequence genes at the direction of a research
committee comprised of representatives of SmithKline Beecham and us.
In July 1997, we further amended our collaboration agreements with
SmithKline Beecham with respect to the field of human diagnostic products. This
amendment streamlined the procedures for outlicense by SmithKline Beecham of
diagnostic products based on our technology and specified a royalty on
diagnostic products sold by SmithKline Beecham or its licensees. The agreement
also permits us to develop and market diagnostic tests that support our own
therapeutic products, provided SmithKline Beecham is not already developing and
marketing such a diagnostic test. The agreement provides for an initial research
term that continues through June 2001, and may be extended by SmithKline Beecham
for up to five additional years by making certain payments and provided that the
amended agreement is also extended for a commensurate period of time.
Other Collaboration Agreements in the SmithKline Beecham Field. In June and
July 1996, we and SmithKline Beecham entered into additional collaboration
partner agreements with Schering-Plough, Sanofi-Synthelabo and Merck. Each of
these agreements provides the additional collaboration partner the rights and
licenses to access and use our human gene technology, as well as biological
information developed by us and SmithKline Beecham prior to, and by us after the
effective date of such agreement, to discover, develop and commercialize
products based upon or derived from our human gene technology in SmithKline
Beecham's field, other than diagnostics and animal healthcare. Each additional
collaboration partner may also designate, and receive exclusive license rights
under our and SmithKline Beecham's patents and technology to, potential
therapeutic protein products for its exclusive development and
commercialization, subject, in certain cases, to restrictions as to the number
of therapeutic protein candidates that can be claimed, and subject to
achievement of certain research requirements prior to such designation. Each of
these additional collaboration partners is obligated to pay license fees,
research payments, and milestone payments in connection with development of
products under the agreement and royalties. Each of these additional
collaboration partner agreements is for an initial research term expiring in
June 2001. Each additional collaboration partner has the right to extend the
term for up to five additional years by making certain payments. We cannot enter
into additional agreements similar to these agreements without the consent of
SmithKline Beecham, Takeda and certain of the additional collaboration partners.
We will be entitled to one-half of all license fees and milestone payments
and to all royalties due from each additional collaboration partner. In
addition, each additional collaboration partner will make research payments
directly to us for the duration of the initial research term, which continues
through June 2001. Aggregate license fees and research payments due to us and
SmithKline Beecham under these additional collaboration partner agreements are
$140 million during the initial research term, of which we are entitled to $87.5
million, payable in equal installments, over a five-year period. As of December
31, 1999, we had received $69.0 million of this amount.
Our additional collaboration partner agreement with Schering-Plough includes
an option for Schering-Plough to co-develop and co-commercialize up to two of
our products in SmithKline Beecham's field to which we have exclusive
development and commercialization rights under our agreements with SmithKline
Beecham.
SmithKline Beecham and Takeda entered into a license agreement relating to
the development and sale of products in SmithKline Beecham's field based upon
rights licensed from us. We will be entitled to all royalty
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payments and one-half of the milestone payments due from Takeda to SmithKline
Beecham under this license agreement on sales of products developed by Takeda
under the agreement. In addition, at the same time that SmithKline Beecham and
Takeda entered into their license agreement, we and Takeda entered into an
option and license agreement pursuant to which we granted Takeda an exclusive
option to license rights under our patents and technology in the field of human
healthcare, other than gene therapy, antisense and diagnostics, to make and sell
a limited number of products in Japan. This number is equal to the number of
collaboration partners other than SmithKline Beecham and Takeda with which we
enter into collaboration agreements in SmithKline Beecham's field. In
consideration of the grant of the option, Takeda paid us $5 million and agreed
to pay to us royalties based on the sale of Takeda products covered by the
option and license agreement and certain milestone payments. The option period
terminates three years following expiration of the initial research term under
our collaboration agreements with SmithKline Beecham. Takeda has exercised one
of its options with respect to MPIF-1.
Collaboration Agreements Outside the SmithKline Beecham Field. We have
entered into collaboration agreements with respect to the development of
products based on our gene discovery research outside of SmithKline Beecham's
field. These collaboration agreements, which generally provide for milestone
payments and royalties and in most cases up front license fees and/or research
payments, include the following:
- A collaboration and license agreement with MedImmune, entered into in
July 1995 and amended in March and December 1997, with respect to the
development of drugs based upon certain infectious agents sequenced by
us or TIGR or as to which we have licensed the rights. Programs under
the agreement with MedImmune include the creation of vaccines and
immunotherapeutics for non-encapsulated Haemophilus influenzae,
Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori and
Borrelia burgdorferi.
- A license agreement with Roche, entered into in March 1996, under which
we are responsible for sequencing and assembling the genome of
Streptococcus pneumoniae, a bacterial pathogen responsible for severe
respiratory and other infections and under which Roche received a
non-exclusive license to use this information to identify potential new
anti-infectives and antibiotics; a similar agreement was entered into in
1997 with respect to the genome of Enterococcus faecalis, a bacterial
pathogen which is a major component of hospital-acquired infections.
- A collaboration and license agreement with Schering-Plough relating to
the field of human gene therapy, including gene therapy vaccines to the
extent we have the right to do so, under which we granted
Schering-Plough a non-exclusive license to use our human gene technology
to conduct research and an option to obtain an exclusive license to
specific genes in the field of gene therapy.
- An agreement entered into in October 1996 with Pharmacia whereby we
granted to Pharmacia:
- a nonexclusive license to conduct research and to make, use and sell
products based on genes of Staphylococcus aureus and the pathogenicity
islands of Escherichia coli sequenced by us,
- the right to obtain an exclusive license to certain products, and
- the right to negotiate an exclusive license on certain microbial
genomes on which we desire to grant an exclusive license.
- An agreement entered into in November 1996 with OraVax Merieux Co., with
respect to an exclusive license granted by MedImmune and us with respect
to the use of our and MedImmune's technology for a Helicobacter pylori
vaccine.
- An agreement entered into in November 1997 with Vascular Genetics
whereby we granted to Vascular Genetics.
- an exclusive license in the field of gene therapy for our VEGF-2 gene,
and
- an option for up to two additional genes for use as gene therapy drugs
to treat vascular disease. As of December 31, 1999, we held a
significant minority equity interest in Vascular Genetics of
approximately 32%. Other initial investors included St. Elizabeth's
Medical Center of Boston, Inc., CATO Holding Company and Jeffrey M.
Isner, M.D.
- A collaboration and license agreement with Transgene, entered into in
February 1998, relating to the field of human gene therapy, including
gene therapy vaccines to the extent we have the right to do so, under
which we granted Transgene the right to license exclusively up to 10
genes. We obtained a 10% equity interest in Transgene and certain
co-development and co-marketing rights.
- A collaboration and license agreement with Abgenix, entered into in
November 1999, relating to the field of
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fully human antibody drug candidates, where we licensed technology from
Abgenix that we and Abgenix will use to generate fully human antibody
drug candidates.
- A license agreement with Vical Incorporated, entered into in February
2000, relating to the field of gene therapy, where we licensed
technology from Vical and granted Vical the right to license up to three
genes.
- An antibody license agreement with Cambridge Antibody Technology,
entered into in February 2000, relating to the field of fully human
antibody drug candidates, where we licensed technology that we and
Cambridge Antibody Technology will use to generate fully human antibody
drug candidates. We will also invest approximately $55.0 million in
exchange for 1,670,000 of its ordinary shares, subject to approval in
part by their shareholders.
We have entered into numerous material transfer agreements with many
academic institutions covering more than 1,000 gene sequences, cDNAs and
proteins. We are continuing to negotiate additional material transfer and
license agreements. The purpose of these agreements is to expand research and
development relating to the our gene information by providing academic
researchers with proprietary gene sequence information and related materials
which enable them to explore the biological activity and potential medical
utility of newly discovered human genes. Most of these material transfer
agreements grant us a license, with established royalty rates, to any invention
resulting from the use of gene sequence information or related materials
provided by us. A relatively small number of the material transfer agreements
signed by us provide for an option to license any invention resulting from the
use of our gene sequencing information. All our material transfer agreements
with academic institutions provide for a license or option to exclusive rights
for inventions resulting from use of our information. In addition, TIGR,
SmithKline Beecham and Takeda have also entered into material transfer
agreements with academic institutions. We are also entitled to rights with
respect to inventions resulting from the use of sequence information and related
materials under such arrangements.
Agreements with TIGR. In October 1992, we entered into a research services
agreement and an intellectual property agreement with The Institute for Genomic
Research, a not-for-profit research institute. TIGR initially performed most of
the gene sequencing and made the sequences available to us. We subsequently
developed our own gene sequencing capability.
Pursuant to these agreements, we entered into a lease funding agreement in
March 1993 and a subsequent agreement in April 1993, whereby we committed to
provide an aggregate of approximately $85 million to TIGR over a ten-year
period, ending September 2002. Of this amount, $70 million consisted of a
research grant and equipment funding for TIGR's scientific research relating to
determining human genes and their functions and uses. We paid approximately $47
million pursuant to these agreements.
Under the research services agreement and the intellectual property
agreement, TIGR was obligated to disclose to us all significant developments
relating to information or inventions discovered at TIGR, and we owned, on a
royalty-free basis, all TIGR's interest in inventions and patent rights arising
out of TIGR's research during the term of the agreement, including rights
arising from research funded by third parties, except for research funded by
certain governmental and not-for-profit organizations as to which we have been
granted a royalty-bearing, worldwide, perpetual, exclusive license, subject to a
non-exclusive royalty-free license retained by such organization.
In June 1997, TIGR agreed to an early conclusion of our relationship.
Accordingly, we terminated the prior agreements and entered into a new agreement
whereby we ceased all future payments to TIGR in return for relinquishing rights
to future work done by TIGR. We retained rights to inventions and patents
arising out of TIGR's research prior to June 1997. TIGR agreed not to enter into
commercial agreements for four years on selected therapeutic proteins and
associated diagnostic tests in development by us, and further agreed to share
with us any proceeds from all commercial arrangements relating to other human
therapeutic proteins completed prior to June 1999. In exchange for this limited
non-compete agreement, we granted to TIGR and its non-commercial collaborators a
research license for our prior work. The new agreement also eliminated certain
restrictions that prevented TIGR from publishing sequence information. This
agreement relieved us of a funding obligation of more than $38 million over the
remaining life of the original agreements.
PATENTS AND PROPRIETARY RIGHTS
Our commercial success is dependent in part on our ability to obtain patent
protection on genes we discover. We apply for patent protection for genes we
identify by partial sequencing and, subsequently, for those genes which we fully
sequence. However, there is substantial uncertainty as to the patentability of
genes based on partial sequences. Even if patent protection is afforded for such
sequences, it may not provide effective marketing exclusivity. Our business
might be enhanced by obtaining patent protection based on partial gene
sequences, but we do not believe that our commercial success will be materially
dependent on our ability to do so. We have isolated and obtained full-length
sequence information for many of the genes that we or our collaborators intend
to develop further and
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have filed, and continue to file, for patent protection based on such
full-length sequences. However, we do not expect to isolate and fully sequence a
significant portion of the partial gene sequences we discover. See "--
Technology and Research."
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.
As of February 25, 2000, we had filed U.S. patent applications with respect
to more than 7,500 human genes and their corresponding proteins. We have also
filed U.S. patent applications with respect to all or portions of the genomes of
eight infectious microorganisms and one non-infectious microorganism. As of
February 25, 2000, we had 116 issued U.S. patents covering 91 full-length human
genes. The remaining applications covering full-length genes and their
corresponding proteins may not result in the issuance of any patents. 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. Moreover,
in certain instances, we will be dependent upon our collaborators to file and
prosecute patent applications.
We also 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
preclinical or clinical 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 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.
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 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. Moreover, the termination of our
agreement with TIGR in April 1997 eliminated limitations on publication of
sequences in the TIGR database. 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. See "-- Collaborative Arrangements -- Agreements with TIGR."
Other companies or institutions may have filed patent applications or may
file patent applications in the future which attempt to patent genes similar to
those covered in our 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.
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 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.
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
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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 its patent.
In addition, we identified a small percentage of sequences covered by our
patents 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 the 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 (1) lack of action on the part of the holder of the patent rights to
achieve practical application of the invention or (2) a need to alleviate public
health or safety concerns not reasonably satisfied by the holder of the patent
rights.
The enactment of the legislation implementing the General Agreement on Trade
and Tariffs has resulted in certain changes to U.S. patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of U.S. patents will
commence on the date of issuance and terminate twenty years from the earliest
effective filing date of the application. Because the time from filing to
issuance of patent applications is often more than three years, a twenty-year
period from the effective date of filing may result in a substantially shortened
term of patent protection, which may adversely affect our patent position.
We rely on trade secret protection to protect our confidential and
proprietary information. We believe 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. We have taken security measures to
protect our data and continue to explore ways to further enhance the security
for our data. However, we may not be able to meaningfully protect our trade
secrets. 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. TIGR has developed or possesses specific
trade secrets important to our business, including information about sequencing
procedures and genes identified by TIGR. Although TIGR also enters into
confidentiality agreements with its employees, there is an additional risk that
such trade secrets cannot be meaningfully protected.
COMPETITION
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 other 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.
Research to identify genes is also being conducted by various institutes and
U.S. and foreign government-financed entities, including British, French, German
and Japanese efforts, as well as numerous smaller laboratories associated with
universities or other not-for-profit entities. In addition, a number of
pharmaceutical and biotechnology companies and government-financed programs are
engaged or have announced the intention to engage in areas of human genome
research similar to or competitive with our focus on gene discovery, and other
companies are likely to enter the field.
The gene sequencing machines we use are commercially available and are
currently being utilized by many other companies, in some cases for business
purposes that compete with our business. In addition, a number of other
companies have announced plans to engage in gene discovery and could acquire
similar machines and develop procedures for automated sequencing of genes.
Although we believe that our large-scale, automated processes and lead time
provide us with a competitive advantage, any one of these companies or other
entities may discover and establish a patent position in one or more genes that
we have identified and might have designated or considered designating as a
product candidate. Any potential products based on genes we identify will face
competition both from companies developing gene-based products and from
companies developing other forms of treatment for diseases that may be caused
by, or related to, genes we identify.
We face significant competition in our product development and
commercialization efforts. In particular, although we believe that there are
significant product development opportunities for both us and our collaborators
based on our gene database, competition exists among us and our collaborators to
develop and commercialize products. In addition, our competitors may succeed in
developing products before we do, obtaining approvals from the FDA or other
regulatory agencies for such products more rapidly than we do, or developing
products that are more effective than those proposed to be developed by us.
Similarly, while we will share any success of our
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collaborators in identifying and commercializing products through royalties and
co-payment arrangements, our collaborators face similar competition from other
competitors who may succeed in developing products more quickly, or developing
products that are more effective, than those developed by our collaborators.
Certain of these competitors may be further advanced than us in developing
potential products. Research and development by others may render the products
that we or our collaborators may seek to develop obsolete or uneconomical or
result in treatments, cures or diagnostic tests superior to any therapy or
diagnostic test developed by us or our collaborators. In addition, therapies or
diagnostic tests developed by us or our collaborators may not be preferred to
any existing or newly developed technologies.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products. New drugs and biological drugs are
subject to regulation under the Federal Food, Drug, and Cosmetic Act. In
addition to being subject to certain provisions of that Act, biologics are also
regulated under the Public Health Service Act. We believe that the
pharmaceutical products developed by us or our collaborators will be regulated
either as biological products or as new drugs. Both statutes and the regulations
promulgated thereunder govern, among other things, the testing, manufacturing,
distribution, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research is responsible for the
regulation of biologics, and the Center for Drug Evaluation and Research is
responsible for the regulation of new drugs.
In addition, any gene therapy products developed by us will require
regulatory approvals prior to clinical trials and additional regulatory
approvals prior to commercialization. New human gene therapy products are
subject to extensive regulation by the FDA, and the Center for Biological
Evaluation and Research, in particular, and comparable agencies in other
countries. Currently, each clinical protocol is reviewed by the FDA and, in some
instances, the National Institute for Health, on a case-by-case basis. The FDA
and the National Institute for Health have published guidance documents with
respect to the development and submission of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time-consuming
process. 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. Generally, in order to gain
FDA pre-market approval, a developer first must conduct preclinical studies in
the laboratory and in animal model systems to gain preliminary information on an
agent's efficacy and to identify any safety problems. The results of these
studies are submitted as a part of an investigational new drug application,
which the FDA must review before human clinical trials of an investigational
drug can start. The investigational new drug application includes a detailed
description of the initial clinical investigation to be undertaken.
Preclinical studies can take several years to complete, and there is no
assurance that an investigational new drug application based on such studies
will ever become effective so as to permit clinical testing to begin. A 30-day
waiting period after the receipt of each investigational new drug application is
required by the FDA prior to the commencement of initial clinical testing. If
the FDA has not commented on or questioned the investigational new drug
application within this 30-day period, initial clinical studies may begin. If
the FDA has comments or questions, it places the studies on clinical hold and
the questions must be answered to the satisfaction of the FDA before the initial
clinical testing may begin.
In order to commercialize pharmaceutical products, we or one of our
collaborators must sponsor and file an investigational new drug application and
be responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy and, for a biologic product, the potency, which are
necessary to obtain FDA approval of any such products. For our or
collaborator-sponsored investigational new drug applications, we or our
collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the investigational new drug application. Clinical trials
are normally done in three phases, although the phases may overlap. Phase I
trials are concerned primarily with the safety and preliminary effectiveness of
the drug, involve fewer than 100 subjects, and may take from six months to over
a year to complete. Phase II exploratory trials normally involve a few hundred
patients, but in some cases may involve fewer. Phase II trials are designed
primarily to demonstrate effectiveness in treating or diagnosing the disease or
condition for which the drug is intended, although short-term side effects and
risks in people whose health is impaired may also be examined. Phase III
confirmatory trials are expanded clinical trials with larger numbers of patients
which are intended to gather the additional information for proper dosage and
labeling of the drug and demonstrate its safety and effectiveness. Clinical
trials generally take two to five years, but may take longer, to complete.
Recent regulations promulgated by the FDA may shorten the time periods and
reduce the number of patients required to be tested in the case of certain
life-threatening diseases, which lack available alternative treatments.
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The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension, or termination of clinical
trials if an unwarranted risk is presented to patients. If the FDA imposes a
clinical hold, clinical trials may not recommence without prior FDA
authorization and then only under terms authorized by the FDA. The
investigational new drug application process can thus result in substantial
delay and expense. Human gene therapy products (which is one of the areas in
which we are seeking to develop products) are a new category of therapeutics.
Because this is a relatively new and expanding area of novel therapeutic
interventions, there can be no assurance as to the length of the clinical trial
period, the number of patients the FDA will require to be enrolled in the
clinical trials in order to establish the safety, efficacy and potency of human
gene therapy products, or that the clinical data generated in these studies will
be acceptable to the FDA to support marketing approval.
After completion of clinical trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
the Center for Biological Evaluation and Research will require the submission
and approval, depending on the type of biologic, of either a biologic license
application or, in some cases, a product license application and an
establishment license application before commercial marketing of the biologic.
If the product is classified as a new drug, we must file a new drug application
with the Center for Drug Evaluation and Research and receive approval before
commercial marketing of the drug. The new drug application or biologic license
applications must include results of product development, preclinical studies,
clinical trials and manufacturing information. The testing and approval
processes require substantial time and effort and there can be no assurance that
the FDA will accept the new drug application or biologic license applications
for filing and, even if filed, that any approval will be granted on a timely
basis, if at all. In the past, new drug applications and biologic license
applications submitted to the FDA have taken, on average, one to two years to
receive approval after submission of all clinical data. If questions arise
during the FDA review process, approval can take more than two years.
Notwithstanding the submission of relevant data, the FDA may ultimately decide
that the new drug application or biologic license application does not satisfy
its regulatory criteria for approval and require additional clinical studies. In
addition, the FDA may condition marketing approval on the conduct or specific
post-marketing studies to further evaluate safety and effectiveness. Rigorous
and extensive FDA regulation of pharmaceutical products continues after
approval, particularly with respect to manufacturing, which must be done in
compliance with cGMP, reporting of adverse effects, and advertising, promotion,
and marketing. Discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. In addition, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness.
If a developer obtains designation by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases generally, a disease or condition that
affects populations of fewer than 200,000 individuals in the United States,
including many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations. Essentially, this means that no other company can market
the same orphan drug for the use approved by the FDA for seven years after the
approval.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation and marketing
approval will remain in effect in the future.
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.
We are currently conducting clinical development activities with respect to
MPIF-1 and KGF-2. We are conducting preclinical trials with respect to other
proteins and expect to continue to conduct preclinical and clinical studies with
respect to additional potential products, as permitted under our collaboration
agreements. Accordingly, we are beginning to incur significant expenses with
respect to our preclinical and clinical development activities. We cannot assure
you that the preclinical or clinical trials will lead to our successful
development of any products. As further studies are conducted, we may choose to
abandon particular projects which we might have previously considered promising.
Other. Ethical, social and legal concerns about gene therapy, genetic
testing and genetic research could result in
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additional regulations restricting or prohibiting the processes we or our
suppliers may use. Federal and state agencies, congressional committees and
foreign governments have expressed interest in further regulating biotechnology.
More restrictive regulations or claims that our products are unsafe or pose a
hazard could prevent us from commercializing any products.
In addition to the foregoing, state and federal laws regarding environmental
protection and hazardous substances, including the Occupational Safety and
Health Act, the Resource Conservation and Recovery Act and the Toxic Substances
Control Act, affect our business. These and other laws govern our use, handling
and disposal of various biological, chemical and radioactive substances used in,
and wastes generated by, our operations. If our operations result in
contamination of the environment or expose individuals to hazardous substances,
we could be liable for damages and governmental fines. We believe that we are in
material compliance with applicable environmental laws and that our continued
compliance therewith will not have a material adverse effect on our business. We
cannot predict, however, how changes in these laws may affect our future
operations.
SOURCES OF SUPPLY
We currently depend on a single supplier, Applied Biosystems, a division of
PE Corporation (formerly Perkin-Elmer Corporation), to provide all our gene
sequencing machines and some of the chemicals we require in connection with our
gene sequencing process. PE Corporation has recently created Celera Genomics
Corporation, an entity that is sequencing the human genome and could potentially
be one of our competitors. We have not experienced problems in obtaining either
gene sequencing machines or chemicals in a timely manner. While other gene
sequencing machines are available, we do not believe that other machines are as
efficient as the machines we currently use. We have entered into certain
agreements with PE Corporation that provide for an established pricing structure
with respect to our purchase of selected chemicals, although such pricing is
subject to change if we do not meet certain minimum purchase requirements, and
in the case of one enzyme, provides that we will purchase and PE Corporation
will sell a stated quantity at a fixed price. We order these chemicals by
submitting purchase orders at the time of purchase. Gene sequencing machines or
chemicals may not remain available in commercial quantities at acceptable costs.
If we are unable to obtain additional machines or an adequate supply of
chemicals or other ingredients at commercially reasonable rates, our ability to
continue to identify genes through gene sequencing in accordance with our
current business plan would be adversely affected.
We have contracted for the manufacture of therapeutic proteins for
preclinical testing and clinical development. We will be dependent on third
party manufacturers for our supply of therapeutic proteins until we are able to
produce sufficient therapeutic proteins at our leased facility which was
substantially completed in February 1999. Any failure or delay in supplying
therapeutic proteins could affect the timing of preclinical tests and clinical
trials and could delay submission of products for regulatory approval.
MANUFACTURING AND MARKETING
We have developed in-house capabilities for the production and purification
of recombinant proteins for use in our research activities, but do not have any
manufacturing facilities licensed to supply materials suitable for clinical
trials or for commercial sale, or any experience in manufacturing materials
suitable for clinical 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 manufacturing facility for the
preparation of quantities of our proteins for clinical studies. The facility
comprises approximately 84,000 square feet, with an additional 43,000 square
foot expansion currently under construction, and is located in the Johns Hopkins
Belward Research Campus near our offices and research laboratories. Construction
on the original facility was substantially completed in February 1999. The
facility has been designed to allow for the production and purification of
multiple recombinant proteins. We intend to use the facility for production of
preclinical and clinical supplies of our therapeutic proteins and for process
development and scale-up. 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 clinical studies and could delay
submission of our products for regulatory approval. We may not be able to
successfully establish manufacturing capabilities and manufacture our products
economically or in compliance with cGMPs and other regulatory requirements. We
have entered into a long-term lease arrangements with the Maryland Economic
Development Corporation for the facility and the expansion.
Our long range plan is to establish additional manufacturing capabilities to
allow us to meet our full commercial manufacturing requirements. While we intend
to expand our manufacturing capabilities, we may contract with third party
manufacturers or may develop products with partners and take advantage of such
partner's manufacturing capabilities. We may not be able to successfully
establish manufacturing capabilities or manufacture our products
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economically or in compliance with cGMPs and other regulatory requirements.
We do not currently have any products that can be marketed. In the future,
we generally expect to rely on collaborators or on third parties with whom we
may contract 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 also may co-promote or retain U.S. marketing rights to certain of 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.
EMPLOYEES
As of February 25, 2000, we had 505 full-time employees, of whom 427 were in
research and development, including 81 scientists holding doctorate degrees. We
anticipate hiring approximately 50 additional employees during the next six
months. The additional staff is expected to include research and development
staff, process development and manufacturing personnel, and medical and
regulatory affairs staff. None of our employees is covered by a collective
bargaining agreement and we consider our relations with our employees to be
good.
FACTORS THAT MAY AFFECT OUR BUSINESS
There are a number of important factors that could cause our actual results
to differ materially from those that are indicated by forward-looking
statements. Those factors include, without limitation, those listed below and
elsewhere herein.
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 all or any 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 CLINICAL TRIALS FOR OUR PRODUCTS WILL BE EXPENSIVE AND THEIR OUTCOME IS
UNCERTAIN, WE MUST INCUR SUBSTANTIAL EXPENSES THAT MAY NOT RESULT IN ANY VIABLE
PRODUCTS
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we must demonstrate through preclinical testing and clinical trials
that our product candidates are safe and effective for use in humans. We will
incur substantial expense for, and devote a significant amount of time to,
preclinical testing and clinical trials.
Historically, the results from preclinical testing and early clinical trials
have often not been predictive of results obtained in later clinical trials. A
number of new drugs have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including changes in regulatory policy
during the period of product development.
Three of our products, MPIF-1, KGF-2 and VEGF-2, have entered clinical
trials. Patient follow-up for these clinical trials has been limited. To date,
data obtained from these clinical trials has been insufficient to demonstrate
safety and efficacy under applicable FDA guidelines and are not sufficient to
support an application for regulatory approval without further clinical trials.
Clinical trials conducted by us or by third parties on our behalf may not
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals for MPIF-1, KGF-2 and VEGF-2 and or any other potential products.
Regulatory authorities may not permit us to undertake any additional clinical
trials for our product candidates.
Completion of clinical trials may take several years or more. The length of
time generally varies substantially according to the type, complexity, novelty
and intended use of the product candidate. Our commencement and rate of
completion of clinical trials may be delayed by many factors, including:
- inability to manufacture sufficient quantities of materials for use in
clinical trials;
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- slower than expected rate of patient recruitment or variability in the
number and types of patients in a study;
- inability to adequately follow patients after treatment;
- unforeseen safety issues or side effects;
- lack of efficacy during the clinical trials; or
- government or regulatory delays.
THE CLINICAL SUCCESS OF VEGF-2 IS UNCERTAIN
Vascular Genetics announced that it will not enroll or treat additional
patients in its clinical trials of VEGF-2 in response to an FDA hold on testing.
Four clinical trials of VEGF-2 had been ongoing. Vascular Genetics announced the
completion of three of these trials because enrollment and treatment were
complete. In the fourth study, a majority of the enrollment target had been
enrolled and treated. During the hold period, Vascular Genetics will provide the
FDA with results which are being compiled from the clinical trials, in addition
to providing measurements of the amount of the VEGF-2 protein in patient blood
samples using new assay methodology which has been developed. Vascular Genetics
must receive approval of the FDA before the fourth trial can be completed or
additional trials initiated.
In addition to the factors affecting clinical trials noted above, the trials
of VEGF-2 are being conducted with patients who have failed conventional
treatments or for which no conventional treatment exists. During the course of
treatment, these patients can die or suffer adverse medical effects for reasons
that may or may not be related to our products. Deaths in the patient population
for the VEGF-2 trial did occur, in both active and placebo groups, and Vascular
Genetics has reviewed the relevant data regarding these patients and will
provide an analysis of the reasons for these deaths to the FDA. These adverse
effects may affect the interpretation of the clinical trial results and the
success of the trials. Further, as for most pharmaceutical drug products, later
stage clinical trials may be extensive, expensive and time-consuming.
Ultimately, VEGF-2 may not be approved for use in humans.
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 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 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.
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.
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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
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;
- we may be unable to obtain additional financing in the future for
capital expenditures, acquisitions 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.
BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE
MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER THAN YOU EXPECTED
Our stock price has and the stock prices of other emerging and biotechnology
companies have historically been highly volatile. During the past year, the
market price of our common stock has been as low as $14.38 per share and as high
as $231.00 per share. The market price of our 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;
- 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 entities conducting genomic research have identified the majority
of genes in the human genome and will identify virtually all 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:
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<PAGE> 23
- institutes, such as those sponsored by 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;
- 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 Patent and Trademark Office has recently proposed new guidelines on the
written description and utility requirements for patents. 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 February 25, 2000,
we had filed patent applications for:
- more than 7,500 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 116 U.S. patents issued covering 91 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 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
23
<PAGE> 24
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 a scientific or commercial 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 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:
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<PAGE> 25
- 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. TIGR has developed or
possesses specific trade secrets important to our business, including
information about sequencing procedures and genes identified by TIGR.
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 2001. 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 any other valuable
executive dies. 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 UNABLE 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. For instance, Vascular Genetics recently announced
that it will not enroll or treat additional patients in its clinical trials of
VEGF-2 in response to an FDA hold on further testing. 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.
ADVERSE PERCEPTION AND INCREASED REGULATORY SCRUTINY OF GENE THERAPY AND GENETIC
RESEARCH MAY LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS
Ethical, social and legal concerns about gene therapy, genetic testing and
genetic research could result in additional regulations restricting or
prohibiting the processes we or our suppliers may use. Recently, gene therapy
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<PAGE> 26
studies, including studies of VEGF-2, have come under increasing scrutiny which
has delayed ongoing and may delay future clinical trials and regulatory
approvals. Federal and state agencies, congressional committees and foreign
governments have expressed interest in further regulating biotechnology. More
restrictive regulations or claims that our products are unsafe or pose a hazard
could prevent us from commercializing any products.
BECAUSE WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WE MAY BE
UNABLE TO CONDUCT OUR BUSINESS IN THE MANNER WE CURRENTLY INTEND
State and federal laws regarding environmental protection, hazardous
substances and human health and safety affect our business. The use of hazardous
substances in our operations exposes us to the risk of accidental releases. If
our operations result in contamination of the environment or expose individuals
to hazardous substances, we could be liable for damages and governmental fines.
Future changes to environmental, health and safety laws could cause us to incur
additional expense or restrict our operations.
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 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 manufacturing facility for the
preparation of quantities of our proteins for human studies. Construction of an
expansion of this facility has begun. The FDA must validate and inspect this
facility and the expansion to determine compliance with cGMP requirements. A
delay in validation of the facility or the expansion could delay or increase the
cost of human studies and could delay submission of our products for regulatory
approval. We may not be able to successfully establish manufacturing
capabilities and manufacture our products economically or in compliance with
cGMPs and other regulatory requirements.
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
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<PAGE> 27
take action to limit their payments for goods and services. Any of these events
could limit our ability to commercialize our products successfully.
ITEM 2. PROPERTIES
We currently lease approximately 193,000 square feet of laboratory and
office space in five buildings in Rockville, Maryland. Our leased space includes
approximately 141,000 square feet of laboratory space and approximately 52,000
square feet of administrative office space. In addition, we have entered into
long-term leases for our process development and manufacturing facility and the
expansion of that facility. Construction was substantially completed in February
1999 on the 84,000 square foot facility, with an additional 43,000 square feet
currently under construction. We believe that our properties are generally in
good condition, are well maintained and are generally suitable and adequate to
carry on our business.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders, held on December 16, 1999, the
following proposal was approved:
<TABLE>
<CAPTION>
Affirmative Negative Abstentions
Votes Votes
------------------------------------------
<S> <C> <C> <C>
Amendment to our Restated Certificate of 23,155,534 12,208,198 70,888
Incorporation to increase our authorized
common stock from 50,000,000 to
250,000,000 and to increase our authorized
preferred stock from 1,000,000 to 20,000,000
</TABLE>
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<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S
MATTERS
Our common stock has been traded on the NASDAQ National Market System under
the symbol HGSI since December 2, 1993. The following table presents the
quarterly high and low sales prices as quoted by NASDAQ, restated to reflect a
two-for-one stock split, paid in the form of a stock dividend on January 28,
2000.
1998 HIGH LOW
First Quarter $22.56 $17.88
Second Quarter $21.63 $17.50
Third Quarter $20.00 $11.66
Fourth Quarter $18.13 $12.78
1999 HIGH LOW
First Quarter $18.38 $14.81
Second Quarter $23.00 $17.47
Third Quarter $44.75 $20.44
Fourth Quarter $79.78 $37.09
As of January 31, 2000, there were approximately 533 holders of record of our
common stock. 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.
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<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
We present below our selected financial data for the years ended
December 31, 1999, 1998, and 1997, and as of December 31, 1999 and 1998 which
have been derived from the audited financial statements included elsewhere
herein and should be read in conjunction with such financial statements and the
accompanying notes. We present below our selected financial data for the years
ended December 31, 1996 and 1995, and as of December 31, 1997, 1996 and 1995
which have been derived from audited financial statements not included herein.
The results of operations of prior periods are not necessarily indicative of
results that may be expected for any other period. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"ITEM 1. BUSINESS." Per share data has been restated to reflect a two-for-one
stock split, paid in the form of a stock dividend on January 28, 2000.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue-research and
development collaborative
contracts..................... $24,524 $29,598 $25,605 $36,460 $5,000
-------- -------- -------- --------- --------
Costs and expenses:
Research and development:
Direct expenditures........ 60,607 47,006 39,893 30,409 22,904
Payments under research
services agreement....... - 0 - -0- 6,247 10,063 10,075
-------- -------- -------- --------- --------
Total research and
development.............. 60,607 47,006 46,140 40,472 32,979
General and administrative.... 14,838 14,370 11,113 9,639 8,745
-------- --------- -------- --------- --------
Total cost and expenses......... 75,445 61,376 57,253 50,111 41,724
-------- -------- -------- --------- --------
Income (loss) from operations (50,921) (31,778) (31,648) (13,651) (36,724)
Net interest income............. 8,977 11,047 10,500 6,092 4,005
Equity in income (loss) in joint
venture....................... -0- (2,226) -0- -0- -0-
-------- -------- -------- --------- --------
Income (loss) before taxes...... (41,944) (22,957) (21,148) (7,559) (32,719)
Provision for (benefit from)
income taxes.................. 225 225 245 208 (1,651)
-------- -------- -------- --------- --------
Net income (loss)............... $(42,169) $(23,182) $(21,393) $ (7,767) $(31,068)
======== ======== ======== ========= ========
Net income (loss) per share,
basic and diluted (1)......... (0.92) $ (0.52) (0.50) $(0.21)(2) (0.99)(2)
======== ======== ======== ========= ========
OTHER DATA:
Ratio of earnings
to fixed charges.............. (1.45) (14.41) (12.93) (4.98) (24.37)
======== ======== ======== ========= ========
Coverage deficiency............. $(41,944) $(22,957) $(21,148) $ (7,559) $(32,719)
======== ======== ======== ========= ========
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
investments.................. $454,555 $181,767 $205,212 $116,116 $105,462
Total assets................... 527,725 244,247 236,232 140,117 126,963
Total debt and capital leases,
less current portion......... 326,336 1,780 2,224 2,954 4,332
Retained earnings (deficit).... (120,873) (78,704) (55,522) (34,129) (26,362)
Total stockholders' equity..... 169,068 208,848 223,254 128,521 115,606
</TABLE>
- --------------------------------------------------------------------------------
(1) Restated to reflect two-for-one stock split paid in the form of a stock
dividend on January 28, 2000.
(2) The net loss per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of net loss per share and the
impact of Statement No. 128, see Notes B and P of the notes to our financial
statements included herein.
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<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We research and develop novel compounds for treating and diagnosing human
diseases based on the discovery and understanding of the medical usefulness of
genes. 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 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. We recently
expanded our use of anitbodies and other technologies to increase the
opportunities created by our genomic database.
We have not received any product sales revenue or royalties from product
sales and do not anticipate revenues from product sales or from royalties on
product sales in the next several years. Through December 31, 1999, we have
received (1) $70.0 million in revenue and $55.0 million in equity payments
pursuant to our collaboration agreements with SmithKline Beecham, (2) payments
of $69.0 million from additional collaboration partners and (3) an aggregate of
$58.7 million from other collaborators, including $25.6 million from Transgene
S.A., $16.0 million from Pioneer Hi-Bred International, Inc., $9.0 million from
Pharmacia & Upjohn Company, $4.0 million from Schering Plough (in addition to
certain payments received from Schering Plough pursuant to our additional
collaboration partner agreements), $3.0 million from F. Hoffmann-La Roche and
$1.1 million from OraVax Merieux Co. and Merieux OraVax S.N.C. Pursuant to the
terms of such collaboration agreements, we expect to receive license fees and
research payments of $19.5 million in the aggregate over the next two years. See
"Business -- Collaborative Arrangements."
We expect that our revenue sources for at least the next several years may
be limited to interest income, payments under various collaboration agreements,
payments from the sale of rights and other payments from other collaborators and
licensees under existing or future arrangements, to the extent that we enter
into any future arrangements. We expect to continue to incur substantial
expenses relating to our research and development efforts, which are expected to
increase relative to historical levels as we focus on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
As a result, we expect to incur continued and increasing losses over the next
several years unless we are able to realize additional revenues under existing
or new collaboration agreements. The timing and amounts of such revenues, if
any, cannot be predicted with certainty and will likely fluctuate sharply.
Results of operations for any period may be unrelated to the results of
operations for any other period. In addition, historical results should not be
viewed as indicative of future operating results. Earnings per share have been
restated to reflect a two-for-one stock split paid in the form of a stock
dividend on January 28, 2000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. We had revenues of $24.5 million and $29.6 million for the
years ended December 31, 1999 and December 31, 1998, respectively. The 1999
revenue consisted of $18.5 million in license fees and additional payments from
collaborations with Schering Plough, Sanofi-Synthelabo, and Merck, the
recognition of $4.2 million from the collaborations with Transgene, S.A. and
Pharmacia, and $1.8 million in other revenue. The 1998 revenue consisted of
$19.5 million in annual license fees and additional payments from collaborations
with Schering Plough, Sanofi-Synthelabo and Merck, $5.0 million in license fees
and research payments from a collaboration with Pioneer, the recognition of $2.6
million from the collaboration with Transgene S.A., $2.3 million in license fees
from a collaboration with Pharmacia, and $0.2 million in other revenue.
Expenses. Research and development expenses increased to $60.6 for the
year ended December 31, 1999 from $47.0 million for the year ended December 31,
1998. The increase resulted primarily from the start of operations for our
leased process development and manufacturing facility in 1999, along with a
continued increase in preclinical and clinical research. We expect to continue
to incur substantial expenses relating to our research and development efforts,
which expenses are expected to increase relative to historical levels as we
focus on preclinical and clinical trials required for the development of
therapeutic protein product candidates.
General and administrative expenses increased to $14.8 million for the
year ended December 31, 1999 from $14.4 million for the year ended December 31,
1998 to support the increase in our activities. The increase also resulted from
higher legal expenses associated with filing and prosecuting a larger number of
patent applications relating to genes and proteins we discovered. Patent
expenses will continue to increase as additional applications
31
<PAGE> 32
are filed and existing applications are prosecuted in the United States and
internationally. Interest income was higher for the year ended December 31, 1999
compared to the year ended December 31, 1998 due to higher average cash
balances. Our average cash balance has increased during 1999 as a result of the
placement of two convertible subordinated note offerings during 1999, totaling
$325.0 million. The increase in interest expense is attributable to these two
convertible subordinated notes.
Net Income (Loss). We recorded a net loss of $42.2 million, or $0.92 per
share, for the year ended December 31, 1999 compared to a net loss of $23.2
million, or $0.52 per share, for the year ended December 31, 1998. The
difference in results for the years ended December 31, 1999 and 1998 is
primarily due to higher operating expenses, reduced collaboration partner
revenues, and lower net interest income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. We had revenues of $29.6 million and $25.6 million for the
years ended December 31, 1998 and December 31, 1997, respectively. The 1998
revenue consisted of $19.5 million in annual license fees and additional
payments from collaborations with Schering Plough, Sanofi-Synthelabo and Merck,
$5.0 million in license fees and research payments from a collaboration with
Pioneer, the recognition of $2.6 million from the collaboration with Transgene
S.A., $2.3 million in license fees from a collaboration with Pharmacia and $0.2
million in other revenue. The 1997 revenue consisted of $17.5 million in annual
license fees and additional payments from collaborations with Schering Plough,
Sanofi-Synthelabo and Merck, $4.1 million in license fees and research payments
from collaborations with Pioneer and Roche, and $4.0 million in license fees
from collaborations with Pharmacia, MedImmune and OraVax.
Expenses. Research and development expenses increased to $47.0 for the
year ended December 31, 1998 from $46.1 million for the year ended December 31,
1997. The increase resulted primarily from the start of our clinical trials in
1998, partially offset by a $6.2 million reduction of payments under a research
services agreement pursuant to the early termination of various agreements with
The Institute for Genomic Research.
General and administrative expenses increased to $14.4 million for the
year ended December 31, 1998 from $11.1 million for the year ended December 31,
1997 to support the increase in our activities. The increase also resulted from
significantly higher legal expenses associated with filing and prosecuting a
larger number of patent applications relating to genes and proteins discovered
by us. Interest income was higher for the year ended December 31, 1998 compared
to the year ended December 31, 1997 due to higher average cash balances.
Net Income (Loss). We recorded a net loss of $23.2 million, or $0.52 per
share, for the year ended December 31, 1998 compared to a net loss of $21.4
million, or $0.50 per share, for the year ended December 31, 1997. The
difference in results for the years ended December 31, 1998 and 1997 is
primarily due to higher operating expenses, and the recognition of losses of
$2.2 million related to our investment in Vascular Genetics during the year
ended December 31, 1998, offset by higher collaboration partner payments.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $444.9 million at December 31, 1999 as compared to
$174.4 million at December 31, 1998. The increase in working capital is due to
the private placement of $325.0 million in convertible subordinated notes during
1999, partially offset by the net loss generated during the year.
We expect to continue to incur substantial expenses relating to our research
and development efforts, which expenses are expected to increase relative to
historical levels as we focus on preclinical and clinical trials required for
the development of therapeutic protein product candidates. At December 31, 1999,
we had outstanding commitments for construction and equipment purchases totaling
approximately $5.5 million.
We expect that our existing funds, interest income, and committed license
fees and research payments from our existing collaboration agreements will be
sufficient to fund our operations for the next several years. Our future
capital requirements and the adequacy of our available funds will depend on many
factors, including scientific progress in our research and development programs
(including our preclinical and clinical product development activities), the
magnitude of those programs, the ability to establish collaborative and
licensing arrangements, the cost involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and competing technological and market
developments. There can be no assurance that any additional financing required
in the future will be available on acceptable terms, if at all.
As of December 31, 1999, we had net operating loss carryforwards for federal
income tax purposes of approximately $103.8 million which expire, if unused, by
the year 2019. We also had available research and development tax credit and
other tax credit carryforwards of approximately $9.5 million, the majority of
which will expire, if unused, by the year 2014.
Our funds are currently invested in U.S. Treasury and government agency
obligations and high-grade corporate
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<PAGE> 33
debt securities and commercial paper. These investments reflect our policy
regarding the investment of liquid assets, which is to seek a reasonable rate of
return consistent with the emphasis on safety, liquidity and preservation of
capital.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to become Year 2000, or "Y2K",
compliant. Because we were founded in 1992, most if not all of our computer
equipment and software adopt modern design principles. We have not experienced
any problems with the date rollover to the year 2000 with regard to our
purchased computer systems, operating systems, or database management systems.
For internal systems development, we use four digit entries for all date items
in our databases. Because these date representations have been built into
systems from their inception, we have found them to be fully Y2K compliant. We
use third-party equipment and software that has proved to be Y2K compliant. To
date, we are not aware of any major Y2K compliance problems impacting our
business, however there can be no assurance that there will be no Y2K compliance
disruptions in the coming months.
We do not believe that the cost of identification and correction of any Y2K
compliance problems, estimated to be less than $100,000, will have a material
adverse effect on our business, financial condition or operating results.
However, there can be no assurance that a failure of our internal computer
systems, third-party equipment, software we use, systems maintained by our
suppliers, or utility systems such as electricity, gas, water, and
telecommunications, to be Y2K compliant, will not have a material adverse effect
on our business, financial condition or operating results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
including statements concerning future collaboration agreements, royalties and
other payments under collaboration agreements, and product development and sales
and other statements are forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected in the forward looking statements as a result of risks and
uncertainties, including but not limited to, the following: our scientific
progress in our research and development programs; the magnitude of these
programs; the ability to establish additional collaborative and licensing
arrangements; the degree of success of our collaboration partners in
identification, research, development and marketing of products based on our
technology; the extent to which we engage in clinical development of any
products on our own; the degree of success in using our technology and database
to select viable product opportunities; our ability to develop or arrange for
marketing and sales initiatives with respect to products under development; the
success in raising additional capital and satisfying liquidity needs in the
future; the scope and results of pre-clinical testing and clinical trials; the
time and costs involved in obtaining regulatory approvals; the costs and
uncertainties involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims; competing technological and market developments; and
whether conditions to milestone payments are met and the timing of such
payments; other risks and uncertainties detailed elsewhere herein and from time
to time in our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. We do not have significant exposure to market risks associated with
changes in interest rates related to our corporate debt securities held as of
December 31, 1999. We believe that any market change related to our U.S.
securities held as of December 31,1999 is not material to our financial
statements. As of December 31, 1999, the carrying value of our equity investment
in Transgene was approximately $17.7 million. Our investment in Transgene is
subject to equity market risk. In February 2000, we entered into an agreement
with Cambridge Antibody Technology to invest approximately $55.0 million in
exchange for 1,670,000 ordinary shares of CAT. We expect to close this
transaction in April 2000. Because we must make this investment in pounds
sterling, we entered into a forward contract in order to eliminate any foreign
currency risk associated with the purchase price. Our ongoing investment in CAT
will be denominated in pounds sterling and will be subject to both foreign
currency risk as well as equity market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item are set forth on pages F-1 -- F-21.
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<PAGE> 34
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate herein by reference the information concerning directors and
executive officers in our Notice of Annual Stockholders' Meeting and Proxy
Statement to be filed within 120 days after the end of our fiscal year (the
"2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
We incorporate herein by reference the information concerning executive
compensation contained in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 2000
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate herein by reference the information concerning certain
relationships and related transactions contained in the 2000 Proxy Statement.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
(1) Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................... F-2
Balance Sheets at December 31, 1999 and 1998........................ F-3
Statements of Operations for the years ended December 31, 1999, 1998
and 1997.......................................................... F-4
Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997............................................... F-5
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997.......................................................... F-6
Notes to Financial Statements....................................... F-7
</TABLE>
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not required.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
3.1* Restated Certificate of Incorporation of the Registrant (Filed as Exhibit 3.3 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1997).
3.2* Amendment to Restated Certificate of Incorporation (Filed as Exhibit 3.1 to the Registrant's
Form 8-K filed December 16, 1999).
3.3* By-laws of the Registrant (Filed as Exhibit 3.2 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1993).
4.1* Form of Common Stock certificate. (Filed as Exhibit 4.1 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No. 33-69850), originally filed October
1, 1993).
4.2* Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as
Rights Agent, dated as of May 20, 1998 (Filed as Exhibit 4 to the Registrant's Current Report
on Form 8-K filed May 28, 1998.)
4.3* Indenture dated as of June 25, 1999 between the Registrant and The Bank of New York, as
trustee, including the form of 5 1/2% Convertible Subordinated Notes due 2006 (Filed as Exhibit
4.1 to the Registrant's Form 8-K filed June 28, 1999).
4.4* Indenture dated as of December 14, 1999 between the Registrant and The Bank of New York, as
trustee, including the form of 5 % Convertible Subordinated Notes due 2006 (Filed as Exhibit
4.1 to the Registrant's Form 8-K filed December 16, 1999).
4.5* Indenture dated as of February 1, 2000 between the Registrant and The Bank of New York, as
trustee, including the form of 5 % Convertible Subordinated Notes due 2007 (Filed as Exhibit
4.1 to the Registrant's Form 8-K filed February 2, 2000).
4.6* Indenture dated as of March 10, 2000 between the Registrant and The Bank of New York, as
trustee, including the form of 3 3 3/4% Convertible Subordinated Notes due 2007 (filed as Exhibit
4.1 to the Registrant's Form 8-K filed March 13, 2000).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
10.1*+ Collaboration Agreement, dated May 19, 1993, between the Registrant and SmithKline Beecham
Corporation, as amended on May 19, 1993 and August 19, 1993 (Filed as Exhibit 10.1 to the
Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993).
10.2* Second Amendment to HGS-SB Collaboration Agreement, Effective September 1, 1993, between
the Registrant and SmithKline Beecham Corporation (Filed as exhibit 10.2 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1993).
10.3* Amendment to HGS-SB Collaboration Agreement, effective March 17, 1994, between the Registrant
and SmithKline Beecham Corporation (Filed as Exhibit 10.3 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1993).
10.4*+ License Agreement between the Registrant and SmithKline Beecham Corporation dated September 15,
1994 (Filed as Exhibit 10.8 to the Registrant's Form 10-Q filed November 14, 1994).
10.5*+ Amendment to HGS-SB Collaboration Agreement (Therapeutic Protein Amendment), effective
December 23, 1994, between the Registrant and SmithKline Beecham Corporation (Filed as Exhibit
10.4 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994).
10.6*+ Amendment to HGS-SB Collaboration Agreement (Milestone III Amendment), effective December 29,
1994, between the Registrant and SmithKline Beecham Corporation (Filed as Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994).
10.7* Amendment to the Series B Convertible Preferred Stock Purchase Agreement between the Registrant
and SmithKline Beecham Corporation, dated December 29, 1994. (Filed as Exhibit 10.96 to the
Registrant's Form S-3 Registration Statement, as amended (Commission File No. 33-96206)
originally filed August 25, 1995).
10.8*+ Amendment to HGS-SB Collaboration Agreement, effective April 24, 1995, between the Registrant
and SmithKline Beecham Corporation. (Filed as Exhibit 10.6 to the Registrant's Form S-3
Registration Statement, as amended (Commission File No. 33-96206), originally filed August 25, 1995).
10.9*+ Amendment to HGS-SB Collaboration Agreement, effective May 31, 1995, between the Registrant
and SmithKline Beecham. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q filed August 14,
1995).
10.10*+ Amendment and Restated License Agreement between the Registrant and SmithKline Beecham effective
May 31, 1995 (Filed as Exhibit 10.1 to the Registrant's Form 10-Q filed August 14, 1995).
10.11*+ Amendment to SmithKline Beecham and Human Genome Sciences, Inc. Collaboration Agreement and
License Agreement and Amended and Restated License Agreement dated June 28, 1996. (Filed as
Exhibit 10.1 to the Registrant's Form 10-Q filed August 14, 1996).
10.12*+ SmithKline Beecham and Human Genome Sciences, Inc. License Agreement dated June 28, 1996.
(Filed as Exhibit 10.2 to the Registrant's Form 10-Q filed August 14, 1996).
10.13*+ Therapeutic Collaboration and License Agreement by and among the Registrant, Schering
Corporation, Schering Plough Ltd., and SmithKline Beecham Corporation dated June 28, 1996.
(Filed as Exhibit 10.3 to the Registrant's Form 10-Q filed August 14, 1996).
10.14*+ Gene Therapy Collaboration and License Agreement by and among the Registrant, Schering
Corporation, and Schering Plough Ltd., June 28, 1996. (Filed as Exhibit 10.4 to the
Registrant's Form 10-Q filed August 14, 1996).
10.15*+ Collaboration and License Agreement by and among the Registrant, SmithKline Beecham
Corporation and Sanofi-Synthelabo dated June 30, 1996. (Filed as Exhibit 10.5 to the
Registrant's Form 10-Q filed August 14, 1996).
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
10.16*+ Collaboration and License Agreement between the Registrant, SmithKline Beecham Corporation
and Merck KGaA effective July 10, 1996. (Filed as Exhibit 10.6 to the Registrant's Form 10-Q
filed November 14, 1996).
10.17*+ Option and License Agreement between the Registrant and Takeda Chemical Industries, Ltd.
dated June 12, 1995 (Filed as Exhibit 10.3 to the Registrant's Form 10-Q filed August 14, 1995).
10.18*+ Collaboration and License Agreement between the Registrant and MedImmune, Inc. dated July 27,
1995 (Filed as Exhibit 10.5 to the Registrant's Form 10-Q filed August 14, 1995).
10.19*+ Research Collaboration Agreement, dated January 19, 1996, between the Registrant and Pioneer
Hi-Bred International, Inc. (Filed as Exhibit 10.15 to the Registrant's Form 10-K filed March 31, 1996).
10.20*+ License Agreement between Registrant and F. Hoffmann-La Roche, Ltd. (Filed as Exhibit 10.16
to the Registrant's Form 10-K filed March 31, 1996).
10.21*+ Research Services Agreement, dated October 1, 1992, between the Registrant and The Institute
for Genomic Research (Filed as Exhibit 10.4 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
10.22*+ Intellectual Property Agreement, dated October 2, 1992, between the Registrant and The
Institute for Genomic Research (Filed as Exhibit 10.5 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
10.23* Amendment to collaboration agreement among SmithKline Beecham Corporation and SmithKline Beecham
p.l.c. and the Registrant dated July 24, 1997 (Filed as Exhibit 10.2 to the Registrant's Form 10-Q
filed August 14, 1997).
10.24* Gene Therapy Collaboration and License Agreement between the Registrant and Transgene S.A.,
dated February 25, 1998 (Filed as Exhibit 10.66 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1997).
10.25* Stock Purchase and Restriction Agreement, dated December 31, 1992, between the Registrant
and William A. Haseltine, Ph.D. (Filed as Exhibit 10.15 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
10.26* Employment Agreement, dated February 25, 1997, with William A. Haseltine, Ph.D. (Filed as
Exhibit 10.44 to the Registrant's Form 10-K for the fiscal year ended December 31, 1996).
10.27* Restricted Stock Purchase Agreement, dated May 18, 1993, between the Registrant and
William A. Haseltine, Ph.D. (Filed as Exhibit 10.24 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
10.28* Promissory Note, dated March 4, 1994, given by William A. Haseltine, Ph.D. to the Registrant
(Filed as Exhibit 10.58 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993).
10.29* First Allonge to Promissory Note, dated December 16, 1994, given by William A. Haseltine, Ph.D.
to the Registrant (Filed as Exhibit 10.65 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994).
10.30* Pledge Agreement, dated March 4, 1994, between William A. Haseltine, Ph.D. and Registrant
(Filed as Exhibit 10.59 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993).
10.31* First Amendment to Pledge Agreement, dated December 16, 1994, between William A. Haseltine, Ph.D.
and Registrant (Filed as Exhibit 10.67 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994).
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C>
10.32* Employment Agreement, dated October 1992, with Craig A. Rosen, Ph.D. (Filed as Exhibit 10.17
to the Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993).
10.33* Restricted Stock Purchase Agreement, dated April 21, 1993, between the Registrant and Craig A. Rosen,
Ph.D. (Filed as Exhibit 10.22 to the Registrant's Form S-1 Registration Statement, as amended
(Commission File No. 33-69850), originally filed October 1, 1993).
10.34* Restricted Stock Purchase Agreement, dated April 21, 1993, between the Registrant and Donald D.
Johnston (Filed as Exhibit 10.21 to the Registrant's Form S-1 Registration Statement, as amended
(Commission File No. 33-69850), originally filed October 1, 1993).
10.35* 1993 Stock Option Plan (Filed as Exhibit 10.45 to the Registrant's Form S-1 Registration Statement,
as amended (Commission File No. 33- 69850), originally filed October 1, 1993).
10.36* 1994 Stock Option Plan (Filed as Exhibit 4 to the Registrant's Registration Statement on Form S-8,
File No. 33-79020, filed May 17, 1994).
10.36(a)* Amendment to 1994 Stock Option Plan (Filed as Exhibit 4.5 to the Registrant's Form S-8 filed
November 13, 1998).
10.37* Form of Stock Option Agreement (Filed as Exhibit 10.46 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
10.40* $4,000,000 Maryland Industrial Development Financing Authority Taxable Variable Rate Demand Economic
Development Revenue Bonds dated December 21, 1994 (Filed as Exhibit 10.90 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994).
10.41*+ HGS/TIGR Agreement dated June 20, 1997 (Filed as Exhibit 10.1 to the Registrant's Form 10-Q filed
August 14, 1997).
10.42* Lease Agreement between Maryland Economic Development Corporation and Human Genome Sciences, Inc.,
dated December 1, 1997 (Filed as Exhibit 10.67 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1997).
10.43 Lease Agreement between Maryland Economic Development Corporation and Human Genome Sciences, Inc.
dated December 1, 1999.
12.1 Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE> 39
- --------------------------------------------------------------------------------
* Incorporated by reference.
+ Confidential treatment has been granted by the Commission. The copy
filed as an exhibit omits the information subject to the confidentiality
request.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, on December 6, 1999, announcing
our proposed private offering of $150.0 million aggregate principal amount of
Convertible Subordinated Notes due 2006.
We filed a Current Report on Form 8-K, on December 16, 1999, announcing
(1) an offer to convert to the holders of our 5 1/2% Convertible Subordinated
Notes due 2006, (2) the completion of a private placement of $150.0 million
aggregate principal of 5 % Convertible Subordinated Notes due 2006, and (3)
stockholder approval to amend our Restated Certificate of Incorporation and
increase our authorized Common Stock from 50,000,000 to 250,000,000 and to
increase our authorized Preferred Stock from 1,000,000 to 20,000,000 shares.
We filed a Current Report on Form 8-K, on February 2, 2000, announcing
the completion of a private placement of $225.0 million aggregate principal of
5% Convertible Subordinated Notes due 2007.
We filed a Current Report on Form 8-K, on March 3, 2000, announcing
collaborative agreements with Cambridge Antibody Technology, plc and Compugen
Ltd., and that Vascular Genetics, Inc., a joint venture in which we hold a
substantial interest, announced that it will not enroll or treat additional
patients in its clinical trials, in response to a U.S. Food and Drug
Administration hold on testing. We also announced our decision to call our
$200.0 million aggregate principal amount of Convertible Subordinated Notes due
2006.
We filed a Current Report on Form 8-K, on March 13, 2000, announcing the
completion of a private placement of $300.0 million aggregate principal of
3 3/4% Convertible Subordinated Notes due 2007.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC.
BY: /S/ William A. Haseltine, Ph.D.
-------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer
Dated: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/William A. Haseltine, Ph.D. Chairman of the Board and March 17, 2000
- ------------------------------ Chief Executive Officer
William A. Haseltine, Ph.D. (principal executive officer)
/S/Craig A. Rosen, Ph.D. Executive Vice President, March 17, 2000
- ------------------------ Research and Development and
Craig A. Rosen, Ph.D. Director
/S/Steven C. Mayer Senior Vice President and March 17, 2000
- ------------------ Chief Financial Officer
Steven C. Mayer (principal financial and
accounting officer)
/S/ Jurgen Drews, M.D. Director March 17, 2000
- ----------------------
Jurgen Drews, M.D.
/S/ Beverly Sills-Greenough Director March 17, 2000
- ---------------------------
Beverly Sills-Greenough
/S/ Robert Hormats Director March 17, 2000
- ------------------
Robert Hormats
/S/ Max Link, Ph.D. Director March 17, 2000
- -------------------
Max Link, Ph.D.
/S/ Alan G. Spoon Director March 17, 2000
- -----------------
Alan G. Spoon
/S/Laura D'Andrea Tyson, Ph.D. Director March 17, 2000
- ------------------------------
Laura D'Andrea Tyson, Ph.D.
/S/ James Barnes Wyngaarden, M.D. Director March 17, 2000
- ---------------------------------
James Barnes Wyngaarden, M.D.
</TABLE>
40
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................... F-2
Balance Sheets at December 31, 1999 and 1998................................................ F-3
Statements of Operations for the years ended December 31, 1999, 1998 and 1997............... F-4
Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997..... F-5
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............... F-6
Notes to Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland
We have audited the accompanying balance sheets of Human Genome Sciences, Inc.
as of December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Human Genome Sciences, Inc. at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
February 9, 2000
F-2
<PAGE> 43
HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
(dollars in thousands, except for
share and per share amounts)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents................................................ $180,839 $ 16,139
Short-term investments................................................... 273,716 165,628
Prepaid expenses and other current assets................................ 4,294 5,374
-------- --------
Total current assets................................................. 458,849 187,141
Long-term investments............................................... 17,709 27,228
Property, plant and equipment (net of accumulated depreciation and
amortization)............................................................... 25,557 20,965
Restricted investments....................................................... 11,637 6,749
Other assets................................................................. 13,973 2,164
-------- --------
TOTAL ASSETS......................................................... $527,725 $244,247
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt........................................ $ 444 $ 444
Accounts payable and accrued expenses.................................... 7,511 4,642
Accrued payroll and related taxes........................................ 2,380 2,400
Deferred revenues........................................................ 3,568 5,265
-------- --------
Total current liabilities............................................ 13,903 12,751
Long-term debt, net of current portion....................................... 326,336 1,780
Deferred revenues............................................................ 17,975 20,543
Other liabilities............................................................ 443 325
-------- --------
Total liabilities.................................................... 358,657 35,399
-------- --------
Stockholders' Equity:
Common stock - $0.01 par value; shares authorized - 250,000,000 and
50,000,000 at December 31, 1999 and 1998, respectively; shares issued
46,657,128 and 45,494,376 at December 31, 1999 and 1998, respectively... 466 455
Additional paid-in capital............................................... 299,791 285,308
Unearned portion of compensatory stock options........................... (335) (110)
Retained deficit......................................................... (120,873) (78,704)
Accumulated other comprehensive income (loss)............................ (9,981) 1,899
-------- --------
Total stockholders' equity........................................... 169,068 208,848
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $527,725 $244,247
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE> 44
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
---------- ---------- ----------
(dollars in thousands, except for share
and per share amounts)
<S> <C> <C> <C>
Revenue -- research and development collaborative contracts....... $ 24,524 $ 29,598 $ 25,605
---------- ---------- ----------
Costs and expenses:
Research and development:
Direct expenditures................................... 60,607 47,006 39,893
Payments under research services agreement............ - - 6,247
---------- ---------- ----------
Total research and development........................ 60,607 47,006 46,140
General and administrative.................................... 14,838 14,370 11,113
---------- ---------- ----------
Total costs and expenses.................................. 75,445 61,376 57,253
---------- ---------- ----------
Income (loss) from operations..................................... (50,921) (31,778) (31,648)
Interest income................................................... 13,307 11,219 10,889
Interest expense.................................................. (4,330) (172) (389)
Equity in income (loss) of joint venture.......................... - (2,226) -
---------- ---------- ----------
Income (loss) before taxes........................................ (41,944) (22,957) (21,148)
Provision for income taxes:
Current....................................................... 225 225 245
---------- ---------- ----------
Net income (loss)................................................. $(42,169) $(23,182) $(21,393)
========== ========== ==========
Basic and diluted net income (loss) per share..................... $ (0.92) $ (0.52) $ (0.50)
========== ========== ==========
Weighted average shares outstanding, basic and diluted............ 46,025,994 44,868,262 43,050,566
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE> 45
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
Unearned Accumulated
Portion of Other
Common Stock Additional Compensatory Comprehensive Retained
--------------------- Paid-In Stock Income Earnings
Shares Amount Capital Options (Loss) (Deficit) Total
---------- ------ --------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1996 37,568,764 $ 376 $ 162,395 $ - $ (121) $(34,129) $ 128,521
Comprehensive income (loss):
Net loss - - - - - (21,393) (21,393)
Unrealized gain on investments - - - - 169 - 169
----------
Comprehensive income (loss) (21,224)
Exercise of options 560,680 5 4,171 - - - 4,176
Warrants exercised 112,064 1 9 - - - 10
Issuance of common pursuant to the Public
Offering (net of expenses) 6,385,500 64 111,681 - - - 111,745
Compensatory stock options issued - - 147 (147) - - -
Compensatory stock options earned - - - 26 - - 26
---------- ------ --------- ------ --------- --------- ----------
Balance -- December 31, 1997 44,627,008 446 278,403 (121) 48 (55,522) 223,254
Comprehensive income (loss):
Net loss - - - - - (23,182) (23,182)
Unrealized loss on investments - - - - 1,851 - 1,851
----------
Comprehensive income (loss) (21,331)
Exercise of options 706,566 7 6,826 - - - 6,833
Warrants exercised 160,802 2 38 - - - 40
Compensatory stock options issued - - 110 (110) - - -
Compensatory stock options earned - - - 52 - - 52
Compensatory stock options cancelled - - (69) 69 - - -
---------- ------ --------- ------ --------- --------- ----------
Balance -- December 31, 1998 45,494,376 455 285,308 (110) 1,899 (78,704) 208,848
Comprehensive income (loss):
Net loss - - - - - (42,169) (42,169)
Unrealized loss on investments - - - - (11,880) - (11,880)
----------
Comprehensive income (loss) (54,049)
Exercise of options 1,145,802 11 14,085 - - - 14,096
Warrants exercised 14,950 - - - - - -
Compensatory stock options issued 2,000 - 398 (398) - - -
Compensatory stock options earned - - - 173 - - 173
---------- ------ --------- ------ --------- --------- ----------
Balance -- December 31, 1999 46,657,128 $ 466 $ 299,791 $ (335) $ ( 9,981) $(120,873) $ 169,068
========== ====== ========= ====== ========= ========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE> 46
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- --------- --------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (42,169) $ (23,182) $(21,393)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Accrued interest on U.S. Treasury bills and commercial
paper.................................................. (795) 942 (1,109)
Depreciation and amortization............................. 7,102 6,541 6,359
Loss due to disposal and write-down of property, plant
and equipment.......................................... 45 15 50
Compensation expense related to stock options............. 173 52 26
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.............. 1,105 (3,254) 738
Other assets........................................... (2,059) (493) (341)
Accounts payable and accrued expenses.................. 1,926 (141) 988
Accrued payroll and related taxes...................... (20) 323 957
Deferred revenues ..................................... (4,265) 22,788 483
Other liabilities...................................... 118 (9) (35)
--------- --------- --------
Net cash provided by (used in) operating activities....... (38,839) 3,582 (13,277)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- property, plant and equipment........ (10,796) (6,747) (8,717)
Purchase of short-term investments and marketable securities. (210,646) (184,546) (205,572)
Purchase of long-term investment............................. - (25,679) -
Proceeds from sale and maturities of short-term investments
and marketable securities............................... 100,967 179,145 134,833
--------- --------- --------
Net cash provided by (used in) investing activities....... (120,475) (37,827) (79,456)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, (net of expenses).. 315,250 - -
Repayment of long-term debt.................................. (444) (444) (444)
Restricted investments....................................... (4,888) (167) (4,877)
Payments on capital lease obligations........................ - (223) (874)
Proceeds from issuance of common stock (net of expenses)..... 14,096 6,872 115,933
--------- --------- --------
Net cash provided by (used in) financing activities....... 324,014 6,038 109,738
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 164,700 (28,207) 17,005
Cash and cash equivalents -- beginning of year.................. 16,139 44,346 27,341
--------- --------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR........................ $ 180,839 $ 16,139 $ 44,346
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 3,780 $ 179 $ 240
Income taxes.............................................. $ 250 $ 200 $ 245
See Note G for non-cash exercise of warrants.
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE> 47
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE A) - THE COMPANY
Human Genome Sciences, Inc. (the "Company") was incorporated and commenced
operations on June 26, 1992. The Company is engaged in the research and
development of novel, proprietary pharmaceutical and diagnostic products based
on the discovery and understanding of the medical utility of genes. The
Company's revenues are currently derived from license fees and research payments
under collaboration agreements. The Company does not yet generate any revenues
from product sales.
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. On December 31, 1999
and 1998, the Company had purchased $17,077 and $17,050, respectively, of U.S.
Government securities under agreements to resell on January 1, 2000 and 1999,
respectively. The market value of the securities approximated the carrying
amount.
The Company classifies its short-term investments into the categories:
"held-to-maturity" and "available-for-sale," each of which has different
accounting treatment. Investments in securities that are classified as
available-for-sale and have readily determinable fair values are measured at
fair market value in the balance sheets, and unrealized holding gains and losses
for these investments are reported as a separate component of stockholders'
equity until realized. Debt securities classified as held-to-maturity securities
are carried at amortized cost.
Investment Risk
The Company has invested its cash in obligations of the U.S. Government and in
high-grade corporate debt securities and commercial paper. The Company's
investment policy limits investments to certain types of instruments issued by
institutions with investment grade credit ratings, and places restrictions on
maturities and concentration by type and issuer.
Investments
Investments, in which the Company has the ability to exercise significant
influence over the investee, but less than a controlling voting interest, are
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's share of the investee's earnings or losses are
included in operations, to the extent the Company has an investment and
receivable from the investee company recorded as an asset plus the amount of any
continuing commitment to fund the investee.
Investments in which the Company owns a 20% equity interest or less, does not
have significant influence and the market value of the investees' common stock
is not readily determinable (i.e., privately held company), are accounted for
using the cost method. The Company periodically reviews the investment to
determine whether the investment is recorded at the lower of cost or market
value.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Laboratory equipment....................... 3 - 10 years
Computers and EDP equipment................ 3 years
Furniture and office equipment............. 3 - 5 years
Leasehold improvements..................... lesser of the lease term or the useful life
</TABLE>
F-7
<PAGE> 48
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
Periodically, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The
Company made no adjustments to the carrying values of its assets during the
years ended December 31, 1999, 1998, and 1997.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with the
provisions of APB No. 25 and has provided the pro forma disclosures of net loss
and net loss per share in accordance with Statement of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS No.123")
using the fair value method. See Note L to the financial statements for further
information.
Revenue Recognition
Non-refundable license fees, research payments, additional payments and
milestone payments in connection with collaboration agreements are recognized
when they are earned in accordance with the applicable performance requirements
and / or contractual terms.
Research and Development
Research and development costs are charged to expense as incurred.
Financing Costs Related to Long-term Debt
Costs associated with obtaining long-term debt are deferred and amortized over
the term of the related debt.
Patent Costs
Patent application costs are charged to expense as incurred.
Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All net income (loss) per share amounts for all periods have
been presented, and where appropriate, restated to conform to the SFAS No. 128
requirements.
Comprehensive Income (Loss)
In 1998, the Company adopted Statement No. 130, "Reporting Comprehensive
Income", ("SFAS No. 130"). SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's financial position and results of
operations. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities and on the Company's investment in Transgene S.A.
which, prior to adoption of SFAS No.130, were reported separately in
stockholders' equity, to be included in other comprehensive income. The
statements of stockholders' equity for all previous years have been restated to
conform to the requirements of SFAS No. 130.
Comprehensive income (loss) consisted of $2,361 of unrealized loss, $301 of
unrealized gain, and $169 of unrealized gain for available-for-sale short-term
investments for fiscal years 1999, 1998, and 1997, respectively and $9,519 of
unrealized loss and $1,550 of unrealized gain on the Company's equity investment
in Transgene S.A. for fiscal years 1999 and 1998, respectively.
F-8
<PAGE> 49
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New SEC Interpretations
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB Opinion No. 20, "Accounting Changes." The Company is currently in the
process of evaluating what impact, if any, SAB 101 will have on the financial
position or results of operations of the Company.
Sources of Supply
The Company currently relies on a single supplier, Applied Biosystems, a
division of PE Corporation (formerly Perkin-Elmer Corporation), to provide all
of its gene sequencing machines and certain reagents required in connection with
the gene sequencing process. The Company has not experienced problems in
obtaining either gene sequencing machines or reagents in a timely manner. While
other gene sequencing machines are available, the Company does not believe that
such other machines are as efficient as the machines currently used by the
Company. No assurance can be given that either the gene sequencing machines or
the reagents will remain available in commercial quantities at costs that are
not economically prohibitive.
Reclassifications
Certain balances have been reclassified to conform to fiscal 1999 presentation.
(NOTE C) - INVESTMENTS
Investments, including accrued interest, at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Amortized Fair Unrealized
Available for Sale Cost Value Gain/(Loss)
------------------ ------------ ------------- -------------
<S> <C> <C> <C>
U.S. Treasury and agencies $ 31,530 $ 31,380 $ (150)
Corporate debt securities 244,197 242,336 (1,861)
----------- ------------ ----------
Subtotal 275,727 273,716 (2,011)
Investment in Transgene 25,679 17,709 (7,970)
----------- ------------ ----------
Total $301,406 $291,425 $(9,981)
=========== ============ ==========
</TABLE>
December 31, 1998
-----------------
<TABLE>
<CAPTION>
Available for Sale
------------------
<S> <C> <C> <C>
U.S. Treasury and agencies $ 12,551 $ 12,627 $ 76
Corporate debt securities 152,727 153,001 274
----------- ------------ ----------
Subtotal 165,278 165,628 350
Investment in Transgene 25,679 27,228 1,549
----------- ------------ ----------
Total $190,957 $192,856 $ 1,899
=========== ============ ==========
</TABLE>
F-9
<PAGE> 50
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE D) - AGREEMENT WITH THE INSTITUTE FOR GENOMIC RESEARCH ("TIGR")
- ---------------------------------------------------------------------
In June 1997, the Company and TIGR reached an agreement to terminate the
Research Services Agreement (the "Services Agreement") dated October 1, 1992,
the Intellectual Property Agreement dated October 2, 1992, the Lease Funding
Agreement and Assignment dated March 2, 1993, the Agreement of April 19, 1993
related to human cDNA sequencing, and all other agreements entered into any time
prior to the Termination Date between the Company and TIGR. Pursuant to the
Termination Agreement, the Company retains rights in intellectual property
arising out of TIGR's research prior to June 2, 1997, but will have no rights to
intellectual property resulting from future research by TIGR. The Company is
relieved of its obligation to provide future funding (including all research
funding) to TIGR, which would have amounted to approximately $38,000. Certain
limitations on TIGR's publication of intellectual property and restrictions on
TIGR entering into commercial agreements contained in the prior agreements were
also terminated. However, pursuant to the Termination Agreement, TIGR has agreed
not to enter into commercial agreements for the next four years with respect to
selected therapeutic proteins and associated diagnostic tests currently in
development by the Company. In addition, the Company is entitled to be paid a
percentage of certain payments received by TIGR from commercial agreements
relating to human therapeutic proteins in which TIGR granted or agreed to grant
rights during the two years from June 20, 1997 to June 20, 1999.
(NOTE E) - COLLABORATION AGREEMENTS
Agreements with SmithKline Beecham Corporation
In May 1993, the Company entered into a collaboration agreement, as amended ("SB
Collaboration Agreements"), providing SmithKline Beecham Corporation ("SB") a
first right to develop and market products in human and animal healthcare ("SB
Products"), based upon human genes identified by the Company. In return, SB has
paid $125,000 to the Company since 1993. Approximately $55,000 was allocated to
the purchase price of 2,703,476 shares of common stock with the balance of
$70,000 recognized from license fees, option rights and milestone payments. In
addition, the Company is entitled to (1) royalties on the net sales of SB
Products, (2) product development progress payments and (3) the option to
co-promote up to 20% of any product development by SB under the collaboration
agreement.
In June 1996, the SB Collaboration Agreements were substantially amended (the
"SB Amendment") to allow the Company and SB together to enter into collaboration
agreements with additional pharmaceutical companies ("Collaboration Partners")
in the SB Field (other than diagnostics and animal healthcare in which SB has
generally retained exclusive rights). The SB Amendment restricts the Company
from entering into further collaborations in the SB Field during the initial
research term (through June 2001). The restriction also applies to certain
products which are subject to research plans submitted by SB prior to the
expiration of the initial research term and for a period thereafter. SB has the
right to extend the research term for up to five additional years by making
certain payments, which would extend the time for submitting research plans as
to therapeutic products.
The SB Amendment provides that SB and the Company will share equally in any
license fee payments paid by the Collaboration Partners and that the Company
will receive all royalties and research payments paid by the Collaboration
Partners.
Other Collaboration Agreements in the SB Field
In June 1995, the Company entered into an Option and License Agreement with
Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted
an exclusive option to license rights under the Company's patents and technology
in the field of human healthcare (other than gene therapy, antisense and
diagnostics) to make and sell a limited number (equal to the number of
collaboration partners other than SB and Takeda with which the Company enters
into collaboration agreements in the SB field) of products in Japan. In
consideration of the grant of the option, Takeda paid the Company $5,000, which
was recognized as revenue by the Company in 1995, and agreed to pay to the
Company royalties based on the sale of Takeda products covered by the Option and
License Agreement and certain milestone payments.
In June 1996, the Company and SB entered into collaboration agreements
("Additional Collaboration Partner Agreements") with Schering Corporation and
Schering Plough Ltd. ("Schering Plough"), Sanofi-Synthelabo S.A., and Merck KGaA
("Merck"), (collectively "Additional Collaboration Partners"). The Additional
Collaboration Partner Agreements provide the Additional Collaboration Partners
the rights and licenses to access the Company's Human Gene Technology, as well
as biological information developed by the Company and SB prior to, and in the
case of the Company, after the effective date of such Agreement, to discover,
develop and commercialize products based upon or derived from such Company
technology in the SB Field (other than diagnostics and animal healthcare). The
Additional Collaboration Partners are obligated to pay license fees, research
payments, milestone
F-10
<PAGE> 51
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)
Other Collaboration Agreements in the SB Field (continued)
payments and royalties in connection with the agreements. The initial research
term expires in June 2001. The Additional Collaboration Partners have the right
to extend the term for up to five additional years by making certain additional
payments. Aggregate license fees and research payments due under the Additional
Collaboration Partner Agreements to which the Company is entitled is $87,500,
payable in equal installments over a five-year period. The Company has
recognized revenue of $17,500, $18,500 and $16,500 in license fees and
additional payments during 1999, 1998 and 1997, respectively, related to the
Additional Collaboration Partner Agreements.
Collaborative Agreements Outside of the SB Field
During 1996, the Company entered into several collaborative agreements with an
initial aggregate research value of $33,000. These collaboration partners
included Pioneer Hi-Bred International, Inc., Pharmacia & Upjohn Company,
Schering-Plough Ltd., and F. Hoffman-La Roche, Ltd. On an aggregate basis, the
Company received payments of $1,000, $9,000, and $8,000 from these collaborators
and recognized revenue of $2,600, $8,300, and $8,600 pursuant to these
agreements for fiscal years 1999, 1998, and 1997, respectively. For those
payments received from the inception of these agreements through December 31,
1999, the Company has no deferred revenue as of December 31, 1999. A final
$1,000 is scheduled to be paid and recognized as revenue during fiscal 2000.
In March 1998, the Company entered into a gene therapy collaboration agreement
with Transgene, S.A. ("Transgene"), of Strasbourg, France. Under this agreement,
the Company received a 10% equity interest in Transgene valued at $25,679 based
on Transgene's initial public offering ("IPO") share price in exchange for
giving Transgene the right to develop and co-market gene therapy products from
10 genes selected by Trangene from the Company's database. The Company initially
recorded its investment in Transgene at the IPO price with an offsetting entry
to deferred revenues. The Company will recognize the $25,679 of revenue from
this transaction over the shorter of the ten-year term of the agreement or
prorated upon the selection of genes by Transgene. The Company recognized $2,568
as revenue in both 1999 and 1998. As of December 31, 1999, the Company adjusted
the investment to the current market value of $17,709 with an offsetting debit
of $9,519 to accumulated other comprehensive income within the Company's
stockholders' equity section of the balance sheet. At December 31, 1999, the
Company's cumulative reduction in the carrying value of this investment was
$7,970.
In August 1999, the Company entered into a collaborative agreement with
Cambridge Antibody Technology Ltd. of Melbourn, United Kingdom ("CAT") to
jointly pursue the development of fully human monoclonal antibody therapeutics.
Under the agreement, CAT will conduct research to identify fully human,
monoclonal antibodies specific for the Company's proprietary proteins. CAT will
receive milestone payments from the Company in connection with the development
of any such antibodies as well as royalty payments on the Company's net sales of
such licensed product following regulatory approval. During 1999, the Company
paid CAT a total of $313 towards the achievement of the first contractual
milestone and is obligated to pay an additional $62 in fiscal 2000 towards this
same milestone. The agreement provides for additional payments to CAT for each
product relating to the achievement of milestones corresponding to the
regulatory approval process. In the event of the achievement of other milestones
or successful product launch, the Company would be obligated to pay CAT
additional compensation and royalties. While this agreement may be terminated
early under certain circumstances, it will remain in force until the later of
the expiration date of certain CAT patents or ten years after the date of first
commercial sale of a product licensed by the Company.
In December, 1999, the Company entered into a collaborative agreement with
Abgenix, Inc., of Fremont, California ("ABX") to exchange technology to identify
novel human antibody drug candidates for development and commercialization. The
Company has the right to use ABX's proprietary technology to generate fully
human antibody drug candidates. In addition, ABX has a future option to develop
and commercialize products derived from the Company's pool of novel human
antibody drug candidates. Under this reciprocal agreement, depending upon whose
product moves through the regulatory approval process, the Company or ABX would
be obligated to the other for milestone payments for each therapeutic product or
each diagnostic product along with royalties in the event of a successful
product launch. While this agreement may be terminated under certain
circumstances, it will remain in force until the expiration of the last of each
party's royalty obligations.
F-11
<PAGE> 52
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE F) - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Laboratory equipment......................... $24,341 $19,688
Computers and EDP equipment.................. 8,156 7,437
Furniture and office equipment............... 780 953
Leasehold improvements....................... 14,274 9,045
Construction in progress..................... 3,497 4,338
----------- -----------
51,048 41,461
Less accumulated depreciation and
amortization............................... 25,491 20,496
----------- -----------
$25,557 $20,965
=========== ===========
</TABLE>
(NOTE G) - EQUIPMENT LEASE OBLIGATIONS
Prior to 1995, the Company entered into sale and leaseback agreements in
connection with certain computer and laboratory equipment having a net book
value of $2,132 and $1,302, respectively. The Company sold the equipment for
$2,198 and $1,575, respectively, and entered into three master lease agreements
pursuant to which it leased back the above equipment for initial terms of 48
months. All of the equipment leased under these agreements has been accounted
for as capital leases. In addition, the Company entered into other capital lease
agreements for certain equipment for initial terms of 36 months. As of December
31, 1998, the Company had ended all of its capital leases. The recording of
capital leases is considered a non-cash transaction, and therefore is excluded
from the statements of cash flows. Amortization expense related to equipment
under capital leases is included in depreciation and amortization on the
statements of cash flows.
In conjunction with the master lease agreements, the Company granted warrants to
the lessors to purchase 1,188,000 shares of the Company's common stock, which
the Company valued at $0.14 per warrant. All of the warrants have been exercised
at a purchase price of $0.67 per share or by receiving shares equal to the value
(as determined by a formula) of the warrants by surrender of the warrants.
In 1999, a lessor exercised warrants for the purchase of 15,000 shares by
electing to receive 14,950 shares. In 1998, a lessor exercised warrants for the
purchase of 151,300 shares by electing to receive 147,054 shares. In 1997, a
lessor exercised warrants for the purchase of 10,700 shares by electing to
receive 10,322 shares.
(NOTE H) - OTHER ASSETS
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization of $335........................ $ 9,831 $ -
Note receivable from Officer.................. 891 891
Receivable from Vascular Genetics, Inc........ 2,081 -
All other assets.............................. 1,170 1,273
----------- -----------
$13,973 $2,164
=========== ===========
</TABLE>
Deferred financing costs were incurred in connection with the Company's two
convertible subordinated debt offerings during fiscal 1999. In connection with
the $125,000 5 1/2% convertible subordinated notes, the Company incurred
financing costs of approximately $3,962. In connection with the $200,000 5%
convertible subordinated notes, the Company incurred financing costs of
approximately $6,204. The deferred financing costs represent
F-12
<PAGE> 53
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE H) - OTHER ASSETS (CONTINUED)
primarily underwriting fees of 3% of the gross amount of notes issued, or
$9,750. The Company is amortizing these costs on a straight-line basis over the
life of the notes. However, in January 2000, the Company completed a tender
offer to the holders of the 5 1/2% convertible subordinated notes, which will
result in a reclassification of the remaining deferred financing costs
associated with the converted debt to stockholders' equity. See Note Q,
Subsequent Events, for further discussion.
The Company holds a note receivable from an officer of $891 that is due on
demand and does not bear interest. The note is collateralized by shares of the
Company's common stock owned by the officer that have a market value of at least
200% of the outstanding balance of the note.
The Company has a receivable from Vascular Genetics, Inc. ("VGI") in connection
with services and materials provided during fiscal 1999. See Note O, Investment
in Vascular Genetics, Inc. for further discussion.
(NOTE I) - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Equipment purchases........................... $1,685 $ 799
Professional fees............................. 1,716 1,316
Other accrued expenses........................ 4,110 2,527
--------- ----------
$7,511 $4,642
====== ======
</TABLE>
(NOTE J) - LONG-TERM DEBT
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31,
December 31, ------------
Debt 1999 Interest Rates Maturities 1999 1998
---- ------------------- ---------- ---- ----
<S> <C> <C> <C> <C>
MIDFA 6.43% December 2003 $ 1,780 $ 2,224
5 1/2% Convertible Subordinated Notes 5.50% June 2006 125,000 -
5 % Convertible Subordinated Notes 5.00% December 2006 200,000 -
---------- -----------
326,780 2,224
Less current portion 444 444
---------- -----------
$ 326,336 $ 1,780
========== ===========
Annual maturities of all long term debt are as follows:
2000 $ 444
2001 444
2002 444
2003 448
2004 -
2005 and thereafter 325,000
---------
$ 326,780
=========
</TABLE>
In December 1994, the Company entered into a loan agreement with Maryland
Industrial Development Financing Authority ("MIDFA"). Major leasehold
improvements were financed with the proceeds of a $4,000 taxable variable rate
bond issue (the "Bonds") from MIDFA. The Company is required to make annual
payments of $444 commencing December 1995 plus interest at a variable rate of
interest (6.43% at December 31, 1999 and 5.46% at December 31, 1998), to the
trustee on behalf of the bondholders which is equal to the interest and
principal requirements on the bonds. The variable rate is equal to 50 basis
points plus the higher of the yield equivalent of the average 30-day or 90-day
commercial paper rate. Under certain circumstances, the rate may be adjusted
either
F-13
<PAGE> 54
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE J) - LONG-TERM DEBT (CONTINUED)
upward or downward but in no event in excess of 10 basis points above or below
the rate determined above. MIDFA has entered into an indenture with the Trustee
whereby the Trustee has obtained an irrevocable letter of credit on behalf of
the bondholders.
Required monthly principal payments of $37 plus interest are deposited into a
bond fund. The interest is disbursed monthly to the bondholders. Principal is
repaid to the bondholders at the rate of $444 annually with a final payment of
$448 on December 1, 2003. The Company deposited $561 and $592 of principal and
interest into the bond fund during the years ended December 31, 1999 and 1998,
respectively.
In connection with the Loan Agreement, the Company entered into an irrevocable
Letter of Credit Agreement with a bank for the account of the Company and in
favor of the Trustee in the initial amount of $4,067, which expires on December
15, 2003. Concurrently, the Company entered into a Collateral Pledge Agreement
with the bank.
The Company is required to maintain 43% of the outstanding principal amount of
the Bonds (50% is required under certain circumstances) with the bank as
Collateral for the Letter of Credit. Pursuant to the Collateral Pledge Agreement
at December 31, 1999 and 1998, the Company had $1,059 and $1,367, respectively,
on deposit with the bank, which is included in Restricted Investments in the
balance sheets. The pledge collateral will be released upon the payment and
performance in full of the Company's Letter of Credit obligations. The agreement
contains covenants with respect to tangible net worth, cash and cash equivalents
and investment securities, as well as other covenants, and prohibits the payment
of cash dividends. During 1994, the Company incurred costs of $136 in connection
with this loan, which are being amortized over the term of the loan.
During fiscal 1999, the Company completed the private placement of $125,000 of
5 1/2% Convertible Subordinated Notes due June 2006, and $200,000 of 5%
Convertible Subordinated Notes due December 2006, convertible into common stock
at $26.10 and $71.63 per share, respectively. Total debt issuance costs
aggregated $10,166, of which $335 had been amortized as of December 31, 1999.
See Note Q, Subsequent Events, for additional discussion of the Company's
Convertible Subordinated Notes.
(NOTE K) - COMMITMENTS AND OTHER MATTERS
Operating Leases
The Company leases office and laboratory premises and equipment pursuant to
operating leases expiring at various dates through 2019. The leases contain
various renewal options. Minimum annual rentals are as follows:
<TABLE>
<S> <C>
Years Ending December 31,
2000.................... $ 7,013
2001.................... 8,750
2002.................... 8,797
2003.................... 7,820
2004.................... 5,442
Thereafter.............. 54,078
-------
$91,900
=======
</TABLE>
The Company has entered into leases for office and laboratory space which
provide for certain rent abatement and rent escalations on each anniversary of
the lease commencement date. For financial reporting purposes, rent expense is
charged to operations on a straight-line basis over the term of the lease,
resulting in a liability for deferred rent of $551 and $343 at December 31, 1999
and 1998, respectively.
Certain other leases provide for escalation for increases in real estate taxes
and certain operating expenses, as well as various renewal terms.
During 1997, the Company entered into a 20-year lease for a process development
and manufacturing facility consisting of 84,000 square feet expandable to
127,000 square feet being built to the Company's specifications. Annual base
rent of $2,236 began January 1, 1999. Pursuant to the lease terms, the Company
had a security deposit of $10,578 and $5,382 as of December 31, 1999 and 1998,
respectively, on deposit with the bank which is included in Restricted
Investments in the balance sheets. The security deposit will accrue interest
earned up to a total security deposit of $15,000. Any amounts over $15,000 will
be released to the Company. The security deposit
F-14
<PAGE> 55
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE K) - COMMITMENTS AND OTHER MATTERS (CONTINUED)
Operating Leases (continued)
will be released at the end of the lease term. The lease agreement contains
covenants with respect to tangible net worth, cash and cash equivalents and
investment securities, as well as other covenants. The lease requires additional
security deposit if the Company does not meet its covenants.
During 1998, the Company entered into a lease agreement to lease up to $10,300
of lab, furniture and computer equipment for its recently leased process
development and manufacturing facility. The lease agreement has an initial term
of 7 years. As of December 31, 1999, the Company had leased $10,300 of
equipment. The agreement has been accounted for as an operating lease.
During the fourth quarter of fiscal 1999, the Company entered into an 18-year
lease for a 43,000 square foot expansion of the process development and
manufacturing facility, bringing the total square footage under lease at this
facility to 127,000. Annual base rent of $1,529 commences on January 1, 2001.
The financial covenants and security deposit provisions for this lease are
included with the provisions of the 1997 lease discussed above. For the entire
127,000 square foot facility, beginning in January 2001 and expiring January 1,
2019, the Company will incur annual lease payments of $3,765.
Rent expense aggregated $7,210, $3,136, and $2,384 for the years ended December
31, 1999, 1998 and 1997, respectively.
Capital Expenditures
At December 31, 1999 and 1998, the Company had commitments for capital
expenditures, consisting primarily of laboratory equipment, of $5,506 and
$2,480, respectively.
401(k) Plan
Effective January 15, 1993, the Company adopted a 401(k) pension plan available
to eligible full-time employees. The Company made contributions of $446, $340,
and $235 to the plan for the years ended December 31, 1999, 1998, and 1997,
respectively.
(NOTE L) - STOCKHOLDERS' EQUITY
Common Stock and Preferred Stock
On December 16, 1999, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation (Fifth) which increased the
Company's authorized common stock to 250,000,000 from 50,000,000 shares and
increased the Company's authorized preferred stock to 20,000,000 from 1,000,000.
Subsequent to year-end, on January 5, 2000, the Company's Board of Directors
approved a two-for-one stock split to be effected in the form of a stock
dividend payable to stockholders of record as of January 14, 2000. On January
28, 2000, the Company effected the two-for-one stock split. All share, per
share, common stock and stock option amounts presented in the financial
statements and related footnotes for all periods presented have been restated to
reflect the Company's two-for-one stock split.
Stock Option Plans
The Company has stock option plans under which options to purchase shares of the
Company's common stock may be granted to employees, consultants and directors at
a price no less that the fair market value on the date of grant. At December 31,
1999, the total authorized number of shares under all plans was 13,031,654. The
vesting period of the options is determined by the Board of Directors and is
generally five years. All options expire after ten years from the date of grant.
The Company issued options to non-employees of 24,000, 12,000, and 16,000 during
the years ended December 31, 1999, 1998, and 1997, respectively. The fair value
of these options has been recorded as a debit to unearned compensatory stock
options and is being amortized over the vesting period of the options. During
1998, the Board of Directors approved the re-pricing of stock option grants
totaling 3,829,898 shares to the then current market value.
F-15
<PAGE> 56
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE L) - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (continued)
Option transactions during 1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 7,162,676 $16.91 6,085,818 $18.71 3,644,794 $11.51
Options granted 2,784,236 49.88 6,411,064 15.46 3,288,702 24.29
Options exercised (1,145,802) 12.30 (706,566) 9.67 (560,680) 7.45
Options canceled or
expired (183,624) 15.89 (4,627,640) 18.38 (286,998) 13.19
----------- ----------- ----------
Outstanding at end of
year 8,617,486 28.20 7,162,676 16.91 6,085,818 18.71
========== =========== ==========
Options exercisable at
end of year 2,689,758 20.64 2,164,630 13.15 1,452,568 11.72
========== =========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted-
Average
Remaining Weighted- Average
Contractual Average Weighted-
Number Life (In Exercise Number Exercise
Range of Exercise Price Outstanding Years) Price Exercisable Price
- ----------------------- ----------- --------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.10 to $ 6.38 70,178 3.6 $ 1.69 69,679 $ 1.65
$ 6.39 to $ 11.00 253,760 4.7 9.30 243,513 9.28
$ 11.01 to $ 17.25 4,750,712 7.6 14.64 1,812,690 14.47
$ 17.26 to $ 19.50 139,400 8.9 18.03 36,000 18.56
$ 19.51 to $ 34.99 358,600 9.2 21.31 30,000 20.33
$ 35.00 to $ 50.00 1,149,400 7.3 42.89 204,000 40.95
$ 50.01 to $ 65.00 1,895,436 9.9 58.82 293,876 58.75
--------- ---------
8,617,486 8.0 28.20 2,689,758 20.64
========= =========
</TABLE>
The Company applies APB No. 25 in accounting for its stock option plans and,
accordingly, recognizes compensation expense for the difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in 1999, 1998, and 1997 would have been approximately
$78,202, $27,661, and $32,493, respectively, or $1.70 per share, $0.62 per
share, and $0.75 per share, respectively. The fair value of the options granted
during 1999, 1998 and 1997 is estimated as $31.30, $8.52 and $9.13 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0% for all years presented,
volatility of 62% for 1999, 52% for 1998 and 46.03% for 1997, risk-free interest
rate of 6.71% for 1999, 4.54% for 1998 and 5.75% for 1997, and expected life of
6 years for all years presented. The effect of applying SFAS No. 123 on 1999,
1998 and 1997 pro forma net loss and net loss per share as stated above is not
necessarily representative of the effects on reported net loss for future years
due to, among other things, (1) the vesting period of the stock options and the
(2) fair value of additional stock options in future years.
Options available for future grant were 1,297,898 at December 31, 1999.
F-16
<PAGE> 57
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE M) - PREFERRED SHARE PURCHASE RIGHTS
On May 20, 1998, the Company adopted a Shareholder Rights Plan which
provided for the issuance of rights to purchase shares of Junior Participating
Preferred Stock, par value $0.01 per share (the "Preferred Shares"), of the
Company. Under the shareholder rights plan, the Company distributed one
preferred share purchase right (a "Right") for each outstanding share of common
stock, par value $0.01 (the "Common Shares"), of the Company. The Rights were
distributed on June 26, 1998 to stockholders of record on May 27, 1998.
Each Right entitles the holder to purchase from the Company one
one-thousandth of a Preferred Share at a price of $250 per one one-thousandth of
a Preferred Share, subject to adjustment. The rights become exercisable ten
business days after any party acquires or announces an offer to acquire
beneficial ownership of 15% or more of the Company's Common Shares. In the event
that any party acquires 15% or more of the Company's Common Stock, the Company
enters into a merger or other business combination, or if a substantial amount
of the Company's assets are sold after the time that the Rights become
exercisable, the Rights provide that the holder will receive, upon exercise,
shares of the common stock of the surviving or acquiring company, as applicable,
having a market value of twice the exercise price of the Right.
The Rights expire May 20, 2008, and are redeemable by the Company at a
price of $0.001 per Right at any time prior to the time that any party acquires
15% or more of the Company's Common Shares. Until the earlier of the time that
the Rights become exercisable, are redeemed or expire, the Company will issue
one Right with each new Common Share issued.
(NOTE N) - INCOME TAXES
The Company provides for income taxes using the liability method. The difference
between the tax provision and the amount that would be computed by applying the
statutory Federal income tax rate to income before taxes is attributable to the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at 34%.......... $ (14,261) $ (7,860) $ (7,181)
Expenses for which no tax benefit is
available............................... 96 45 31
Expenses for which no book benefit is
available............................... (2,900) (1,664) (1,550)
Increase in valuation allowance on
deferred tax assets..................... 18,252 13,554 12,465
State taxes, net of federal tax benefit...... (2,001) (1,131) (1,286)
Recharacterization of foreign tax credits
to deductions........................... 1,195 - -
Foreign taxes paid........................... 225 225 245
Tax credits generated and not used........... (2,299) (1,097) (2,436)
Other........................................ 1,918 (1,847) (43)
---------- -------- ---------
$ 225 $ 225 $ 245
========== ======== =========
</TABLE>
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows:
F-17
<PAGE> 58
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE N) - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
CURRENT LONG-TERM
ASSET/(LIABILITY) ASSET/(LIABILITY)
----------------- -----------------
<S> <C> <C>
December 31, 1999
Net operating loss carryforward......................... $ - $ 40,436
Research and development and other tax credit
carryforwards......................................... - 9,517
Deferred revenue........................................ 1,234 6,942
Depreciation............................................ - 528
Reserves................................................ - 860
Other................................................... 483 220
------------ ----------
1,717 58,503
Less valuation allowance................................ (1,717) (58,503)
------------ ----------
$ - $ -
============ ==========
December 31, 1998
Net operating loss carryforward......................... $ - $ 23,052
Research and development and other tax credit
carryforwards......................................... - 7,438
Deferred revenue........................................ 8,925
Depreciation............................................ 1,339
Other................................................... 330 143
------------ ----------
330 40,897
Less valuation allowance................................ (330) (40,897)
------------ ----------
$ - $ -
============ ==========
</TABLE>
The Company recognized a valuation allowance to the full extent of its deferred
tax assets since the likelihood of realization of the benefit cannot be
determined.
Provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................... $ - $ - $ -
State...................................... - - -
Foreign taxes.............................. 225 225 245
Deferred...................................... - - -
------- ------- -------
$225 $225 $245
======= ======= =======
</TABLE>
The Company has available tax credit carryforwards expiring as follows:
<TABLE>
<S> <C>
2008................................................... $ 745
2009................................................... 1,297
2010................................................... 534
2011................................................... 846
2012................................................... 1,711
2018................................................... 1,847
2019................................................... 2,299
No expiration.......................................... 238
--------
$ 9,517
========
</TABLE>
F-18
<PAGE> 59
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE N) - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards for federal income tax purposes
of approximately $103,800 which expire, if unused, from the year 2010 through
the year 2019. The tax benefit of approximately $10,900 of net operating losses
related to stock options will be credited to equity when the benefit is realized
through utilization of the net operating loss carryforwards.
(NOTE O) - INVESTMENT IN VASCULAR GENETICS INC.
In November 1997, the Company entered into an agreement with three other parties
to form Vascular Genetics Inc. ("VGI"), to pursue the development and
commercialization of gene therapy products for the treatment of vascular
diseases. As a result of the November 1997 agreement and other transactions
since that time, as of December 31, 1999, the Company holds a significant
minority equity interest in VGI of 32.0%. The Company also holds preemptive
rights that will permit retention of the Company's ownership position in the
event of a future financing. In addition, the Company has the option to purchase
100% of VGI's common stock at fair market value upon receiving the approval from
one of the other parties and the board of directors of VGI. The Company will
earn royalties on net sales from products developed and commercialized by VGI or
by a party granted a sublicense by VGI. Royalty rates are competitive and
increase as specified sales targets are reached. In addition, the Company has
the option to manufacture certain products developed by VGI and receive a
manufacturing fee. The Company committed to lend VGI up to $600 at an interest
rate of prime plus 1%. In 1998, the Company loaned $600 to VGI of which the
Company forgave $100 in 1998. In 1998, the Company recorded on its statement of
operations $2,226 as Equity in Loss of Joint Venture. The Company has appointed
two directors to the Board of Directors of VGI.
During 1999, the Company provided manufacturing services and product to VGI in
connection with a manufacturing agreement. At December 31, 1999, the Company's
receivable balance due from VGI is $2,081. This balance represents the net of
fiscal 1999 revenues of $1,677 along with certain other costs recorded as
pass-through charges to VGI, less payments received from VGI.
(NOTE P) - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss $ (42,169) $ (23,182) $ (21,393)
============ ============ ==============
Denominator:
Denominator for basic earnings per
share - weighted-average shares 46,025,994 44,868,262 43,050,566
============ ============ ==============
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 46,025,994 44,868,262 43,050,566
============ ============ ==============
Basic net loss per share $ (0.92) $ (0.52) $ (0.50)
============ ============ ==============
Diluted net loss per share $ (0.92) $ (0.52) $ (0.50)
============ ============ ==============
</TABLE>
(NOTE Q) - SUBSEQUENT EVENTS
During the first quarter of fiscal 2000, the Company concluded an offer to the
holders of its 5 1/2% Notes to convert their Notes into common stock. As an
inducement to convert, the Company offered its 5 1/2% Note holders an additional
one hundred and eighty dollars per thousand dollars of principal amount of the
5 1/2% Notes, payable in the Company's common stock. This inducement was in
addition to the 38.3142 shares issuable for each thousand dollar principal
amount of 5 1/2% Notes convertible at $26.10 per share. As a result of the
conversions, the Company converted $118,285 of 5 1/2% Notes to common stock and
issued a total of 4,786,104 shares of common stock, including a total of 254,122
shares of common stock issued as an inducement to convert. In the first quarter
of fiscal 2000, the Company will record a one-time charge of $21,017,
representing $19,433 in inducement costs and an additional $1,584 in other costs
associated with this conversion. In addition, the Company will reclassify the
$3,470 of unamortized debt financing costs to stockholders' equity as part of
the conversion.
F-19
<PAGE> 60
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE Q) - SUBSEQUENT EVENTS (CONTINUED)
The pro forma effects of this conversion, had it occurred prior to December 31,
1999 would appear as follows:
<TABLE>
<CAPTION>
(unaudited)
As Reported at Pro Forma at
December 31, 1999 December 31, 1999
----------------- -----------------
<S> <C> <C>
Total Assets $ 527,725 $ 522,670
Long-term Debt, net of current portion $ 326,336 $ 208,051
Total Liabilities $ 358,657 $ 240,372
Stockholders' Equity $ 169,068 $ 282,298
Net Income (Loss) $ (42,169) $ (63,186)
Common stock outstanding 46,657,128 51,443,232
Weighted average common shares outstanding 46,025,994 50,812,098
Basic and diluted net income (loss) per
share $ (0.92) $ (1.24)
</TABLE>
In addition, during the first quarter of fiscal 2000, the Company completed the
private placement of $225,000 of 5% Convertible Subordinated Notes due February
2007, convertible into common stock at $112.50 per share. Debt issuance costs
amounted to approximately $7,513. See Note R, Events (unaudited) Subsequent to
Date of Independent Auditors Report, for additional discussion of the Company's
debt activity.
(NOTE R) - EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS REPORT
On February 29, 2000, the Company announced an agreement with Cambridge
Antibody Technology plc ("CAT"). The ten-year agreement provides the Company
with rights to use CAT technology to develop and sell an unlimited number of
fully human antibodies for therapeutic and diagnostic purposes. The Company also
has rights to use CAT antibody technology for the use and sale of research
tools, for which the Company will pay to CAT a share of revenues received. The
Company will also pay CAT clinical development milestones and royalties based on
product sales. The Company and CAT also plan to combine resources to develop and
sell a significant number of therapeutic antibody products. CAT has the right to
select up to twenty-four of the Company's proprietary antigens for laboratory
development. The Company has the option to share clinical development costs and
to share the profits equally with CAT on up to eighteen such products. CAT has
rights to develop six such products on its own. The Company is entitled to
clinical development milestones and royalty payments on the products developed
by CAT.
Under the agreement, the Company will also buy 1,670,000 ordinary shares of
CAT for the sterling equivalent of approximately $55,000, giving the Company an
initial equity stake of approximately six percent in CAT. In March 2000, the
Company paid an additional $12,000 in licensing fees to CAT, which includes
research support at CAT to help them to develop the Company's human antibody
products. A portion of the equity investment is subject to approval by CAT's
shareholders. The equity investment is expected to close in April 2000.
On March 2, 2000, the Company announced the call of its $200,000 aggregate
principal amount of 5% Convertible Subordinated Notes Due 2006 for redemption on
March 22, 2000. In lieu of redemption, holders may convert their notes into the
Company's common stock at any time on or prior to March 21, 2000. Based upon the
current market price of the Company's common stock, the Company expects that
holders will convert their notes into common stock rather than accept
redemption. Holders of the notes would receive one thousand dollars in cash per
one thousand dollars principal amount of notes, plus accrued interest, or may
convert their notes into common stock. The notes may be converted into common
stock at a price of $71.625 per share, which is equivalent to 13.9616 shares of
common stock per one thousand dollars principal amount of notes. In addition,
the Company will make a "make-whole" payment of one hundred and fifty dollars
per one thousand dollars principal amount of notes, whether redeemed or
converted, which will result in a one-time charge to earnings of $30,000.
In March 2000, the Company completed a private placement of $300,000
aggregate principal of 3 3/4% Convertible Subordinated Notes Due March 2007. The
Company received net proceeds of approximately $291,200.
F-20
<PAGE> 61
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE S) - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 1999 and 1998 is presented in the
following tables:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999
Revenue $ 1,422 $14,798 $ 7,442 $ 862
Income (loss) from Operations (14,738) (4,279) (11,735) (20,169)
Net income (loss) (12,253) (2,248) (9,713) (17,955)
Basic and diluted net income per share (1) (0.27) (0.05) (0.21) (0.39)
Stock Prices (1)
High 18.38 23.00 44.75 79.78
Low 14.81 17.47 20.44 37.09
1998
Revenue $ 1,991 $13,936 $ 11,279 $ 2,392
Income (loss) from Operations (12,549) (936) (4,534) (13,759)
Net income (loss) (9,733) 1,223 (2,127) (12,545)
Basic and diluted net income per share (1) (0.22) 0.03 (0.05) (0.28)
Stock Prices (1)
High 22.56 21.63 20.00 18.13
Low 17.88 17.50 11.66 12.78
</TABLE>
(1) Restated to reflect two-for-one stock split paid in the form of a stock
dividend on January 28, 2000.
F-21
<PAGE> 1
LEASE AGREEMENT
BETWEEN
MARYLAND ECONOMIC DEVELOPMENT CORPORATION
AND
HUMAN GENOME SCIENCES, INC.
DATED DECEMBER 1, 1999
i
<PAGE> 2
LIST OF EXHIBITS
EXHIBIT A Description of Land
EXHIBIT B Description of Construction Contract
EXHIBIT C List of Tenant's Equipment
EXHIBIT D Schedule of Option Purchase Prices
EXHIBIT E Notice and Payment Addresses
ii
<PAGE> 3
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made as of December 1, 1999, by
and between MARYLAND ECONOMIC DEVELOPMENT CORPORATION, a body politic and
corporate and an instrumentality of the State of Maryland ("Landlord") and HUMAN
GENOME SCIENCES, INC., a Delaware corporation ("Tenant").
RECITALS
A. Landlord, at the request of Tenant, has acquired from
Montgomery County, Maryland a certain parcel of land located at the Johns
Hopkins Belward Research Campus in Montgomery County, Maryland, more
particularly described on Exhibit A attached hereto and made a part hereof (the
"Land") as further defined in Paragraph 2 hereof).
B. Landlord acquired the Land at the request of Tenant for the sole
purposes of
(a) constructing on the Land, a process development and manufacturing
plant consisting of approximately 84,000 square feet in accordance with plans
and specifications approved by Landlord and Tenant,
(b) leasing to Tenant, pursuant to that certain Lease Agreement dated as
of December 1, 1997 between Landlord and Tenant, the 1997 Leased Premises (as
that term is defined in Paragraph 2 hereof),
(c) constructing on the Land, an addition to such process development and
manufacturing plant consisting of approximately 43,000 square feet in accordance
with plans and specifications approved by Landlord and Tenant, and
(d) leasing to Tenant, pursuant to this Lease, the Leased Premises (as
that term is defined in Paragraph 2 hereof).
C. The parties desire to enter into this Lease defining their
respective rights, duties, obligations and liabilities relating to the Leased
Premises.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby
covenant and agree as follows:
1. Demise of Leased Premises. In consideration of the rents and
covenants herein stipulated to be paid and performed, Landlord
<PAGE> 4
hereby demises and lets to Tenant, and Tenant hereby demises and lets from
Landlord, the Leased Premises.
2. Certain Definitions. The following terms shall have the
definitions provided below. Unless specifically provided otherwise, all
accounting terms have the definitions given them in accordance with GAAP
(hereinafter defined) as applied to the applicable Person on a consistent basis
by its accountants in the preparation of its previous annual financial
statements.
Act of Bankruptcy means with respect to any Person, the filing of a
petition in bankruptcy under the Bankruptcy Code, or the commencement of a
proceeding under any other applicable law concerning insolvency, reorganization
or bankruptcy, by or against such Person as debtor.
Accumulated Funding Deficiency means an "accumulated funding deficiency"
as defined in Section 302 of ERISA or Section 412(a) of the Code.
Additional Improvements means the buildings, structures and other
improvements, including "fit-outs", constituting an addition to the
Improvements, consisting of approximately 43,000 square feet, constructed on the
Land in accordance with Plans approved by Landlord and Tenant.
Additional Rent means Additional Rent as defined in Paragraph 7.
Affiliate means: (a) any Person in which Tenant legally or beneficially
owns or holds, directly or indirectly, any capital stock or other equity
interest; (b) any Person that is a partnership in which Tenant is a partner, or
a joint venturer in which Tenant is a joint venturer or a limited liability
company of which Tenant is a managing member; (c) any Person that is a director,
officer, employee, stockholder (legally or beneficially) or other affiliate of
any of the foregoing or of Tenant; and (d) any Person that directly or
indirectly controls, is under the control of, or is under common control with,
Tenant, including, without limitation, any Person that directly or indirectly
has the right or power to direct the management or policies of Tenant and any
Person whose management or policies Tenant directly or indirectly has the right
or power to direct.
Allfirst means Allfirst Bank, a Maryland state-chartered commercial bank
(formerly known as The First National Bank of Maryland, a national banking
association), its successors and assigns.
Allfirst Letter of Credit means that certain Letter of Credit to be
issued by Allfirst in the original stated amount of $4,446,918 for the account
of Landlord as security for the Series A Bonds, as the same may from time to
time be modified, amended, supplemented, renewed or replaced.
2
<PAGE> 5
Allfirst Letter of Credit Agreement means that certain Letter of Credit
Agreement between Allfirst and Landlord dated as of December 1, 1999, as the
same may from time to time be modified, amended, supplemented, renewed or
replaced.
Alterations means all changes, additions (including additional
Improvements on the Land), improvements or repairs to, all alterations,
reconstructions, renewals or removals of and all substitutions or replacements
for any of the Improvements, both interior and exterior, structural and
non-structural, and ordinary and extraordinary.
Assignment means the Assignment, Subordination and Non-Disturbance
Agreement by and among Landlord, Tenant and the Banks, dated as of December 1,
1999, together with all amendments thereto and modifications thereof.
Bankruptcy Code means Title 11 of the United States Code, as amended, and
all rules and regulations promulgated pursuant thereto.
Banks means, collectively, Allfirst and First Union.
Basic Rent means Basic Rent as defined in Paragraph 7.
Basic Rent Payment Date means any date on which an installment of Basic
Rent is due pursuant to Paragraph 7.
Beneficiary means, collectively, MIDFA, the Banks and any other Credit
Facility Provider, as Beneficiary under the Deed of Trust.
Bond Documents has the meaning given to such term in the Indenture.
Bond Purchase Drawing has the meaning given to such term in the
Indenture.
Bonds means, collectively, the Series A Bonds and the Series B Bonds.
Building Equipment means the equipment and fixtures to be installed in
the Additional Improvements which are integral to the occupancy of the Leased
Premises as a "tenantable shell" (e.g., all elevators, escalators, shades,
awnings, floor coverings, screens, landscaping and security systems and building
code required plumbing, heating, electrical, ventilation and fire-extinguishing
equipment) and financed with proceeds of the Bonds as evidenced through the
requisitions from the Facility Fund, but excluding therefrom the Tenant's
Equipment.
Change in Control means the occurrence of any of the following: (a) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of
3
<PAGE> 6
the assets of Tenant and its Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act), (b) the adoption of
a plan relating to the liquidation or dissolution of Tenant, (c) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of more than 51% of the
voting stock of Tenant.
Closing Date means the date on which fully executed and authenticated
Bonds are issued and initially delivered.
Code means the Internal Revenue Code of 1986, or any applicable
predecessor statutory provision. Each reference to a section of the Code herein
shall be deemed to include the United States Treasury Regulations in effect or
proposed from time to time with respect thereto.
Collateral Pledge Agreement means the Amended and Restated Collateral
Pledge Agreement dated as of December 1, 1999 from Tenant to Landlord, together
with all amendments thereto and modifications thereof.
Commonly Controlled Entity means any trade or business (whether or not
incorporated) which is a member of a "controlled group of corporations" (as such
phrase is used and defined in Section 414(b) of the Code) or which is under
"common control" (as such phrase is used and defined in Section 414(c) of the
Code), and of which Tenant or any Subsidiary of Tenant is a part.
Construction Contract means that certain Construction Contract between
Contractor and Landlord described on Exhibit B hereto.
Contractor means the contractor named in the Construction Contract.
Credit Facilities has the meaning given to such term in the Indenture.
The initial Credit Facilities are the Letters of Credit.
Credit Facility Agreements has the meaning given to such term in the
Indenture. The initial Credit Facility Agreements are the Letter of Credit
Agreements.
Credit Facility Documents has the meaning given to such term in the
Indenture. The initial Credit Facility Documents are the Letter of Credit
Documents.
Credit Facility Providers has the meaning given to such term in the
Indenture. The initial Credit Facility Providers are the Banks.
Deed of Trust means the Deed of Trust dated as of December 1, 1999,
encumbering the Land, the Improvements and the Leased
4
<PAGE> 7
Premises, from Landlord to certain individual trustees for the benefit of the
Beneficiary, together with all amendments thereto and modifications thereof.
Default Rate means the Default Rate as defined in Paragraph 7(e).
Encumbrances means Encumbrances as defined in Paragraph 30.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
Event of Default means an Event of Default as defined in Paragraph 19.
Exchange Act means the Securities Exchange Act of 1934, as amended.
Facility Fund means the "Facility Fund", as such term is defined in the
Indenture.
First Union means First Union National Bank, a national banking
association, its successors and assigns.
First Union Letter of Credit means that certain Letter of Credit to be
issued by First Union in the original stated amount of $13,340,754 for the
account of Landlord as security for the Series B Bonds, as the same may from
time to time be modified, amended, supplemented, renewed or replaced.
First Union Letter of Credit Agreement means that certain Letter of
Credit Agreement between First Union and Landlord dated as of December 1, 1999,
as the same may from time to time be modified, amended, supplemented, renewed or
replaced.
GAAP means generally accepted accounting principles in the United States
of America in effect from time to time, consistently applied. In the event of a
change in GAAP affecting the covenants contained in Paragraphs 26 or 27 of this
Lease or definitions contained in Paragraph 2 of this Lease relating to such
covenants, such covenants and definitions shall continue to be applied as though
such change in GAAP had not occurred unless and until Landlord, the Credit
Facility Providers, MIDFA, and Tenant shall agree in writing to amend or adjust
such covenants or definitions as deemed necessary as a result of such change in
GAAP.
Hedge means any interest rate swap or similar hedge arrangement in
existence at any time or from time to time between Landlord and any Hedge
Counterparty.
Hedge Agreement means any agreement between Landlord and any Hedge
Counterparty in existence at any time or from time to time, executed in
connection with any Hedge, including (without limitation) the Swap Agreement (as
defined in the Letter of Credit
5
<PAGE> 8
Agreements), together with all amendments thereto and modifications thereof.
Hedge Counterparty means any Person, in its capacity as counterparty to
any Hedge Agreement, with which Landlord has entered into any Hedge or may
hereafter at any time or from time to time enter into any Hedge, including
(without limitation) either or both of the Banks and any other Credit Facility
Provider.
Hedge Documents means, collectively, any Hedge Agreement and all other
documents in existence at any time or from time to time, executed and delivered
to evidence, secure, or in connection with, any Hedge.
Impositions means all taxes, including, without limitation, sales and use
taxes (but excluding, except as hereinafter provided, income, franchise, profits
and gross receipt taxes), assessments (including, without limitation, all
assessments for public improvements or benefits), water and sewer rents, rates
and charges, excises, levies, license fees, permit fees, inspection fees and
other authorization fees and other charges or costs of any nature whatsoever, in
each case whether general or special, ordinary or extraordinary, foreseen or
unforeseen, of every character (including all interest and penalties thereon),
which at any time during or in respect of the term hereof may be assessed
against, levied upon, confirmed or imposed on, or in respect of, or be a lien
upon (a) the Leased Premises or any part thereof or any estate, right or
interest therein, (b) any occupancy, use or possession of, or activity conducted
on, the Leased Premises or any part thereof, (c) any Basic Rent or Additional
Rent or other sum reserved or payable by Tenant hereunder, or (d) this Lease or
Landlord. Notwithstanding the foregoing provisions, the term "Impositions" shall
exclude (i) franchise, capital stock or similar taxes, if any, of Landlord and
assessments, levies and liens arising therefrom; (ii) transfer, income, profits
or other taxes, if any, of Landlord, determined on the basis of its net income
or net revenues, and assessments, levies and liens arising therefrom; (iii)
excise, gross receipts or gross income taxes imposed upon or measured by Basic
Rent, Additional Rent or other sums payable by Tenant pursuant to this Lease,
unless the taxes referred to in clauses (i) and (ii) above are in lieu of or a
substitute for any other tax or assessment upon or with respect to the Leased
Premises or any increases therein which, if such other tax or assessment were in
effect, would be payable by Tenant.
Improvements means the buildings, structures and other improvements,
constituting a process, development and manufacturing plant consisting of
approximately 84,000 square feet constructed on the Land in accordance with
plans and specifications approved by Landlord and Tenant.
Indenture means the Trust Indenture dated as of December 1, 1999 between
Landlord and the Trustee, together with all amendments thereto and modifications
thereof.
6
<PAGE> 9
Insurance and Award Trustee has the meaning given to that term in
Paragraph 15.
Intercreditor Agreement means the Intercreditor Agreement dated as of
December 1, 1999 among the Banks and MIDFA, together with all amendments thereto
and modifications thereof.
Land means that parcel of land described in Exhibit A attached hereto,
together with the easements, rights and appurtenances thereunto belonging or
appertaining.
Landlord means Maryland Economic Development Corporation, a body politic
and corporate and a public instrumentality of the State of Maryland.
Landlord's Bond Obligations means the "Issuer's Bond Obligations," as
such term is defined in the Indenture.
Landlord's Credit Facility Obligations means the "Issuer's Credit
Facility Obligations", as such term is defined in the Indenture.
Law means the Constitution of the United States and of the State of
Maryland and any statute or rule of law of the United States and of the State of
Maryland.
Lease Documents has the meaning given to such term in Paragraph 25.
Leased Premises means the Additional Improvements and the Building
Equipment.
Legal Requirements means all laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, directions, requirements and agreements with all governments,
departments, commissions, boards, courts, authorities, agencies, officials and
officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any
time hereafter may be applicable to the use, occupancy, possession, maintenance,
alteration, repair or reconstruction of any of the Leased Premises.
Letters of Credit means, collectively, the Allfirst Letter of Credit and
the First Union Letter of Credit.
Letter of Credit Agreements means, collectively, the Allfirst Letter of
Credit Agreement and the First Union Letter of Credit Agreement.
Letter of Credit Documents has the meaning given to such term in the
Letter of Credit Agreements.
LIBOR Rate means the fluctuating annual rate of interest which shall at
all times equal the interest rate which Allfirst announces and declares from
time to time to be its one month London Interbank
7
<PAGE> 10
Offered Rate, adjusted for any Federal Reserve Board requirements imposed on
Allfirst from time to time. All interest at the LIBOR Rate or computed thereon
shall be calculated on the basis of a 360-day year factor applied to actual days
elapsed and shall be adjusted on any date on which a change occurs in the LIBOR
Rate.
Liquidity Covenant means the covenant described in Paragraph 26(j).
MIDFA means the Maryland Industrial Development Financing Authority.
MIDFA Insurance Agreement means the Amended and Restated Insurance
Agreement dated as of December 1, 1999, by and among MIDFA, the Banks and
Landlord, together with all amendments thereto and modifications thereof.
Multiemployer Plan means a multiemployer plan (as defined in ERISA) to
which Tenant, or any Commonly Controlled Entity, as appropriate, has or had an
obligation to contribute.
Net Award has the meaning given to such term in Paragraph 14.
Net Proceeds has the meaning given to such term in Paragraph 15.
Paying Agent has the meaning given to such term in the Indenture.
Permitted Equipment Lien means any encumbrance or other lien upon, or
security interest in, or any equipment lease of, any Tenant's Equipment, or
interest therein, provided that the acquisition to which any such encumbrance,
lien, security interest or lease relates shall not result in a default under any
other provisions of this Lease.
Permitted Use means the Permitted Use as defined in Paragraph 5.
Person means any natural person, firm, association, corporation, company,
trust, partnership, public body or other entity.
Plan means any pension, profit sharing, savings, stock bonus or other
deferred compensation plan which is intended to qualify under Code '401 and is
subject to the requirements of ERISA, together with any related trusts.
Plans means the Plans and Specifications for the Additional Improvements
which have been approved, and which will be approved from time to time, in
writing by Landlord and Tenant, as the same may be modified or amended in
accordance with Paragraph 4.
Prohibited Transaction means a "prohibited transaction" as defined in
Section 406 of ERISA or Section 4975 of the Code.
8
<PAGE> 11
Rating Agency means any rating agency which at any time or from time to
times provides or furnishes a rating with respect to the Bonds.
Registrar has the meaning given to such term in the Indenture.
Remarketing Agent has the meaning given to such term in the Indenture.
Remarketing Agreement means the "Placement and Remarketing Agreement" as
such term is defined in the Indenture.
Rent Commencement Date means the Rent Commencement Date as defined in
Paragraph 7(a).
Reportable Event means a "reportable event" as defined by Title IV of
ERISA.
Restrictive Covenants means the covenants and restrictions set forth in
(a) the Declaration of Covenants, Easements and Restrictions (Protective
Covenants) made the 24th day of September, 1997, by The Johns Hopkins
University, and recorded among the Land Records of Montgomery County, Maryland,
in Liber 15181 at folio 074, and (b) The Johns Hopkins University Belward
Research Campus Declaration of Covenants, Conditions, Easements and Restrictions
made the 24th day of September, 1997, by The Johns Hopkins University, and
recorded among the Land Records of Montgomery County, Maryland, in Liber 15181
at folio 084.
Series A Bonds means the $4,375,000 Taxable Variable Rate Demand/Fixed
Rate Revenue Bonds (Human Genome Sciences, Inc. Facility), Series 1999A, being
issued by the Landlord to finance a portion of the costs of the acquisition,
construction and equipping of the Leased Premises.
Series B Bonds means the $13,125,000 Taxable Variable Rate Demand/Fixed
Rate Revenue Bonds (Human Genome Sciences, Inc. Facility), Series 1999B, being
issued by the Landlord to finance a portion of the costs of the acquisition,
construction and equipping of the Leased Premises.
State means the State of Maryland, acting through the Maryland Department
of Business and Economic Development and any other department or agency of the
State of Maryland which makes any of the State Loans to Landlord.
State Loans means, collectively, the following loans made by the State to
Landlord for the purpose of financing a portion of the costs of the acquisition
and construction of the 1997 Leased Premises:
(a) Loan in the principal amount of $2,000,000, from the
Maryland Department of Business and Economic Development
under the Maryland Industrial Land Act;
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<PAGE> 12
(b) Loan in the principal amount of $3,000,000, made by the
Maryland Department of Business and Economic Development
from the Maryland Industrial and Commercial Redevelopment
Fund; and
(c) Loan in the principal amount of $2,000,000, made by the
Maryland Department of Business and Economic Development
from the Maryland Economic Development Opportunities
Program Fund.
State Loan Assignment means the Assignment, Subordination and
Non-Disturbance Agreement by and among Landlord, the Tenant and the State, dated
December 31, 1997, together with all amendments thereto and modifications
thereof.
State Loan Beneficiary means the Beneficiary as such term is defined in
the State Loan Deed of Trust.
State Loan Deed of Trust means the Second Deed of Trust dated December 1,
1997, encumbering the 1997 Leased Premises, from Landlord to certain individual
trustees for the benefit of the State Loan Beneficiary, together with all
amendments thereto and modifications thereof.
State Loan Documents means, collectively, any and all documents executed
and delivered by Landlord as evidence of, as security for, or in connection
with, the State Loans, including (without limitation) the State Loan Deed of
Trust and the State Loan Assignment.
Subsidiary or Subsidiaries means, with respect to any Person (including
Tenant), any present or future Person at least a majority of whose outstanding
Voting Stock shall at the time be owned by such Person (including Tenant) or by
one or more Subsidiaries of such Person, or by such Person (including Tenant)
and one or more Subsidiaries of such Person (including Tenant).
Substantial Completion means the date on which the Additional
Improvements are in such condition that Tenant may commence its final fit out of
the Additional Improvements and move in and a Certificate of Occupancy of a
tenantable shell either has been issued or would be issued except for work to be
performed by Tenant.
Tenant's Equipment means that certain equipment described on Exhibit C
attached hereto (as such Exhibit C may from time to time be updated by the
Tenant to include equipment to be used for the Permitted Use), together with all
replacements thereof. It is anticipated that some or all of Tenant's Equipment
will be leased by Tenant.
Tenant's Subordinated Notes means Tenant's $125,000,000 Human Genome
Sciences, Inc. 5 1/2% Convertible Subordinated Notes Due 2006.
10
<PAGE> 13
Term means the Term as defined in Paragraph 6.
Trustee means Allfirst Trust Company, National Association (formerly FMB
Trust Company, National Association), its successors and assigns.
Voting Stock means the shares of any class of capital stock of a Person
having ordinary voting power to elect the directors, managers or trustees
thereof (irrespective of whether or not at the time stock of any class or
classes of such Person shall have or might have voting power by reason of the
happening of any contingencies).
1997 Bond Beneficiary means, collectively, MIDFA, Allfirst and any other
Credit Facility Provider (as defined in the 1997 Lease), as Beneficiary under
the 1997 Bond Deed of Trust.
1997 Bond Deed of Trust means the Deed of Trust dated as of December 1,
1997, encumbering the 1997 Leased Premises, from Landlord to certain individual
trustees for the benefit of the 1997 Bond Beneficiary, together with all
amendments thereto and modifications thereof.
1997 Deeds of Trust means, collectively, the 1997 Bond Deed of Trust and
the State Loan Deed of Trust.
1997 Lease means the Lease Agreement dated as of December 1, 1997,
between Landlord and Tenant, together with all amendments thereto and
modifications thereof
1997 Leased Premises means the Land, the Improvements and the Building
Equipment (as defined in the 1997 Lease).
3. Title.
(a) The Leased Premises are demised and let subject to (i) the
Deed of Trust and the 1997 Deeds of Trust and any Encumbrances executed in
connection therewith and all of the terms and provisions thereof, including but
not limited to the provisions governing disbursement of insurance proceeds and
condemnation awards, (ii) the existing state of the title of the Land as of the
date hereof and any other exceptions or encumbrances of record as of the date
hereof and any other restrictions, exceptions and Encumbrances entered into
subsequent to the date hereof with Tenant's knowledge and written consent, which
consent shall not be unreasonably withheld or delayed provided Tenant's rights
hereunder are not adversely affected in a material manner (including Tenant's
option to purchase the Leased Premises, together with the Land and the
Improvements pursuant to the 1997 Lease, as hereinafter provided), (iii) any
state of facts which an accurate survey or physical inspection of the Leased
Premises might show, and (iv) the condition of the Leased Premises, as of the
Rent Commencement Date, without representation or warranty by Landlord, and
without liability or obligation of Landlord for patent or latent defects (except
that Landlord shall assign the benefit of all warranties
11
<PAGE> 14
written and implied to Tenant and Tenant shall be a third party beneficiary of
such warranties under the Construction Contract).
(b) Tenant has made its own investigation as to the existing
state of the title of the Land and has made arrangements for its own survey.
4. Plans and Specifications; Construction.
(a) Landlord will cause the Additional Improvements to be
constructed on the Land in accordance with the Plans by the
execution and delivery of the Construction Contract.
Landlord has entered into the Construction Contract
described on Exhibit B attached hereto.
(b) Landlord will not agree to any modifications of the Plans
without Tenant's consent thereto, and any modifications to
the Plans will be made and approved in accordance with the
requirements of the Bond Documents and the Credit Facility
Documents.
(c) Any change orders with respect to the Construction Contract
will be entered into and approved in accordance with the
requirements of the Bond Documents and the Credit Facility
Documents.
5. Use of Leased Premises.
Tenant shall occupy and use the Leased Premises only as a
biological research, product development and manufacturing and related
administrative use facility (the "Permitted Use"), or for such other lawful
purpose as may be approved by Landlord, the Credit Facility Providers, MIDFA and
the State in their sole discretion (except that Landlord, the Credit Facility
Providers, MIDFA and the State will not unreasonably withhold consent to
additional uses which are related to the Permitted Use), subject, in addition,
to the terms and provisions of any covenants, easements, conditions or
restrictions of record now or hereafter recorded with the written consent of
Tenant, including but not limited to the Deed of Trust and the 1997 Deeds of
Trust and the Restrictive Covenants, and for no other purpose. Tenant shall not
abandon the Leased Premises. Tenant shall not permit any unlawful occupation,
business or trade to be conducted on any of the Leased Premises or any use to be
made thereof contrary to applicable Legal Requirements. Tenant shall not use or
occupy or permit any of the Leased Premises to be used or occupied, nor do or
permit anything to be done in or on any of the Leased Premises, in a manner
which would or might (i) make void or voidable any insurance then in force with
respect to any of the Leased Premises, (ii) make it difficult or impossible to
obtain fire or other insurance which Tenant is required to furnish hereunder,
(iii) cause structural injury to any of the Improvements or the Additional
Improvements, or (iv) constitute a public or private nuisance or waste.
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6. Term; Purchase Option.
(a) This Lease shall be effective from and after the date of
its execution and delivery by Landlord and Tenant, December 30, 1999. Subject to
the terms, covenants, agreements and conditions contained herein, Tenant shall
have and hold the Leased Premises for a term (the "Term") commencing on the Rent
Commencement Date and ending at midnight on January 1, 2019.
From the effective date of this Lease, as set forth above, to and
including the Rent Commencement Date, Tenant shall have the right to enter the
Leased Premises for the purpose of performing, or causing to be performed,
"tenant improvement work" for the purpose of installing, or causing to be
installed, Tenant's Equipment and for the purpose of monitoring the construction
of the Additional Improvements.
Landlord shall have the right during the last twelve months of the
Term of this Lease to (i) advertise the availability of the Leased Premises for
sale or for reletting and to erect upon the Leased Premises signs indicating
such availability (provided that such signs do not unreasonably interfere with
the use of the Leased Premises by Tenant), and (ii) show the Leased Premises to
prospective purchasers or tenants at such reasonable times and on reasonable
prior notice during normal business hours as Landlord may select, subject to
Tenant's customary access restrictions.
(b) Provided that, at the time of exercise of the following
purchase option and at the time of closing of the purchase of the Leased
Premises pursuant to such option, (i) no Event of Default or event which, with
the giving of notice or the lapse of time, or both, would constitute an Event of
Default which would entitle Landlord to terminate this Lease or the 1997 Lease
or evict Tenant from possession of the Leased Premises or of the Land or the
Improvements, shall exist, (ii) all payments of Basic Rent and Additional Rent
under this Lease and all payments of Basic Rent (as defined in the 1997 Lease)
and Additional Rent (as defined in the 1997 Lease) under the 1997 Lease shall
have been paid through the date of the exercise of such purchase option, and
(iii) this Lease and the 1997 Lease shall be in full force and effect (unless
this Lease or the 1997 Lease is not in full force and effect due to Landlord's
default), then Tenant shall have the right and option, by giving notice as set
forth below, to acquire the Leased Premises from Landlord as provided below.
Tenant may not exercise such purchase option unless it simultaneously exercises
its option to purchase the Leased Premises (as defined in the 1997 Lease) under
the 1997 Lease, and Tenant may not exercise its option to purchase the Leased
Premises (as defined in the 1997 Lease) under the 1997 Lease unless it
simultaneously exercises the purchase option described in this subparagraph
6(b). Tenant may not exercise such purchase option during any period in which
the Bonds are not subject to redemption pursuant to Section 3.1(c) or Section
3.1(e) of the Indenture, unless the Bonds are to remain outstanding after the
closing of such purchase option.
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From and after January 1, 2004, Tenant may exercise such purchase
option by written notice to Landlord, with a copy of such written notice to
MIDFA, and the Credit Facility Providers; provided that, in the event that
Landlord is in default under the provisions of the Bond Documents or the Credit
Facility Documents and such default is not the result of an Event of Default
under this Lease, Tenant may also exercise such purchase option prior to such
date by written notice to Landlord, with a copy of such written notice to MIDFA
and the Credit Facility Providers. If Tenant exercises such purchase option by
giving such written notice, and (i) the Bonds have been previously redeemed, the
closing of such purchase option shall occur no later than the 90th day following
such notice (or the next business day if such 90th day is not a business day),
or (ii) the Bonds then bear interest at a variable rate, the closing of such
purchase option shall occur no later than the 180th day following such notice
(or the next business day if the 180th day is not a business day), or (iii) the
Bonds then bear interest at a fixed rate, the closing of such purchase option
shall occur no later than the later of (A) the first day on which the Bonds may
be redeemed pursuant to Section 3.1(e) of the Indenture, and (B) the 180th day
following such notice (or the next business day if the 180th day is not a
business day), PROVIDED THAT, in the case of (ii) or (iii) above, unless the
Bonds are to remain outstanding after the closing of such purchase option, the
closing of such purchase option shall not take place unless all Bonds shall have
been redeemed on or before the date of the closing of such purchase option.
Not later than 50 days prior to the date of the closing of such
purchase option, Tenant shall pay to Landlord, in immediately available funds,
the sum of the following (the "Basic Purchase Price"), which sum shall be held,
in trust, by Landlord and used by Landlord solely for the purposes hereinafter
set forth:
(A) the applicable option purchase price set forth on the
Schedule of Option Purchase Prices attached hereto as Exhibit D and made
a part hereof, plus
(B) if Tenant exercises such purchase option during a
period in which the Bonds bear interest at a fixed rate, an amount of
money equal to any redemption premium payable upon redemption of the
Bonds on the next optional redemption date as set forth in Section 3.1(e)
of the Indenture, unless the Bonds are to remain outstanding after the
closing of such purchase option.
Any portion of the Basic Purchase Price which is not paid to the Trustee, as
provided below, will be held by Landlord, in trust, upon terms and conditions
mutually acceptable to Landlord and Tenant, in an interest bearing account at a
commercial bank mutually acceptable to Landlord and Tenant, pending the closing
of such purchase option.
Upon receipt by Landlord of the Basic Purchase Price, Landlord
shall pay to the Trustee from the Basic Purchase Price, to
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be held in an irrevocable escrow for the redemption of the Bonds, in immediately
available funds, an amount sufficient, when added to moneys then held by the
Trustee and available for the redemption of Bonds, to redeem all of the Bonds in
full on the next date on which the Bonds may be redeemed pursuant to Section
3.1(c) or 3.1(e) of the Indenture, unless the Bonds are to remain outstanding
after the closing of such purchase option.
In addition, at the closing of such purchase option, Tenant shall
pay to Landlord, in immediately available funds, the sum of the following:
(A) all Basic Rent and Additional Rent through the date of
the closing of such purchase option, plus
(B) all actual third party costs and expenses (including
reasonable attorneys fees and expenses) of the Credit Facility Providers,
Landlord, MIDFA and the State (excluding Landlord's internal overhead)
incurred in connection with such purchase, including (without limitation)
any costs incurred by Landlord in connection with "unwinding" any Hedge,
but deducting any benefits accruing to Landlord in connection with
"unwinding" any Hedge, plus
(C) all transfer and recordation taxes, brokerage fees, if
any, and other costs and expenses required or necessary to be paid in
connection with the transfer of the Leased Premises from Landlord to
Tenant.
If, at the time Tenant exercises such purchase option, any of the
Bonds shall have been redeemed or paid prior to maturity, the Basic Purchase
Price shall be reduced by an amount equal to the total amount of Bonds so
redeemed or paid.
If, at the time Tenant exercises such purchase option, there shall
be on deposit with the Trustee any moneys which are available for the redemption
of the Bonds upon the closing of such purchase option, and the outstanding Bonds
are to be redeemed upon the closing of such purchase option, the Basic Purchase
Price shall be reduced by an amount equal to the amount of moneys so on deposit
with the Trustee.
Upon Tenant's exercise of such purchase option, Tenant may advise
Landlord that Tenant will purchase the Leased Premises pursuant to such purchase
option, subject to the Bond Documents and the Credit Facility Documents, and
that Tenant either will assume all of the obligations of Landlord under the Bond
Documents and the Credit Facility Documents or, in the alternative, pay the
portion of the Basic Purchase Price attributable to the outstanding Bonds by the
delivery of a loan agreement, or similar document, evidencing Tenant's agreement
to pay Landlord amounts which are sufficient to enable Landlord to pay its
monetary obligations under the Bond Documents and the Credit Facility Documents,
in which event (i) the Basic Purchase Price will be reduced by the principal
amount of the Bonds which would have been redeemed upon the closing
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of such purchase option, (ii) at or prior to the closing of such purchase
option, Tenant and Landlord will execute and deliver such documents, and take
such actions, as Landlord, the Credit Facility Provider and MIDFA may require,
in their sole discretion, to provide for the assumption by Tenant of Landlord's
obligations under the Bond Documents and the Credit Facility Documents, and
(iii) the Bonds will not be redeemed but will remain outstanding after the
closing of such purchase option.
At the closing of such purchase option, Landlord shall pay, from
the moneys paid to Landlord by Tenant as set forth above, (1) to the Trustee,
the Paying Agent, the Registrar, the Remarketing Agent, the Rating Agency, the
Credit Facility Providers, MIDFA, and any Hedge Counterparty, all accrued fees,
costs and expenses then payable to the Trustee, the Paying Agent, the Registrar,
the Remarketing Agent, the Rating Agency, the Credit Facility Provider, MIDFA,
and any Hedge Counterparty, (2) to the Credit Facility Providers, and MIDFA, all
actual third party costs and expenses (including reasonable attorneys fees and
expenses) incurred by them in connection with such purchase of the Leased
Premises by Tenant and, if applicable, in connection with the assumption by
Tenant of the obligations of Landlord under the Bond Documents and the Credit
Facility Documents.
In consideration of the payment by Tenant to Landlord of the Basic
Purchase Price and the other amounts of money set forth above, Landlord, by
special warranty deed, will transfer its interest in the Leased Premises, as
well as incidental personal property relating to the Leased Premises, to Tenant
as of the date of the closing of such purchase option, free of all Encumbrances,
other than (1) Encumbrances in existence on the date of this Lease, (2)
Encumbrances assumed by Tenant, (3) Encumbrances approved by Tenant, and (4) the
Bond Documents and the Credit Facility Documents in the event that in connection
with the purchase of the Leased Premises by Tenant pursuant to such purchase
option Tenant assumes all of Landlord's obligations under the Bond Documents and
the Credit Facility Documents; and Landlord will assign to Tenant all contracts
and warranties (to the extent assignable) relating to the Leased Premises and/or
incidental to any and all personal property relating to the Leased Premises.
Notwithstanding any other provision of this Lease, Landlord will
not accept the Basic Purchase Price and the other amounts of money set forth
above, and will not close such purchase option, unless the amount of the Basic
Purchase Price is sufficient to enable Landlord to redeem all of the Bonds at
the then applicable redemption price, and to pay all of Landlord's Bond
Obligations and Landlord's Credit Facility Obligations in connection therewith,
unless, in connection with the purchase of the Leased Premises by Tenant
pursuant to such purchase option, Tenant assumes all of the obligations of
Landlord under the Bond Documents and the Credit Facility Documents, or, in the
alternative, delivers a loan agreement, or similar document, in payment of a
portion of the Basic Purchase Price as set forth above.
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Concurrently with the closing of such purchase option, Landlord
shall cause the Deed of Trust (if not previously satisfied) to be released upon
the payment by Landlord to the Trustee of the amounts set forth above, unless
Tenant shall have assumed all of the obligations of Landlord under the Bond
Documents and the Credit Facility Documents as set forth above, in which event
the Deed of Trust will not be so released.
Upon the closing of such purchase option and the payment of all
amounts set forth above, Tenant shall be released of all of its obligations
under this Lease; provided, however that any and all obligations and liabilities
of Tenant under this Lease that survive the Term of this Lease (such as
indemnification obligations) shall survive the closing of such purchase option.
(c) In the event Tenant exercises its option to purchase the
Leased Premises from Landlord as set forth above, but fails to close as and when
required as set forth above, such failure shall constitute an Event of Default
under this Lease.
7. Rent.
(a) As used herein, the term "Rent Commencement Date" means the
earlier to occur of (i) the first day of the first month following the date on
which Tenant gives written notice to Landlord, with a copy of such written
notice to the Credit Facility Providers and MIDFA, that Tenant's beneficial use
of the Leased Premises has begun, and (ii) January 1, 2001.
(b) Tenant covenants to pay to Landlord, on the first day of
each and every calendar month, beginning on the Rent Commencement Date, basic
rent in the amount of $127,400 per month, subject to adjustment as set forth in
subparagraph (c) below (such basic rent, as so adjusted from time to time, is
hereinafter referred to as "Basic Rent"). Basic Rent shall be payable to
Landlord by separate check or wire transfer at Landlord's payment addresses set
forth in Exhibit E attached hereto and made a part hereof or at such other place
or bank account within the continental United States or to such other Person as
Landlord from time to time may designate to Tenant in writing, in lawful money
of the United States of America.
(c) Landlord and Tenant acknowledge and agree that the Basic
Rent has been determined based upon a number of factors, which include the
amount of debt service payable by Landlord with respect to the Bonds and other
costs which may fluctuate from time to time. Accordingly, the Basic Rent shall
be adjusted from time to time by Landlord and Tenant to reflect (i) any
redemption of the Bonds prior to maturity, and (ii) the expiration of any Hedge
or any default by any Hedge Counterparty in the performance of its obligations
under any Hedge Documents.
(d) Tenant covenants to pay and discharge, as additional rent,
the following (collectively, the "Additional Rent"):
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(i) the amount of any cost or expense required to be paid
by Landlord with respect to or in connection with the acquisition,
construction and financing of the Additional Improvements and the
ownership of the Leased Premises and the leasing of the Leased Premises
to Tenant, including (without limitation), consultants' fees, accounting
fees, legal fees and other expenses relating to any litigation involving
the Leased Premises (except to the extent that Landlord is otherwise
indemnified therefor pursuant to another provision of this Lease), costs
of maintenance, upkeep and repair of the Leased Premises paid for by
Landlord, costs of permits, charges by governmental authorities, and
amounts paid pursuant to any declaration or covenants including the
Restrictive Covenants, and all indemnification obligations of Landlord to
any Person or Persons resulting from or growing out of such acquisition,
construction, financing, ownership and leasing, and any sales taxes, plus
(ii) all fees and amounts payable by Landlord to any Person
or Persons in connection with the acquisition, construction and financing
of the Additional Improvements, to the extent not otherwise payable
pursuant to the 1997 Lease, including (without limitation) all credit
facility fees, remarketing fees, insurance premiums payable to MIDFA,
common area maintenance fees or rents or other similar charges relating
to the maintenance of the Leased Premises or any roads or other
improvements related thereto, monthly deposits on account of Impositions
and insurance premiums, in the event that Landlord is required to make
such monthly deposits on account of Impositions and insurance premiums,
and amounts representing increases in fees payable to the Rating Agency
or to the Trustee or the Registrar or the Paying Agent pursuant to the
Indenture or increases in the negotiation fees payable to the Credit
Facility Providers, and amounts representing changes in costs resulting
from any conversion of the interest rate payable on the Bonds from a
variable rate to one or more fixed rates or from one or more fixed rates
to one or more other fixed rates or to a variable rate, plus
(iii) to the extent not paid on the Closing Date from the
proceeds of the Bonds, the amounts determined by Landlord to be
sufficient to enable Landlord to make payments of all other monetary
obligations of Landlord under the Bond Documents, the Credit Facility
Documents, and any Hedge Documents.
Landlord, as promptly as practicable after obtaining knowledge that any
Additional Rent will be payable under this Lease, will advise Tenant, by written
notice, of the amount of any Additional Rent payable hereunder and the date on
which any Additional Rent is due and payable by Tenant in order for Landlord to
meet its obligations with respect to payments by Landlord to other Persons.
Additional Rent shall be paid to Landlord's payment addresses set forth in
Exhibit E attached hereto. In the event of any failure by Tenant to pay or
discharge any Additional Rent, Landlord shall have all
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rights, powers and remedies provided herein or by Law in the case of non-payment
of Basic Rent. Unless otherwise provided herein, all payments of Additional Rent
shall be due on the date specified by Landlord in such written notice as the
date on which such Additional Rent is due and payable.
(e) In the event that any payment of Basic Rent or Additional
Rent is not made within 15 days after the date on which the same is due and
payable, any such payment in default and the entire unpaid balance of all
amounts owing to Landlord shall bear interest, from the date on which the
payment was due until such payment in default is paid in full, at the
fluctuating rate which is at all times equal to the LIBOR Rate plus 3% per annum
(the "Default Rate"). In addition, Tenant shall pay (i) a late charge equal to
2% of the payment in default as set forth above (except for any payment with
respect to a Bond Purchase Principal Drawing, as defined in the Indenture) which
is made more than 15 days after the date on which the same is due and payable,
and (ii) all costs of collection, including attorneys' fees, if collection of
amounts due to Landlord is referred to an attorney after default by Tenant.
8. Net Lease; Non-Terminability.
(a) This Lease is a net lease, and Basic Rent, Additional Rent
and all other sums payable by Tenant shall be paid without notice (except as
specifically provided herein) or demand.
(b) Except as expressly provided in this Lease, Tenant shall
not be entitled to any set-off, counterclaim, recoupment, abatement, suspension,
deferment, diminution, deduction, reduction or defense of or to Basic Rent or
Additional Rent or any other sums payable hereunder and the obligations of
Tenant under this Lease shall not be affected, for any reason, including the
following: (i) any damage to or the destruction of all or any part of the Leased
Premises from whatever cause, (ii) the taking of the Leased Premises or any
portion thereof or interest therein by condemnation, requisition or otherwise
for any reason, (iii) the prohibition, limitation or restriction of Tenant's use
of all or any part of the Leased Premises, or any interference with such use,
(iv) any title defect or encumbrance, or any eviction from the Leased Premises
by paramount title or otherwise, (v) Tenant's acquisition or ownership of any
interest in all or any part of the Leased Premises otherwise than pursuant to an
express provision of this Lease, (vi) any failure on the part of Landlord to
observe any provision of this Lease, or any default by Landlord under any other
agreement to which Landlord and Tenant may be parties, (vii) any claim which
Tenant has or might have against Landlord, or (viii) any other cause whether
similar or dissimilar to the foregoing, any present or future Law to the
contrary notwithstanding except by agreement by and among Landlord, Tenant, and
the Credit Facility Providers. It is the intention of the parties hereto that
the obligations of Tenant hereunder shall be separate and independent covenants
and agreements, that Basic Rent, Additional Rent and all other sums payable by
Tenant hereunder shall continue to and be payable in all events, and that the
obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform
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the same shall have been terminated pursuant to an express provision of this
Lease.
(c) Tenant agrees that it will remain obligated under this
Lease in accordance with its terms, and that it will not take any action to
terminate, rescind or avoid this Lease or abate the rent required hereby,
notwithstanding (i) the bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding-up or other proceeding affecting
Landlord or any assignee of Landlord in any such proceeding or/and (ii) any
other action (including rejection) with respect to this Lease which may be taken
by any trustee or receiver of Landlord or of any assignee of Landlord in any
such proceeding or by any court in any such proceeding; and, in any such event,
so long as Tenant pays and performs its obligations under this Lease and does
not take any action to terminate, rescind or avoid this Lease or abate the rent
required hereby, Tenant shall be entitled to the benefits of Tenant set forth in
this Lease.
(d) Except as otherwise provided in this Lease, Tenant waives
all rights which may now or hereafter be conferred by law (i) to quit, terminate
or surrender this Lease or (ii) to any abatement, suspension, deferment or
reduction of Basic Rent, Additional Rent or any other sums payable under this
Lease, except as expressly approved by the Credit Facility Providers or as
otherwise expressly provided herein.
(e) Subject to Paragraph 35(f), Tenant and Landlord agree that
the Credit Facility Providers are and shall be third-party beneficiaries of this
Lease and that, as such, the Credit Facility Providers shall have the right to
pursue any right, remedy or performance to which Landlord shall be entitled
pursuant hereto notwithstanding that but for the provisions of this subparagraph
(e), the Credit Facility Providers may not have had the right to pursue any such
right, remedy or performance.
9. Payment of Impositions; Compliance with Law and Restrictive
Covenants.
(a) Subject to the provisions of Paragraph 18 relating to
contests, Tenant shall pay all Impositions before any fine, penalty, interest or
cost may be added for non-payment. Tenant agrees to furnish to Landlord, within
30 days after written demand therefor, proof of the payment of all Impositions
payable by Tenant as provided in this Paragraph 9. In the event that any
Imposition becomes due and payable during the Term and may be legally paid in
installments, Tenant shall have the option to pay such Imposition in
installments; and in such event, Tenant shall be liable only for those
installments which become due and payable during the Term, with appropriate
proration in the case of fractional years. Any Impositions which are
attributable in part to the Term and in part to a period preceding or following
the Term, as the case may be, shall be equitably apportioned between Landlord
and Tenant. If Landlord is required pursuant to the Bond Documents or the Credit
Facility Documents or the State Loan Documents to make monthly deposits on
account of Impositions and insurance premiums, and
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Landlord informs Tenant in writing thereof specifying the amount of such
deposits, Tenant shall pay such monthly deposits to Landlord, as Additional Rent
hereunder as provided in Paragraph 7 (d).
(b) Tenant shall promptly comply with and conform to all Legal
Requirements concerning the use, occupancy and conditions of the Leased Premises
and all machinery, equipment, furnishings, fixtures and improvements therein. If
any such Legal Requirement requires an occupancy or use permit, license, special
exception, or other local, state or federal agency certification, then Tenant
shall promptly obtain and keep current the same.
(c) Tenant shall comply with all of the Restrictive Covenants.
10. Liens; Recording and Title; Easements.
(a) Tenant will not, directly or indirectly, create or permit
to remain, and will promptly discharge, at its expense, any mortgage, lien,
encumbrance or charge on, pledge of, or conditional sale or other title
retention agreement with respect to, the Leased Premises or any part thereof or
Tenant's interest therein or Basic Rent, Additional Rent or other sums payable
by Tenant under this Lease, other than Permitted Equipment Liens. The existence
of any mechanic's, laborer's, materialman's, supplier's or vendor's lien, or any
right in respect thereof, shall not constitute a violation of this Paragraph 10
if payment is not yet due upon the contract or for the goods or services in
respect of which any such lien has arisen so long as such payment is made or
bonded off within 30 days after the later to occur of the completion of the work
which gave rise to the imposition of said liens or the rendering of the invoice,
statement or demand for such payment. Nothing contained in this Lease shall be
construed as constituting the consent or request of Landlord, expressed or
implied, of any contractor, subcontractor, laborer, materialman or vendor to or
for the performance of any labor or services or other furnishing of any
materials for any construction, alteration, addition, repair or demolition of or
to the Leased Premises or any part thereof.
(b) At Tenant's request and at Tenant's sole cost and expense,
Landlord and Tenant will execute and deliver a memorandum evidencing Tenant's
option to purchase set forth in Paragraph 6, and shall cause such memorandum to
be recorded, filed or registered in such manner and in such places as may be
required by any present or future Law in order to publish notices and protect
the validity of such option to purchase.
(c) Subject to the terms and conditions of Paragraph 30,
Landlord shall have the right to encumber the Leased Premises, provided that any
such encumbrance (except for the Deed of Trust and other Credit Facility
Documents) shall be made expressly subject to Tenant's rights under this Lease
including the purchase option.
11. Indemnification. Tenant shall pay, protect, indemnify and save
harmless Landlord from and against any and all
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liabilities, losses, damages, costs, expenses (including all reasonable
attorneys' fees and expenses), penalties, causes of action, suits, claims,
demands or judgments of any nature whatsoever arising from (i) any injury to, or
the death of, any person or any damage to property on the Leased Premises or
upon adjoining sidewalks, streets or ways, if caused by the negligence of Tenant
or its agents or employees, or in any manner growing out of or connected with
the use, failure of use, condition or occupancy of the Leased Premises or any
part thereof or resulting from the condition thereof, (ii) any violation by
Tenant of any covenant, agreement or condition of this Lease, and (iii) any
violation by Tenant of the terms of any contract or agreement to which Tenant is
a party and which affects the Leased Premises; provided, however, that if any
such liability, loss, damage, penalty, cost or expense, cause of action, suit,
claim, demand or judgment results from the negligence of Landlord, its agents or
employees, or if any such act or omission is determined to be a failure by
Landlord to observe any provision of this Lease (if observance is required of
Landlord), the foregoing indemnity by Tenant shall apply with respect to
Landlord only to the extent of the insurance coverage maintained (or required to
be maintained, if greater) by Tenant pursuant to the provisions of Paragraph 15
of this Lease. In case any action or proceeding is brought against Landlord by
reason of any such claim, Tenant covenants, upon notice from Landlord, to resist
or defend such action or proceeding by counsel reasonably satisfactory to
Landlord, and, at the expense of Tenant, Landlord will cooperate and assist in
the defense of such action or proceeding if reasonably requested so to do by
Tenant.
Tenant also shall pay, protect, indemnify and save harmless Landlord for
all amounts, liabilities, indemnities and obligations which Tenant assumes or
agrees to pay or discharge pursuant to this Lease, as well as any payments or
indemnification made or required to be made by Landlord under the Credit
Facility Documents, the Bond Documents, the State Loan Documents or any Hedge
Documents as a result of Tenant's default hereunder, together with every fine,
penalty, interest and cost which may be added for nonpayment or late payment
thereof.
The obligation of Tenant under this Paragraph 11 shall survive any
termination of this Lease as to any right of indemnity which shall have accrued
prior to such termination.
12. Tenant's Equipment; Building Equipment; Maintenance and Repair.
(a) Tenant, at its expense, shall install all specialized
machinery, apparatus and equipment which Tenant, in its sole and absolute
discretion, deems necessary to permit the Leased Premises to be used for the
Permitted Use including, without limitation, the Tenant's Equipment described on
Exhibit C attached hereto. All Tenant's Equipment shall remain the property of
the lessor thereof or the property of the Tenant, as applicable, notwithstanding
its attachment to the Leased Premises. At the expiration of the Term, all of
Tenant's Equipment shall remain the property of the lessor thereof or the
property of the Tenant (as
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applicable) and shall be removed by Tenant or such lessor in accordance with
subparagraph (c) below.
(b) Tenant, at its sole cost and expense, will keep and
maintain the Leased Premises, including any altered, rebuilt, additional or
substituted buildings, structures and parts of the Additional Improvements, in
good repair and appearance, except for ordinary wear and tear, and will with
reasonable promptness make all structural and nonstructural, foreseen and
unforeseen, and ordinary and extraordinary changes and repairs of every kind and
nature which may be required to be made upon or in connection with the Leased
Premises, the Building Equipment, or any part thereof; in order to keep and
maintain the Leased Premises and the Building Equipment in such good repair and
appearance. All repairs, replacements and renewals shall be at least equal in
quality to the original work and all replacements shall have a value and useful
life at least equal to the value and remaining estimated useful life of the item
being replaced, and be suitable for a use which is the same or similar to that
of the item being replaced. Landlord shall not be required to maintain, repair
or rebuild, or to make any Alteration to the Leased Premises, the Building
Equipment, or Tenant's Equipment, or any part thereof, whether ordinary or
extraordinary, structural or non-structural, foreseen or unforeseen, or to
maintain the Leased Premises, the Building Equipment, or Tenant's Equipment, or
any part thereof, in any way, and Tenant hereby expressly waives the right to
make repairs at the expense of Landlord, notwithstanding the fact that such
right may be provided for in any Law in effect at the time of the execution and
delivery of this Lease or which may thereafter be enacted.
(c) Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Leased Premises in good condition, reasonable wear
and tear and damage by casualty excepted, with all Building Equipment in good
working condition, and all Tenant's Equipment removed. Any Tenant's Equipment
required to be removed but not removed by Tenant within 30 days after the
expiration or earlier termination of this Lease shall be considered abandoned by
Tenant and may be appropriated, sold, destroyed or otherwise disposed of by
Landlord without first giving notice thereof and without obligation to account
therefor to either Tenant or any lessor of such Tenant's Equipment. Tenant
agrees to pay all costs and expenses incurred in removing, storing and disposing
of Tenant's Equipment required to be removed but not removed. Tenant shall
repair (i.e., replace, restore or repair to a sightly and usable condition), at
its expense, any damage to the Leased Premises caused by removal of Tenant's
Equipment, whether effected by Landlord, Tenant, or Tenant's lessor or any of
their agents or employees. Landlord shall not be responsible for any loss or
damage to Tenant's Equipment under any circumstances. The provisions of this
subparagraph (c) are not applicable in the event that Tenant purchases the
Leased Premises as provided in Paragraph 6.
(d) Landlord shall, from time to time upon Tenant's written
request, execute appropriate documents for the benefit of Tenant's lenders or
equipment lessors confirming the provisions of
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this Paragraph 12 and containing such further undertakings of Landlord
concerning the right of any such lender or lessor to enter the Leased Premises
following termination of this Lease for the purpose of exercising its rights
with respect to the collateral of such lender or lessor, including removing the
same, provided such further undertakings are on commercially reasonable terms
and conditions and require such lender or lessor to repair any damage to the
Leased Premises caused by the removal of Tenant's Equipment.
(e) Notwithstanding anything herein to the contrary, Tenant
shall not be required to replace any Building Equipment during the last 3 years
of the Term, but Tenant, at Tenant's expense, shall keep all Building Equipment
in good working condition throughout the Term.
13. Alterations.
(a) So long as no Event of Default or event which, with the
giving of notice, the lapse of time, or both, would constitute an Event of
Default shall have occurred and be continuing, Tenant may, at its expense, make
Alterations, subject to the advance written consent of Landlord and subject to
the Deed of Trust and the 1997 Deeds of Trust provided that the consent of
Landlord shall not be required for non-structural Alterations which do not
involve the exterior of the building or changes in utilities, electrical,
mechanical or other existing systems and which in each separate Alteration do
not exceed $500,000 in cost. Landlord agrees not to withhold, delay or condition
its consent provided that (i) all such Alterations, construction and
installations shall be performed in a good and workmanlike manner; (ii) all such
Alterations, construction and installations shall be expeditiously completed in
compliance with all Legal Requirements; (iii) all work done in connection with
any such Alterations, construction or installation shall comply with the
requirements of any insurance policy required to be maintained by Tenant
hereunder; (iv) Tenant shall promptly pay all costs and expenses of any such
Alteration, construction or installation and shall discharge all liens filed
against any of the Leased Premises arising, out of the same; (v) Tenant shall
procure and pay for all permits and licenses required in connection with any
such Alteration, construction or installation; (vi) all such Alterations,
construction and installations (except as provided in subparagraph 13(c) below)
shall be the property of Landlord and shall be subject to this Lease; (vii) the
design of any Alterations visible from the exterior of the Leased Premises shall
comply with the terms of the Restrictive Covenants (including obtaining any
consents required thereunder); (viii) the contractor performing such alterations
shall be reputable, licensed and insured and shall, if required by Landlord, be
required to obtain performance and payment bonds; and (ix) Landlord shall incur
no expense or cost whatsoever in connection with such Alterations, including
without limitation, costs for reviewing and approving plans, additional common
area maintenance fees, tap fees or other utility fees, and costs incurred by
Landlord in obtaining the approval of the Credit Facility Providers and the
State. Landlord may require, as a condition to its consent to any Alterations,
reasonable appropriate payments, assurances and undertakings from Tenant to
ensure that
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all such conditions are satisfied. Notwithstanding the foregoing, it shall not
be unreasonable for Landlord to withhold its consent, or to condition its
consent, if either of the Beneficiaries withholds its consent to any of the
foregoing, or requires that certain conditions or requirements be satisfied or
observed.
(b) In the event that any Alterations shall encroach upon any
property, street or right-of-way adjoining or adjacent to the Leased Premises,
or shall violate the agreements or conditions contained in any restrictive
covenant affecting the Leased Premises or any part thereof, or shall hinder or
obstruct any easement or right-of-way to which the Leased Premises are subject
or shall impair the rights of others under any such easement or right-of-way,
then promptly after written request of Landlord or of any Person affected by any
such encroachment, violation, hindrance, obstruction or impairment, Tenant
shall, at its expense, either (i) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
encroachment, violation, hindrance, obstruction or impairment, whether the same
shall affect Landlord, Tenant or both, or (ii) take such other action as shall
be necessary to remove such encroachments, hindrances or obstructions and to end
such violations or impairments.
(c) All Tenant improvements that can be removed without damage
to the structural integrity of the Leased Premises or the normal functions of
the Leased Premises or that are not necessary for the normal use of a building
as a tenantable shell building, and which were not financed with the proceeds of
the Bonds or the State Loans, shall, on termination of this Lease, become the
property of the Tenant.
14. Condemnation.
(a) Tenant, immediately upon obtaining knowledge of the
institution of any proceeding for any condemnation of the Leased Premises or the
Land or the Improvements, shall notify Landlord thereof and Landlord shall be
entitled to participate with Tenant in any condemnation proceeding at Tenant's
expense. Tenant hereby irrevocably assigns to Landlord any condemnation award or
condemnation payment to which Tenant may be or become entitled (except as set
forth in subparagraph (b) below) by reason of any taking of the Leased Premises
or any part thereof, in or by condemnation or other eminent domain proceedings
pursuant to any Law, or by reason of the temporary requisition of the use or
occupancy of the Leased Premises, or the Land or the Improvements or any part
thereof, by any governmental authority, civil or military, whether the same
shall be paid or payable in respect of Tenant's leasehold interest hereunder or
otherwise. The proceeds of the condemnation award shall be made available for
restoration if permitted by the Deed of Trust and the 1997 Deeds of Trust and if
this Lease is not terminated. As used herein, the term "Net Award" means any
condemnation award received by Landlord, less Landlord's expenses and Tenant's
expenses, if any, in collecting same.
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(b) The foregoing notwithstanding, nothing in this Lease shall
impair Tenant's right to any award or payment on account of Tenant's trade
fixtures, Tenant's Equipment, and other tangible property, moving expenses, loss
of business and the like, if available, to the extent Tenant shall have a right
to make a separate claim therefor against the appropriate governmental
authority, but in no event shall any such separate claim be based upon the value
of Tenant's leasehold interest in the Leased Premises or result in a reduction
of the award or payment which would have been payable to Landlord absent such
separate claim by Tenant.
(c) If there shall be taken by condemnation or other eminent
domain proceedings pursuant to any Law, general or special, (i) the entire
Leased Premises or (ii) any substantial portion of the Leased Premises which is
sufficient to render the remaining portion thereof, in the reasonable judgment
of Landlord or Tenant, unsuitable for restoration for the continued use and
occupancy of Tenant's business, or (iii) if the Credit Facility Providers or the
State shall retain any Net Award pursuant to the Deed of Trust and the 1997
Deeds of Trust (it being recognized that as a result thereof, either of the
Beneficiaries may refuse to allow the award to be disbursed for restoration
under certain circumstances, as provided in the Deed of Trust and the 1997 Deeds
of Trust), then Landlord and Tenant may each, not later than 90 days after any
such taking, give notice to the other of its intention to terminate this Lease
on any Basic Rent Payment Date specified in such notice, which date shall not be
prior to the date of the vesting of title to the Leased Premises or portion
thereof in the condemning authority. In the event Landlord elects to terminate
this Lease in the case of (ii) or (iii) above, if Tenant elects to provide funds
which, together with the Net Award, are sufficient to restore the Leased
Premises and pay Basic Rent and Additional Rent during such restoration and
provides evidence satisfactory to Landlord, the State and the Credit Facility
Providers (in the Credit Facility Providers and the State's sole and absolute
subjective judgment) of its ability to do so within 30 days of Landlord's
election, Landlord's election to terminate shall be rescinded, this Lease shall
continue in full force and effect pursuant to subsection (d) below, and
restoration of the Leased Premises shall proceed in accordance with Paragraph
16(b). In the event either Landlord or Tenant elects to terminate this Lease
under the provisions of this Paragraph 14(c), Landlord shall be entitled to
recover from Tenant, and Tenant will pay to Landlord, on or prior to the
effective date of termination, an amount equal to the Basic Rent, Additional
Rent and other sums which are then due and payable to the effective date of
termination; provided that in the event of such termination, Tenant may exercise
its purchase option under Paragraph 6(b) within 20 days after notice of
termination.
(d) If a portion of the Leased Premises shall be taken in or by
condemnation or other eminent domain proceedings pursuant to any Law, general or
special, which does not result in a termination of this Lease, then this Lease
shall continue in full force and effect, and there shall be no abatement or
reduction of rent payable hereunder, except to the extent that any portion of
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the Net Award is used to redeem Bonds or to prepay the State Loans prior to
maturity. Unless Tenant immediately elects to exercise its purchase option under
Paragraph 6 above, subject to the provisions of the Deed of Trust and the 1997
Deeds of Trust, the Net Award of such condemnation shall be paid to Landlord
and, promptly after such condemnation and payment to Landlord of the Net Award,
Landlord shall make the Net Award available to Tenant for restoration, in
accordance with Paragraph 16.
(e) For the purposes of this Lease, all amounts payable
pursuant to any agreement with any condemning authority which has been made in
settlement of or under threat of any condemnation or other eminent domain
proceeding affecting the Leased Premises shall be deemed to constitute an award
made in such proceeding.
(f) The terms and provisions of this Paragraph 14 are subject
to the terms and provisions of the Deed of Trust, the 1997 Deeds of Trust, the
1997 Lease and the State Loan Documents.
15. Insurance.
(a) Tenant will maintain at its expense (i) such fire,
casualty, extended coverage and all risk insurance on the Improvements, the
Additional Improvements, the Building Equipment (as defined in the 1997 Lease)
and Building Equipment as is required to be maintained by Landlord, as Grantor
under the Deed of Trust and the 1997 Deeds of Trust, provided that the amount of
any casualty insurance shall be in no event less than the actual replacement
value of the Additional Improvements and Building Equipment, less footings,
foundations and other non-insurable portions, (ii) commercial general public
liability insurance with a single limit of not less than $10,000,000, including
contractual liability coverage insuring the obligations assumed by Tenant under
this Lease, premises and operations coverage, broad form property damage
coverage and independent contractors coverage, (iii) worker's compensation
insurance as required by Law, (iv) business interruption insurance in the amount
of $6,000,000, and (v) employer's liability insurance in an amount not less than
$2,000,000 for each accident, $2,000,000 disease-policy limit and $2,000,000
disease-each employee.
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(b) The insurance referred to in Paragraph 15(a) shall be
written by companies of recognized financial standing which are authorized to
conduct an insurance business in the State of Maryland and which are reasonably
acceptable to Landlord, the Credit Facility Providers, MIDFA and the State. All
commercial public liability insurance shall name as the insured parties
thereunder Landlord, Tenant, MIDFA, the State and each of the Credit Facility
Providers, as their interests may appear. Landlord shall not be required to
prosecute any claim against, or to contest any settlement proposed by, any
insurer, provided that Tenant may, at its expense, prosecute any such claim or
contest any such settlement. In such event, Tenant may bring such prosecution or
contest in the name of Landlord, Tenant, or both, and Landlord will join therein
at Tenant's written request upon the receipt by Landlord of a satisfactory
indemnity from Tenant against all costs, liabilities and expenses in connection
with such prosecution or contest.
(c) So long as no Event of Default exists hereunder, insurance
claims by reason of damage to or destruction of any portion of the Leased
Premises shall be adjusted by Tenant, but Landlord, the State and the Credit
Facility Providers shall have the right to join with Tenant in adjusting any
such loss. In furtherance of Tenant's right to adjust, collect and compromise,
in its discretion, all claims under any of the insurance policies required by
this Paragraph 15, Tenant is authorized to execute and deliver all necessary
proofs of loss, receipts, vouchers and releases required by the insurers.
(d) Every fire, casualty, extended coverage or all risk
insurance policy required above (other than on Tenant's Equipment) shall contain
a non-contributory mortgagee endorsement in favor of Landlord, the Credit
Facility Providers, the State and MIDFA. Every policy which Tenant is obligated
to carry under the terms of Paragraph 15(a) shall contain an agreement by the
insurer that it will not cancel such policy except after 30 days' prior written
notice to Landlord, the Credit Facility Providers, the State and MIDFA, and that
any loss otherwise payable thereunder shall be payable notwithstanding any act
or negligence of Landlord or Tenant which might, absent such agreement, result
in a forfeiture of all or a part of such insurance payment and notwithstanding
any foreclosure or other action or proceeding taken by either of the
Beneficiaries pursuant to any provision of the Deed of Trust or the 1997 Deeds
of Trust upon the happening of an Event of Default, as defined therein, or any
change in title or ownership of the Leased Premises.
(e) Any and all insurance which Tenant is obligated to carry
pursuant to Paragraph 15(a) may be carried under a "blanket" policy or policies
covering other properties or liabilities of Tenant and may be effected by a
combination of basic and excess or umbrella policies, provided, that such
"blanket" policy or policies otherwise comply with the provisions of this
Paragraph 15. The amount of total insurance allocated to the Leased Premises,
which amount shall not be less than the amounts required pursuant to this
Paragraph 15, shall be specified either (i) in each such "blanket" policy or
(ii) in a written statement, which Tenant shall deliver to Landlord from the
insurer thereunder.
(f) Tenant shall promptly comply with and conform to (i) all
provisions of each insurance policy and (ii) all requirements of the insurers
thereunder, applicable to Landlord, MIDFA, the Credit Facility Providers, the
State, Tenant or the Leased Premises or to the use, manner of use, occupancy,
possession, operation, maintenance, alteration or repair of the Leased Premises,
even if such compliance necessitates structural changes or improvements or
results in interference with the use or enjoyment of any of the Leased Premises.
Tenant shall not use the Leased Premises in any manner which would permit the
insurer to cancel any insurance policy unless Tenant obtains, prior to such
cancellation,
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substitute insurance in accordance with the provisions of this Paragraph 15
which permits such use of the Leased Premises.
(g) Any loss under any policy of casualty insurance required to
be carried by Landlord or Tenant hereunder (other than on Tenant's Equipment)
shall be made payable to the Credit Facility Providers or, if references to the
Credit Facility Providers shall be ineffective as provided in Paragraph 35(f),
to the State as long as the State Loans are outstanding, and then to such other
party as the Landlord may designate (in any such case, the "Insurance and Award
Trustee") and each casualty insurer shall be authorized and directed to make
payment under said policies directly to the Insurance and Award Trustee for
disbursement in accordance with the provisions of first, the Deed of Trust,
second, the 1997 Deeds of Trust (in the order of priority set forth in the 1997
Lease), and third, this Lease. As used herein, the term "Net Proceeds" means any
casualty insurance proceeds received by Landlord, less Landlord's expenses and
Tenant's expenses, if any, in collecting same. The term "Net Proceeds" shall not
include proceeds of insurance on Tenant's Equipment, which proceeds shall be
paid directly to Tenant or the lessor of such Tenant's Equipment.
(h) Tenant shall not carry separate insurance concurrent in
form or continuing in the event of loss with that required in this Paragraph 15
unless (i) Landlord, MIDFA, the State and the Credit Facility Providers are
included therein as named insureds, with lender's loss payable endorsements as
provided herein, and (ii) such separate insurance complies with the other
provisions of this Paragraph 15. Tenant shall immediately notify Landlord,
MIDFA, the State and the Credit Facility Providers of such separate insurance
and shall deliver to Landlord, MIDFA, the State and the Credit Facility
Providers duplicate original policies therefor. Notwithstanding the foregoing,
Tenant may maintain insurance to compensate Tenant for loss of use of the
Additional Improvements.
(i) The terms and provisions of this Paragraph 15 are subject
to the terms and provisions of the Deed of Trust, the 1997 Deeds of Trust, the
1997 Lease and the State Loan Documents.
16. Casualty and Restoration.
(a) In the event of any casualty resulting in damage to the
Leased Premises, including any casualty which renders the entire Leased Premises
or a substantial portion thereof unsuitable for continued use, this Lease shall
continue in full force and effect and there shall be no abatement or reduction
of rent payable hereunder.
(b) Until such time as the Deed of Trust and the 1997 Deeds of
Trust shall have been released and discharged, any Net Proceeds and any Net
Award shall be applied either to the restoration or replacement of the property
that was lost or to the redemption of Bonds and payment of the State Loans, as
provided in the Deed of Trust and the 1997 Deeds of Trust.
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(c) Unless there shall have occurred and be continuing an Event
of Default hereunder pursuant to which Landlord is taking action to take
possession of the Leased Premises or to terminate this Lease, or the Net
Proceeds or the Net Award are to be used as directed by the Beneficiary as
provided in the Deed of Trust or either of the Beneficiaries as provided in the
1997 Deeds of Trust, Landlord shall cause the Net Proceeds or Net Award to be
held by the Insurance and Award Trustee in a restoration fund which shall be
disbursed as follows:
(i) If the estimated cost of restoration is less than
$100,000, and if prior to commencement of restoration, no Event of Default or
event which would constitute an Event of Default pursuant to which Landlord is
taking action to take possession of the Leased Premises or to terminate this
Lease shall exist and no mechanics' or materialmen's liens shall have been filed
and remain undischarged, and if the architects, contracts, contractors, plans
and specifications for the restoration shall have been approved by Landlord
(which approval shall not be unreasonably withheld or delayed), and Landlord
shall be provided with reasonable assurance against mechanics' liens, accrued or
incurred, as Landlord may reasonably require, and acceptable performance and
payment bonds reasonably acceptable to Landlord in an amount and form having a
surety reasonably acceptable to Landlord, and naming Landlord, each of the
Credit Facility Providers, MIDFA and the State each as additional obligees; then
such proceeds shall be payable to Landlord and made available to Tenant for
application to pay the costs of restoration incurred by Tenant and Tenant shall
promptly complete such restoration.
(ii) If the estimated cost of restoration is equal to or
exceeds $100,000, and if the conditions set forth in subparagraph (i) above
shall have been satisfied, and if Tenant provides evidence satisfactory to
Landlord, the Credit Facility Providers, MIDFA and the State that sufficient
funds are available to restore the Leased Premises, disbursements shall be made
from time to time in an amount not exceeding the cost of the work completed
since the date covered by the last disbursement, upon receipt of (A)
satisfactory evidence, including architect's certificates, of the stage of
completion, of the estimated cost of completion and of performance of the work
to date in a good and workmanlike manner in accordance with the contracts, plans
and specifications, (B) waivers of liens, (C) contractors' and subcontractors'
sworn statements, (D) a satisfactory bring-to-date of title insurance, and (E)
other evidence of cost and payment so that Landlord can verify that the amounts
disbursed from time to time are represented by work that is completed, in place
and free and clear of mechanics' lien claims.
(iii) Each request for disbursement shall be accompanied by
a certificate of Tenant, signed by the President or any Vice President of
Tenant, describing the work for which payment is requested, stating the cost
incurred in connection therewith and stating that Tenant has not previously
received payment for such work; the certificate to be delivered by Tenant upon
completion of
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the work shall, in addition, state that the work has been completed and complies
with the applicable requirements of this Lease.
(iv) Landlord may retain 10% of each requisition against
the restoration fund until the restoration is fully completed subject to
reduction of the retained amount upon approval by the Credit Facility Providers
in accordance with local custom;
(v) The restoration fund shall be invested in an interest
bearing account of the Insurance and Award Trustee;
(vi) At all times the undisbursed balance of the
restoration fund shall be not less than the cost of completing the restoration
work free and clear of all liens; and
(vii) Landlord may impose other reasonable conditions
provided the same are consistent with those imposed upon such disbursements by
the Beneficiary under the Deed of Trust or either of the Beneficiaries under the
1997 Deeds of Trust. In addition, prior to commencement of restoration and at
any time during restoration, if the estimated cost of restoration, as determined
by the evaluation of an independent engineer acceptable to Landlord, exceeds the
amount of the Net Proceeds or the Net Award available for such restoration,
Tenant will provide evidence satisfactory to Landlord that the amount of such
excess will be available to restore the Leased Premises. Any sum which remains
in the restoration fund upon completion of restoration shall be refunded to
Tenant up to the amount of Tenant's deposits pursuant to the immediately
preceding sentence. If no such refund is required or any sum remains in the
restoration fund after such refund, such sum remaining in the restoration fund
(including the residue of any Net Award in a condemnation remaining after
restoration) upon completion of restoration shall be applied (x) during any
period in which either of the Credit Facilities is in effect, to the Landlord's
reimbursement obligations to the Credit Facility Providers to the extent of any
drawings honored by either of the Credit Facility Providers to pay the
redemption price of Bonds redeemed in accordance with Section 3.1(b) of the
Indenture or to pay the purchase price of Bonds purchased pursuant to Section
4.4 of the Indenture or (y) during any period in which any Bonds are
outstanding, to the redemption of Bonds in accordance with Section 3.1(b) of the
Indenture or to the purchase of Bonds as set forth in Section 4.4 of the
Indenture. During any period in which any Bonds are outstanding, any sums
remaining in an amount less than the minimum Authorized Denomination (as defined
in the Indenture) shall be deposited in the Principal Account (as defined in the
Indenture). If no Bonds are outstanding, and either of the Credit Facility
Agreements is still in effect, such remaining sum shall be applied to the
Landlord's Credit Facility Obligations under the Credit Facility Documents. If
no Bonds are outstanding and neither of the Credit Facility Agreements is in
effect, such remaining sum shall be distributed to the State for repayment of
the State Loans and then to Landlord and Tenant in proportion to the value of
each party's interest in the Leased Premises as determined by mutual agreement.
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(d) Tenant shall be solely responsible for the replacement
and/or repair of any of Tenant's Equipment damaged by casualty.
(e) The terms and provisions of this Paragraph 16 are subject
to the terms and provisions of the Deed of Trust, the 1997 Deeds of Trust, the
1997 Lease and the State Loan Documents.
17. Assignment and Subletting.
(a) Provided no Event of Default or event which, with the
giving of notice or the lapse of time or both, would constitute an Event of
Default, shall have occurred and be continuing, with prior notice to Landlord,
Tenant may sublet all or any part of the Leased Premises to an Affiliate, or
assign this Lease to an Affiliate, which Affiliate will use the Leased Premises
for the Permitted Use. Provided no Event of Default or event which, with the
giving of notice or the lapse of time or both, would constitute an Event of
Default, shall have occurred and be continuing, with the consent of Landlord
(which consent shall not be unreasonably withheld), Tenant may sublet all or any
part of the Leased Premises to a Person which is not an Affiliate, or assign
this Lease to a Person which is not a Affiliate, which Person will use the
Leased Premises for the Permitted Use. Notwithstanding the foregoing, in any
instance in which Landlord may not unreasonably withhold its consent, it shall
not be unreasonable for Landlord to withhold its consent, or to condition its
consent, if either of the Credit Facility Providers, the State or MIDFA
withholds its consent to any assignment or subletting, or requires that certain
conditions or requirements be satisfied or observed. Tenant shall give Landlord
at least 30 days' advance written notice of its intention to enter into any
transaction governed by this Paragraph 17, together with such information as
Landlord, the Credit Facility Providers, the State or MIDFA may reasonably
request concerning the business and financial background of the proposed
subtenant or assignee. Within 10 days after the execution and delivery of any
assignment or sublease permitted pursuant to this Paragraph 17, Tenant shall
deliver a conformed copy thereof to Landlord, and within 10 days after the
execution and delivery of any permitted sublease, Tenant shall give notice to
Landlord of the existence and term thereof, and of the name and address of the
sublessee thereunder.
(b) If Tenant assigns all its rights and interests under this
Lease, the assignee under such assignment shall expressly assume all the
obligations of Tenant hereunder in a written instrument delivered to Landlord at
the time of such assignment. No assignment or sublease shall affect or reduce
any of the obligations of Tenant hereunder, and all such obligations shall
continue in full effect as obligations of a principal and not as obligations of
a guarantor or surety, to the same extent as though no assignment or subletting
had been made. No assignment or sublease shall impose any obligations on
Landlord beyond those of Landlord under this Lease or otherwise affect any of
the rights of Landlord under this Lease. Any assignment or subletting,
Landlord's consent thereto, or Landlord's collection or acceptance of rent from
any assignee or subtenant shall not be construed
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either as waiving or releasing Tenant from any of its liabilities or obligations
under this Lease, or as relieving Tenant or any assignee or subtenant from the
obligation of obtaining Landlord's prior written consent to any subsequent
assignment or subletting.
(c) Upon the occurrence of an Event of Default under this
Lease, Landlord shall have the right to collect and enjoy all rents and other
sums of money payable under any sublease of any of the Leased Premises, and
Tenant hereby irrevocably and unconditionally assigns such rents and money to
Landlord, which assignment may be exercised upon and after (but not before) the
occurrence of an Event of Default. From and after the date, if any, that such
Event of Default is cured, such rents shall again become payable to Tenant and
the excess, if any, of the sublease rents collected by Landlord over the amount
thereof applied toward Tenant's obligations under this Lease shall be paid to
Tenant.
(d) All restrictions and obligations imposed pursuant to this
Lease on Tenant shall be deemed to extend to any subtenant or assignee, and
Tenant shall cause such Person to comply with such restrictions and obligations.
Each sublease is subject to the condition that if the Term is terminated or
Landlord succeeds to Tenant's interest in the Leased Premises by voluntary
surrender or otherwise, at Landlord's option the subtenant shall be bound to
Landlord for the balance of the term of such sublease and shall attorn to and
recognize Landlord as its landlord under the then executory terms of such
sublease.
18. Permitted Contests. Notwithstanding any other provision of this
Lease to the contrary, Tenant shall not be required to (i) pay any Imposition,
or (ii) discharge or remove any lien, encumbrance or charge referred to in
Paragraph 10 or 12, so long as Tenant shall contest, in good faith and at its
expense, the existence, the amount or the validity thereof, the amount of the
damages caused thereby, or the extent of its liability therefor, by appropriate
proceedings, provided that such contest shall operate at all times during the
pendency thereof to prevent (i) the collection of, or other realization upon,
the sums payable to satisfy any Imposition or lien, encumbrance or other charge
so contested, (ii) the sale, forfeiture or loss of the Leased Premises, or any
part thereof, or any interest therein or Basic Rent or any Additional Rent, or
any portion thereof, (iii) any interference with the use or occupancy of the
Leased Premises or any part thereof, (iv) any interference with the payment of
Basic Rent or any Additional Rent, or any portion thereof, (v) the cancellation
of any fire or other insurance policy, unless such policy is replaced prior to
its cancellation by another policy complying with the provisions of this Lease,
and (vi) the imposition of any civil or criminal liability upon Landlord. While
any such proceedings are pending, Landlord shall not have the right to pay,
remove or cause to be discharged the tax, assessment, levy, fee, rent or charge
or lien, encumbrance or charge thereby being contested, provided that Landlord
shall have the right to require Tenant to establish reasonable reserves for such
liabilities being contested if the Landlord reasonably determines such reserves
to be necessary. Tenant further agrees to give Landlord prompt notice of
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Tenant's intention to contest any Imposition and that each such contest shall be
promptly prosecuted to a final conclusion. Tenant will pay, and save Landlord
harmless against, any and all losses, judgments, decrees and costs (including
all reasonable attorneys' fees and expenses) in connection with any such contest
and will, promptly after the final settlement, compromise or determination of
such contest, fully pay and discharge the amounts which shall be levied,
assessed, charged or imposed or be determined to be payable therein or in
connection therewith, together with all penalties, fines, interests, costs and
expenses thereof or in connection therewith, and perform all acts the
performance of which shall be ordered or decreed as a result thereof.
19. Default Provisions.
(a) Any of the following occurrences or acts shall constitute
an Event of Default under this Lease:
(i) Tenant fails to pay, within 5 days after notice from
Landlord or any of its assignees to Tenant, any installment of Basic Rent.
(ii) Tenant fails to pay any payment of Additional Rent, or
any other payment required to be paid by Tenant hereunder, including, without
limitation, payment of Impositions and insurance premiums, and such failure
continues for 30 days after written notice thereof shall have been given to
Tenant by Landlord.
(iii) Tenant fails to observe or perform any other
provision hereof for 30 days (or such shorter period of time as Landlord may
reasonably determine if such default endangers life or property) after Landlord
shall have delivered to Tenant written notice (except in the case of an
emergency) of such failure (provided that, in the case of any default referred
to in this clause (iii) which does not endanger life or property and which
cannot with diligence be cured within such 30 day period, if Tenant shall
proceed promptly to cure the same and thereafter shall prosecute the curing of
such default with diligence, then upon receipt by Landlord of a certificate from
an authorized officer of Tenant stating the reason that such default cannot be
cured within 30 days and stating that Tenant is proceeding with diligence to
cure such default, the time within which such failure may be cured shall be
extended for such additional period as may be necessary to complete the curing
of the same with diligence.
(iv) An Act of Bankruptcy occurs with respect to Tenant, or
Tenant becomes generally unable to pay its debts as they become due; provided,
however, if a proceeding with respect to an Act of Bankruptcy is filed or
commenced against Tenant, the same shall not constitute an Event of Default if
such proceeding is dismissed within 90 days from the date of such Act of
Bankruptcy.
(v) Default is made (A) with respect to any evidence of
indebtedness of liability for borrowed money of Tenant to either of the Credit
Facility Providers, or (B) with respect to any evidence of indebtedness or
liability of Tenant to any other
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Person for borrowed money or pursuant to a lease obligation, if the effect of
such default described in clause (A) or (B) above is to accelerate the maturity
of such evidence of indebtedness or liability prior to its stated maturity
(whether automatically, following an election by the holder or obligee thereof
to accelerate, or otherwise) or any such indebtedness is not paid as and when
due and payable; provided, however, that it shall not constitute an Event of
Default if the outstanding principal balance of such indebtedness or liability
of Tenant to any Person other than either of the Credit Facility Providers or
the State is not in excess of $1,000,000 or Tenant certifies to the Credit
Facility Providers, the State and MIDFA that it is contesting such default in
good faith and by appropriate and diligent proceedings.
(vi) Any amendment to this Lease shall have been made
without the prior written consent of the Credit Facility Providers, the State
and MIDFA, which consent shall not be unreasonably withheld, conditioned or
delayed, and, except for material changes which would require the consent or
approval of the State Board of Public Works or the State Legislative Policy
Committee, which consent shall be deemed given by the Credit Facility Providers,
the State or MIDFA if the Credit Facility Providers, the State or MIDFA does not
object to any proposed amendment within 15 business days after the receipt
thereof by the Credit Facility Providers, the State or MIDFA.
(vii) Tenant abandons the Leased Premises.
(viii) The interest of Tenant in the Leased Premises or any
part thereof shall be assigned or subleased in violation of Paragraph 17, or
shall be levied upon or attached in any proceeding involving a claim in excess
of $1,000,000 and such proceeding is not vacated, discharged or bonded against
to the reasonable satisfaction of Landlord, the Credit Facility Providers, the
State and MIDFA within 30 days thereafter.
(ix) Any representation or warranty made by Tenant or its
representatives in this Lease or any of the Lease Documents executed and
delivered by Tenant or any statement or representation made by Tenant or its
representatives in any certificate, report or opinion (including legal opinions)
financial statement or other instrument furnished in connection with this Lease
or any of the Lease Documents executed and delivered by Tenant proves to have
been incorrect, false or misleading in any material respect when made.
(x) Any judgment against Tenant or any attachment or other
levy against the property of Tenant with respect to a claim for an amount in
excess of $1,000,000 remains unpaid, unstayed on appeal, undischarged, unbonded
or undismissed for a period of 60 days.
(xi) Tenant fails to comply with any material requirement
of any governmental authority having jurisdiction over the Leased Premises
within the time required by such governmental authority; or any proceeding is
commenced or action taken to
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enforce any remedy for a violation of any material requirement of a governmental
authority or any restrictive covenant affecting the Leased Premises or any part
thereof; provided, however, it shall not constitute an Event of Default if
Tenant is contesting the validity or applicability of any such requirement or
covenant, at its sole cost and expense, in good faith and by appropriate and
diligent proceedings.
(xii) If any material provision of this Lease at any time
for any reason ceases to be valid and binding on Tenant, or is declared to be
null and void, or the validity or enforceability thereof is contested by Tenant
or any governmental agency or authority, or Tenant denies that it has any
further liability or obligation under this Lease or any of the Lease Documents
executed and delivered by Tenant.
(xiii) Landlord, the Credit Facility Providers, the State
or MIDFA, or any of their respective representatives are not permitted, at all
reasonable times (after at least 48 hours prior written notice to Tenant, unless
an Event of Default shall have occurred and be continuing in which event notice
will not be required), to enter upon the Leased Premises, to inspect the Leased
Premises and all materials, equipment, fixtures and other items used or to be
used in the construction thereof, and to examine all detailed plans, shop
drawings and specifications which relate to or the appurtenances thereto or to
be used in the operation thereof, provided, however, any person conducting such
inspection shall comply with Tenant's safety and operating policies and
procedures.
(xiv) An Event of Default (as defined in the 1997 Lease)
occurs under the 1997 Lease.
(b) If an Event of Default shall have happened and be
continuing, Landlord shall have the right at its election, then or at any time
thereafter while such Event of Default shall continue, to give Tenant written
notice of Landlord's intention to terminate this Lease on a date specified in
such notice (such termination being hereinafter referred to as a "Default
Termination" and such notice being hereinafter referred to as a "Default
Termination Notice"). Upon giving a Default Termination Notice, the Term and the
estate hereby granted shall terminate on the date specified in the Default
Termination Notice as fully and completely and with the same effect as if such
date were the date hereinbefore fixed for the expiration of the Term, and all
rights of Tenant hereunder shall terminate, but Tenant shall remain liable as
hereinafter provided. Notwithstanding the foregoing, no Default Termination
Notice shall be effective unless it is also executed by the Credit Facility
Providers and MIDFA.
(c) If an Event of Default shall have happened and be
continuing, Landlord shall have the immediate right, whether or not the Term
shall have been terminated pursuant to Paragraph 19(b), to re-enter and
repossess the Leased Premises or any part thereof by force (if legally permitted
in the State of Maryland), summary proceedings, ejectment or otherwise and the
right (subject to the rights and interests of equipment lessors) to remove all
Persons
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and property therefrom. Landlord shall be under no liability for or by reason of
any such entry, repossession or removal. No such re-entry or taking of
possession of the Leased Premises by Landlord shall be construed as an election
on Landlord's part to terminate this Lease unless a Default Termination Notice
shall have been given to Tenant, or unless the termination of this Lease be
finally decreed by a court of competent jurisdiction.
(d) At any time or from time to time after the repossession of
the Leased Premises or any part thereof pursuant to Paragraph 19(c), whether or
not this Lease shall have been terminated pursuant to Paragraph 19(b), Landlord
shall use reasonable efforts to relet the Leased Premises or any part thereof
for the account of Tenant or Landlord or otherwise, without notice to Tenant,
for such term or terms and on such conditions (which may include concessions of
free rent) and for such uses as Landlord, in its absolute discretion, may
determine, and Landlord may collect and receive any rents payable by reason of
such reletting. Landlord shall not be responsible or liable for any failure to
relet the Leased Premises or any part thereof or for any failure to collect any
rent due upon any such reletting.
(e) In the event of the termination of this Lease upon an Event
of Default or repossession of the Leased Premises or any part thereof pursuant
to Paragraph 19(c) or otherwise, or the reletting of the Leased Premises or any
part thereof pursuant to Paragraph 19(d), Tenant shall remain liable as
hereinafter provided.
(f) In the event of any Default Termination or repossession of
the Leased Premises or any part thereof by reason of the occurrence of an Event
of Default, Tenant will pay to Landlord Basic Rent, Additional Rent and other
sums required to be paid by Tenant to and including the date of such termination
or repossession (including, without limitation, the amount of all sums which
have become due and payable by Landlord under the Credit Facility Documents and
the Bond Documents and the State Loan Documents); and, thereafter, Tenant shall,
until the end of what would have been the Term in the absence of such
termination or repossession, and whether or not the Leased Premises or any part
thereof shall have been relet, be liable to Landlord for, and shall pay to
Landlord, as liquidated and agreed current damages on each Basic Rent Payment
Date and on any other date when due and payable: (i) Basic Rent, Additional Rent
and other sums which would be payable under this Lease by Tenant in the absence
of such termination or repossession, less (ii) the net proceeds, if any, of any
reletting effected for the account of Tenant pursuant to Paragraph 19(d), after
deducting from such proceeds all Landlord's expenses in connection with such
reletting (including, without limitation, all repossession costs, brokerage
commissions, legal expenses, attorneys' fees, employees' expenses, alteration
costs and expenses of preparation for such reletting). Tenant will pay such
current damages on the days on which Basic Rent would have been payable under
this Lease in the absence of such termination or repossession, and Landlord
shall be entitled to recover the same from Tenant on each such day.
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(g) At any time after a Default Termination, Landlord shall be
entitled to recover from Tenant, and Tenant will pay to Landlord within 120 days
of demand therefor, an amount equal to Basic Rent, Additional Rent and other
sums which would be payable under this Lease, from the date to which Tenant
shall have satisfied in full its obligations under Paragraph 19(f) to pay
current damages, to the end of the remaining Term of this Lease in the absence
of such termination (assuming, in computing the amount of Basic Rent that would
have been due under Paragraph 7, an interest rate which is equal to the rate
applicable to such obligations on the date the Default Termination Notice is
issued "the "Assumed Rate"), discounted at the Assumed Rate, or such lower rate
as shall be necessary to provide that the sum payable by Tenant hereunder shall
satisfy in full the sum of (I) all Landlord's Credit Facility Obligations" and
"Landlord's Bond Obligations" accrued through the date of the payment due under
this Paragraph 19(g), including without limitation, all accrued fees, costs and
expenses payable to the Trustee, the Remarketing Agent, the Rating Agency and
the Credit Facility Providers, plus (II) all costs and expenses (including
reasonable attorneys fees and expenses) of the Credit Facility Providers,
Landlord and MIDFA in connection with such Default Termination.
(h) The words "enter", "re-enter" or "re-entry", as used in
this Paragraph 19, are not restricted to their technical meaning.
(i) An Event of Default (as defined in this Lease) under this
Lease shall constitute an Event of Default (as defined in the 1997 Lease) under
the 1997 Lease; and an Event of Default (as defined in the 1997 Lease) under the
1997 Lease shall constitute an Event of Default (as defined in this Lease) under
this Lease.
20. Additional Rights of Landlord.
(a) No right or remedy herein conferred upon or reserved to
Landlord is intended to be exclusive of any other right or remedy given
hereunder or now or hereafter existing at Law or in equity. The failure of
either party to insist at any time upon the strict performance of any covenant
or agreement or to exercise any option, right, power or remedy contained in this
Lease shall not be construed as a waiver or a relinquishment thereof for the
future. A receipt by Landlord of any Basic Rent, Additional Rent or any other
sum payable hereunder with knowledge of the breach of any covenant or agreement
contained in this Lease shall not be deemed a waiver of such breach, and no
waiver of any provision of this Lease shall be deemed to have been made unless
expressed in writing and signed by the waiving party. In addition to other
remedies provided in this Lease, Landlord shall be entitled, to the extent
permitted by applicable law, to injunctive relief in case of the violation, or
attempted or threatened violation, of any of the covenants, agreements,
conditions or provisions of this Lease, or to a decree compelling performance of
any of the covenants, agreements, conditions or provisions of this Lease, or to
any other remedy allowed to Landlord at Law or in equity.
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(b) Tenant hereby waives and surrenders, to the extent not
prohibited by Law, for itself and all those claiming under it, including
creditors of all kinds, (i) any right and privilege which it or any of them may
have under any present or future Law to redeem the Leased Premises or to have a
continuance of this Lease for the Term after termination of Tenant's right of
occupancy by order or judgment of any court or by any legal process or writ, or
under the terms of this Lease, or after the termination of the Term as herein
provided, and (ii) the benefits of any present or future law which exempts
property from liability for debt or for distress for rent.
(c) In the event Tenant shall be in default in the performance
of any of its obligations under this Lease, and an action shall be brought for
the enforcement thereof in which it shall be determined that Tenant was in
default, Tenant shall pay to Landlord all the expenses incurred in connection
therewith including reasonable attorney's fees. In the event Landlord shall,
without fault on its part, be made a party to any litigation commenced against
Tenant, and if Tenant, at its expense, shall fail to provide Landlord with
counsel reasonably approved by Landlord, Tenant shall pay all costs and
reasonable attorney's fees incurred or paid by Landlord in connection with such
litigation.
(d) If an Event of Default has happened and is continuing,
Landlord may, but shall not be obligated to, make any payment or perform any act
required hereunder to be made or performed by Tenant which has not been
performed within the time period specified herein for such performance, with the
same effect as if made or performed by Tenant, provided that no entry by
Landlord upon the Leased Premises for such purpose shall create any liability to
Tenant on the part of Landlord or shall constitute or shall be deemed to be an
eviction of Tenant, and no such entry shall waive or release Tenant from any
obligation or default hereunder. All sums so paid by Landlord and all costs and
expenses (including reasonable attorney's fees and expenses) incurred by
Landlord in connection with the performance of any such act, together with
interest at the Default Rate, shall constitute Additional Rent payable by Tenant
hereunder.
21. Inspection. Tenant shall permit Landlord, the Credit Facility
Providers, the State, MIDFA, and the holder of any Encumbrance, and its and
their representatives and agents to enter the Leased Premises, with notice to
Tenant and with an escort provided by Tenant, unless (i) an Event of Default
shall have occurred and be continuing, or (ii) an emergency threatening life or
property exists, in either of which cases, no advance notice shall be required,
without charge therefor and without diminution of the rent payable by Tenant, in
order to examine, inspect and protect the Leased Premises, or, during the last
year of the Term, to exhibit the same to brokers, prospective tenants, lenders,
purchasers and others. In connection with any such entry, Landlord shall
endeavor to minimize the disruption to Tenant's normal business operations in
the Leased Premises.
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22. Notices, Demands and Other Instruments. All notices, demands,
requests, consents, approvals, certificates or other communications required
under this Lease shall be in writing, and shall be sufficiently given and shall
be deemed to have been properly given (i) if delivered by hand, when written
confirmation of delivery is received by the sender, (ii) three days after the
same is mailed by certified mail, postage prepaid, return receipt requested, or
(iii) if sent by overnight courier, 24 hours (plus 24 hours for any intervening
day that is not a business day) after delivery to such overnight courier
addressed to the Person to whom any such notice, demand, request, consent,
approval, certificate or other communication is to be given, at the appropriate
address designated on Exhibit E attached hereto. Any party listed on Exhibit E
shall each have the right from time to time to specify as its address for
purposes of this Lease any other address in the United States of America upon
giving 15 days' written notice hereunder.
23. Estoppel Certificates. Landlord or Tenant, as the case may be,
shall, at any time and from time to time, upon not less than 20 days' prior
written notice by the other (but neither shall be required to do so more than
twice in any calendar year), execute, acknowledge and deliver to the requesting
party a statement in writing, executed by an authorized representative of
Landlord or by the President or a Vice President of Tenant, as the case may be,
certifying (i) that this Lease is unmodified and in full effect (or, if there
have been modifications, that this Lease is in full effect as modified, and
setting forth such modifications), (ii) the dates to which Basic Rent,
Additional Rent and all other sums payable hereunder have been paid, (iii) that
to the knowledge of the signer of such certificate no default by either Landlord
or Tenant exists hereunder or specifying each such default of which the signer
may have knowledge; and (iv) that, in the case of any statement being given by
Tenant, to the knowledge of the signer of such certificate, there are no
proceedings pending or threatened against Tenant before or by any court or
administrative agency which, if adversely decided, would materially and
adversely affect the financial condition and operations of Tenant or Tenant's
ability to perform or fulfill its obligations under this Lease, or if any such
proceedings are pending or threatened to said signer's knowledge, specifying and
describing the same. It is intended that any such statements may be relied upon
by the Credit Facility Providers, the State, MIDFA, Landlord or their assignees
or by any prospective purchaser of the Leased Premises or by any transferee or
assignee of Tenant's interest in the Lease or a sublessee of Tenant or by any
party providing financing to Tenant. Any certificate required under this
Paragraph 23 shall (i) state briefly the nature and scope of the examination or
investigation upon which the statements contained in such certificate are based,
(ii) state that in the opinion of each Person signing such certificate he has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to the subject matter of such certificate, and (iii)
certify to the correctness of the statements contained therein.
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24. No Merger. There shall be no merger of this Lease or of the
leasehold estate hereby created with any other estate or interest in the Leased
Premises or any part thereof by reason of the fact that the same Person may
acquire or hold, directly or indirectly, (a) any interest in this Lease or the
leasehold estate hereby created or (b) any such other estate or interest in the
Leased Premises or any part.
25. Representations and Warranties of Tenant. Tenant makes the
following representations and warranties to Landlord:
(a) Good Standing. Tenant (i) is a corporation duly organized
and existing, in good standing, under the laws of the State of Delaware, (ii)
has the corporate power and all material governmental licenses, authorizations,
consents and approvals required to own its property and to carry on its business
as now being conducted, and (iii) is duly qualified to do business and is in
good standing in each jurisdiction in which the character of the properties
owned by it therein or in which the transaction of its business makes such
qualification necessary, including, but not limited to, the State of Maryland.
(b) Authority. Tenant has full corporate power and authority to
enter into and execute and deliver this Lease and each of the other documents
executed and delivered by Tenant in connection herewith (collectively, the
"Lease Documents"), and to incur and perform the obligations provided for
therein and herein, all of which have been duly authorized by all proper and
necessary corporate action by Tenant. No consent or approval of stockholders or
of any other Person or public authority or regulatory body is required as a
condition to the validity or enforceability of this Lease or any of the other
Lease Documents, or if required the same has been duly obtained.
(c) Binding Agreements. This Lease and each of the other Lease
Documents have been duly and properly executed by Tenant, constitute the valid
and legally binding obligations of the Tenant, and are fully enforceable against
Tenant in accordance with their respective terms; except to the extent that
enforceability may be affected by any bankruptcy or insolvency proceeding filed
by or against the Tenant and subject to the exercise of judicial discretion in
accordance with general principles of equity.
(d) Litigation. There is no litigation or proceeding pending
or, so far as Tenant knows, threatened, before any court or administrative
agency which, in the opinion of Tenant, will materially adversely affect the
financial condition or operations of Tenant, Tenant's ability to perform and
fulfill its obligations under this Lease, or the authority of Tenant to enter
into, or the validity or enforceability of, this Lease or any of the other Lease
Documents.
(e) No Conflicting Agreements, Laws, etc. There is (i) no
charter, by-law or preference stock provision of the Tenant and no provision of
any existing mortgage, indenture, contract or agreement binding on the Tenant or
affecting Tenant's property, and
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(ii) to the knowledge of Tenant, no provision of Law or order of court binding
on the Tenant or affecting any of Tenant's property, which would conflict with
or in any way prevent the execution, delivery, or performance of the terms of
this Lease or any of the other Lease Documents, or which would be in default or
violated as a result of such execution, delivery or performance, or for which
adequate consents or waivers have not been obtained.
(f) Tax Returns. Tenant has filed all required federal, state
and local tax returns and has paid all taxes as shown on such returns as they
have become due. No claims have been assessed and are unpaid with respect to
such taxes, and Tenant has established reserves which it believes to be adequate
for the payment of additional taxes for years which have not been audited by the
respective tax authorities.
(g) Place of Business of Tenant. Tenant's principal place of
business is located at 9410 Key West Avenue, Rockville, Maryland 20850.
(h) Brokers. To the best of Tenant's knowledge (other than
Scheer Partners Inc.), no Person has, or as a result of any action of or by
Tenant in connection with the transactions contemplated hereby and by the Lease
will have, any right, interest or valid claim against or on the Landlord for any
commission, fee or other compensation as a broker or finder, or in any similar
capacity. Tenant shall indemnify the Landlord against any claimed fee,
commission or other compensation arising from or in connection with the
transactions contemplated hereby or by the Lease Documents.
(i) ERISA. (i) Any Plan established and maintained by the
Tenant or any Commonly Controlled Entity is a qualifying plan under the
applicable requirements of Section 401 of the Code and there is no current
matter which would materially adversely affect the qualified tax-exempt status
of any Plan; (ii) neither the Tenant nor any Commonly Controlled Entity has
engaged in or is engaging in any Prohibited Transaction or has incurred any
Accumulated Funding Deficiency in connection with any such Plan, whether or not
waived, and no Reportable Event has occurred with respect to any Plan subject to
the minimum funding requirements of Section 412 of the Code; (iii) no
Multiemployer Plan has "terminated", as that term is defined in ERISA; (iv)
neither the Tenant nor any Commonly Controlled Entity has "withdrawn" or
"partially withdrawn" from any Multiemployer Plan; and (v) no Multiemployer Plan
is in "reorganization" nor has notice been received from the administrator of
any Multiemployer Plan that any such Plan will be placed in "reorganization".
26. Affirmative Covenants of Tenant. Tenant shall:
(a) Reporting Requirements. Furnish or cause to be furnished to
Landlord:
(i) as soon as available but in no event more than 45 days
after the close of each fiscal quarter of Tenant, a
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copy of the 10Q Report of Tenant filed with the Securities and Exchange
Commission (the "SEC") accompanied by a certificate of the chief financial
officer of Tenant stating whether any event has occurred which constitutes an
Event of Default, or which would constitute such an Event of Default with the
giving of notice or the lapse of time or both, and, if so, stating the facts
with respect thereto; and
(ii) as soon as available but in no event more than 90 days
after the close of each fiscal year of Tenant, a copy of the 10K Report of
Tenant filed with the SEC and a copy of the annual audited financial statements
relating to Tenant prepared in accordance with GAAP, which financial statements
shall include a balance sheet of Tenant as at the end of such fiscal year and a
statement of earnings and changes in stockholder's equity of Tenant for such
fiscal year; and
(iii) as soon as available but in no event more than 90
days after the close of each fiscal year of Tenant, a certificate of the chief
financial officer of Tenant stating whether any event which constitutes an Event
of Default under this Lease has occurred, or any event which would constitute
such an Event of Default with the giving of notice or the lapse of time or both
has occurred, and, if so, stating the facts with respect thereto; and
(iv) promptly upon transmission thereof, copies of any
financial statements, proxy statements, reports and the like which Tenant sends
to its shareholders and copies of all registration statements (with exhibits);
and
(v) promptly upon request, access to the registration
materials submitted to the Federal Drug Administration (the "FDA") to evidence
the internal validation and registration of the Leased Premises as a
pharmaceutical-manufacturing facility, any correspondence, notices and the like
received from the FDA relating to the initial and on-going validation and
registration of the Leased Premises as a pharmaceutical-manufacturing facility
with the FDA and, promptly upon receipt thereof, copies of any threatened or
actual revocation, restriction, suspension or expiration of any such validation
and/or registration; and
(vi) within 30 days before February 15, 2006, a written
statement, signed by the President or Vice President of Tenant, stating (A)
whether or not, and to what extent, the Tenant's Subordinated Notes have been
converted into shares of common stock of Tenant or are outstanding, and (B)
whether or not Tenant is in compliance with the Liquidity Covenant; and
(vii) promptly upon the occurrence thereof, written notice
of any Change in Control; and
(viii) with reasonable promptness, such budgets, cash flow
projections and other additional information, reports or statements as Landlord,
either of the Credit Facility Providers or MIDFA may from time to time
reasonably request.
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(b) Taxes and Claims. Pay and discharge or cause to be paid and
discharged all taxes imposed upon it or its income or properties prior to the
date on which penalties attach thereto, and all lawful claims which, if unpaid,
might become a lien or charge upon any of its properties. Tenant shall have the
right to contest the validity of any such tax, assessment, charge, levy or
claim, by timely and appropriate proceedings, provided that Tenant shall (1)
give Landlord written notice of its intention to contest, (2) diligently
prosecute such contest, (3) at all times effectively stay or prevent any
official or judicial sale of the Leased Premises or Building Equipment or any
part thereof by reason of nonpayment of any such taxes, and (4) establish
reasonable reserves for such liabilities being contested if Landlord reasonably
determines such reserves to be necessary.
(c) Insurance. In addition to the insurance required by
Paragraph 15 of this Lease, maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity.
Tenant shall file with Landlord, upon its request, a detailed list of the
insurance then in effect covering Tenant and Tenant's properties, stating the
names of the insurance companies, the amounts and rates of the insurance, dates
of the expiration thereof and the properties and risks covered thereby; and,
within 30 days after notice in writing from the Landlord, obtain such additional
insurance as the Landlord may reasonably request.
(d) Corporate Existence. Maintain its existence in good
standing as a Delaware corporation, qualified to transact business in the State
of Maryland.
(e) Compliance with Laws. Comply with all Legal Requirements,
subject to Tenant's right to contest the validity or applicability of any of the
foregoing, at its sole cost and expense, in good faith and by appropriate and
diligent proceedings, in accordance with Paragraph 18 hereof.
(f) Books and Records. Maintain appropriate books and records
with respect to the Leased Premises and permit access by Landlord, the Credit
Facility Providers, the State and MIDFA and their respective authorized
representatives and employees to the books and records of Tenant at the offices
of Tenant during normal business hours.
(g) Employment Count. Within 30 days after the Closing Date and
on each anniversary date thereafter, and upon subsequent request of Landlord,
the State or MIDFA, Tenant shall supply Landlord, the State and MIDFA with the
employment count at the Leased Premises.
(h) Equal Employment. Tenant shall prohibit discrimination on
the basis of (i) political or religious opinion or affiliation, marital status,
race, color, creed, or national origin, or (ii) sex or age, except when sex or
age constitutes a bona fide occupational qualification, or (iii) the physical or
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mental disability of a qualified individual with a disability; and shall, upon
the request of MIDFA or the State Department of Business and Economic
Development (the "Department"), submit information relating to its employment
practices and operations with regard to the above on a form to be prescribed by
MIDFA or the Department.
(i) Drug and Alcohol Free Workplace. Tenant shall make a good
faith effort to eliminate illegal drug use and alcohol and drug abuse from its
workplace during the Term and specifically, shall:
(i) prohibit the unlawful manufacture, distribution,
dispensation, possession, or use of drugs in its
workplace;
(ii) prohibit its employees from working under the
influence of alcohol or drugs;
(iii) not hire or assign to work on an activity funded in
whole or part with State of Maryland funds, anyone
whom it knows, or in the exercise of due diligence
should know, currently abuses alcohol or drugs and
is not actively engaged in a bona fide
rehabilitation program;
(iv) promptly inform the appropriate law enforcement
agency of every drug related crime that occurs in
its workplace if it or its employee has observed the
violation or otherwise has reliable information that
a violation has occurred; and
(v) notify employees that drug and alcohol abuse is
banned in the workplace, impose sanctions on
employees who abuse drugs and alcohol in the
workplace, and institute steps to maintain a drug
and alcohol free workplace.
(j) Financial Covenants. Subject to the further terms and
conditions set forth in this Paragraph 26(j), maintain, at all times,
unrestricted cash and securities (exclusive of any unrestricted cash or
securities maintained by a consolidated subsidiary of Tenant) with a
market value of at least $75,000,000.
(i) The cash and/or marketable securities pledged by
Tenant pursuant to the Collateral Pledge Agreement
shall be credited against the foregoing $75,000,000
requirement.
(ii) In the event that the market value of such
unrestricted cash and securities falls below
$75,000,000, Tenant shall pledge to Landlord, as
security for Tenant's
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obligations under this Lease, in addition to the
pledge described in the Collateral Pledge Agreement,
cash and/or marketable securities acceptable to the
Credit Facility Providers, as the assignees of
Landlord, in their sole discretion and margined as
required by the Credit Facility Providers, as the
assignees of Landlord, with a market value at all
times equal to at least $5,000,000.
(iii) Any cash and/or marketable securities pledged
hereunder shall be held by Allfirst.
(iv) Tenant shall deposit with Allfirst, as the assignee
of Landlord, additional cash and/or marketable
securities acceptable to the Credit Facility
Providers, as the assignees of Landlord, in their
sole discretion and margined as required by the
Credit Facility Providers, as the assignees of
Landlord, whenever the market value of each
additional pledge hereunder falls below $5,000,000
to make up the deficiency.
(v) Whenever the market value of any cash and/or
marketable securities pledged to Landlord pursuant
to clause (ii) or clause (iv) above (margined as
required by the Credit Facility Providers, as the
assignees of the Landlord) exceeds $5,000,000, the
Credit Facility Providers, as the assignees of
Landlord, shall, in accordance with the terms of the
Collateral Pledge Agreement, release from the pledge
cash and/or marketable securities equal to such
excess.
(vi) Notwithstanding any of the other provisions of this
Paragraph 26(j), during any period in which Tenant
shall have achieved and is continuously maintaining
a Coverage Ratio (as defined below) of at least 1.25
to 1.00, Tenant shall not be required to pledge any
additional cash and/or marketable securities to
Landlord as required by clause (ii) and clause (iv)
above. As used in this Paragraph 26(j)(vi),
"Coverage Ratio" means the sum of EBITDA ("earnings
before interest, taxes, depreciation and
amortization") and operating lease expense divided
by the sum of current maturities of long term debt,
interest expense, capitalized lease obligations and
operating lease expense. The Coverage Ratio, for
purposes of this Paragraph 26(j)(vi), shall be
tested as of the end of each fiscal
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quarter of Tenant on a rolling six quarter basis for
the prior 6 fiscal quarter period.
(vii) In no event shall Tenant's unrestricted cash and
securities (exclusive of any unrestricted cash and
securities maintained by a consolidated subsidiary
of Tenant), including cash and/or marketable
securities pledged by Tenant pursuant to the
Collateral Pledge Agreement, have a market value of
less than $50,000,000, at any time.
(viii) Any investment earnings on the cash and/or
marketable securities pledged by Tenant pursuant to
clause (ii) or clause (iv) above shall be
distributed quarterly by Allfirst, as the assignee
of Landlord, to Tenant.
(ix) If Tenant pledges cash and/or marketable securities
to Landlord to satisfy the requirements of clause
(ii) above and thereafter for a period of two
consecutive fiscal quarters Tenant returns to
compliance with the requirements which necessitated
such pledge, the Credit Facility Providers, as the
assignees of Landlord, shall release such cash
and/or marketable securities from such pledge. By
way of illustration, if the market value of Tenant's
unrestricted cash and securities (as calculated
pursuant to clause (ii) or clause (iv) above) falls
below $75,000,000 and Tenant has pledged $5,000,000
of cash and/or marketable securities to Landlord and
thereafter the market value of Tenant's unrestricted
cash and securities is greater than $75,000,000 for
two consecutive fiscal quarters, the Credit Facility
Providers, as the assignees of Landlord, shall
release from such pledge $5,000,000 of cash and/or
marketable securities.
(x) Notwithstanding any of the other provisions of this
subparagraph 26(j) or subparagraph 26(j) of the 1997
Lease or the Collateral Pledge Agreement, the amount
of cash and/or marketable securities required to be
pledged to Landlord at any time, and in the
aggregate under both this Lease and the 1997 Lease,
shall not exceed $15,000,000.
(xi) If on or before February 15, 2006, all of Tenant's
Subordinated Notes have not been converted into
shares of common stock of Tenant or are no longer
outstanding, on and after February 15, 2006 until
the
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unconverted Tenant's Subordinated Notes have been so
converted or are no longer outstanding, Tenant shall
maintain at all times unrestricted cash and
securities (exclusive of any unrestricted cash or
securities maintained by a consolidated subsidiary
of Tenant) with a market value of at least
$75,000,000 plus the principal amount of, and any
prepayment penalty with respect to, such unconverted
Tenant's Subordinated Notes.
(k) Cooperate in connection with any appraisal of the Leased
Premises conducted by or at the request of Landlord, the Credit Facility
Providers, the State or MIDFA.
27. Negative Covenants of Tenant. Until all of Tenant's obligations
under this Lease have been paid and performed in full (other than any
indemnities which survive the termination of this Lease), without the prior
written consent of Landlord, Tenant shall not, directly or indirectly:
(a) Declare any dividends (other than dividends payable in
capital stock of Tenant) on any shares of any class of its capital stock (other
than preferred stock outstanding on the Closing Date) or apply any of its
property or assets to the purchase, redemption or other retirement of, or set
apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, any shares of any class of capital stock
of Tenant unless (i) there is no Event of Default which has occurred and is
continuing, and (ii) the amount of the dividend does not exceed Tenant's
accumulated earnings at that time.
(b) Fail to notify Landlord of any change in the officers
(within the meaning of Section 240.16a-1 of the Regulations under the Securities
Exchange Act of 1934, as amended) of Tenant.
(c) (i) Restate or amend any Plan established and maintained by
Tenant or any Commonly Controlled Entity and subject to the requirements of
ERISA, in a manner designed to disqualify such Plan and its related trusts under
the applicable requirements of the Code; (ii) permit any officers of Tenant or
any Commonly Controlled Entity to materially adversely affect the qualified
tax-exempt status of any Plan or related trusts of Tenant or any Commonly
Controlled Facility under the Code; (iii) engage in or permit any Commonly
Controlled Entity to engage in any Prohibited Transaction; (iv) incur or permit
any Commonly Controlled Entity to incur any Accumulated Funding Deficiency,
whether or not waived, in connection with any Plan; (v) take or permit any
Commonly Controlled Entity to take any action or fail to take any action which
causes a termination of any Plan in a manner which could result in the
imposition of a lien on the property of Tenant or any Commonly Controlled Entity
pursuant to Section 4068 of ERISA; (vi)
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fail to notify the Credit Facility Providers that notice has been received of a
"termination" (as defined in ERISA) of any Multiemployer Plan to which Tenant or
any Commonly Controlled Entity has an obligation to contribute; (vii) incur or
permit any Commonly Controlled Entity to incur a "complete withdrawal" or
"partial withdrawal" (as defined in ERISA) from any Multiemployer Plan to which
Tenant or any Commonly Controlled Entity has an obligation to contribute; or
(viii) fail to notify the Credit Facility Providers that notice has been
received from the administrator of any Multiemployer Plan to which Tenant or any
Commonly Controlled Entity has an obligation to contribute that any such Plan
will be placed in "reorganization" (as defined in ERISA).
28. Non-Recourse. Anything contained herein to the contrary
notwithstanding, any claim based on or in respect of any liability of Landlord
under this Lease shall be enforced only against Landlord's interest in the
Leased Premises (subject to the lien of the Deed of Trust and the 1997 Deeds of
Trust) and the Collateral Pledge Agreement, and not against any other assets,
properties or funds of Landlord or against any assets, properties or funds of
(i) employee or agent of Landlord (or any director, officer, legal
representative, successor, or assign of any thereof), or (ii) any other Person
affiliated with any of the foregoing, including without limitation, the State of
Maryland or any department, agency or instrumentality thereof.
Notwithstanding any other provision set forth in this Lease or in any
other agreement or document executed in connection with or relating to this
Lease:
(a) No provision of this Lease or of any other agreement or document
executed in connection with or relating to this Lease shall be construed so as
to give rise to any monetary or pecuniary liability of Landlord or of the State
of Maryland, or any political subdivision or agency thereof, or to give rise to
a charge upon the general credit of Landlord or of the State of Maryland, or any
political subdivision or agency thereof, and any claim based on or in respect of
any liability of Landlord under this Lease shall be enforced only as set forth
above in this Paragraph 28.
(b) Neither this Lease nor any other agreement or document executed in
connection with or relating to this Lease nor any claim hereunder or thereunder
shall (i) constitute a debt of Landlord or of the State of Maryland, or any
political subdivision or agency thereof, or a pledge of the full faith and
credit or taxing power of the State of Maryland, or any political subdivision or
agency thereof, or (ii) create any monetary liability on, or obligate Landlord
or the State of Maryland, or any political subdivision or agency thereof, to
make any appropriation for payment. Landlord has no taxing power.
(c) The liability of Landlord under this Lease and under any other
agreement or document executed in connection with or relating to this Lease
shall be non-recourse to Landlord, limited as set forth above in this Paragraph
28; and the lien of any judgment shall be restricted to only Landlord's interest
in the Leased
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Premises (subject to the lien of the Deed of Trust and the 1997 Deeds of Trust)
and the Collateral Pledge Agreement, and not against any other assets,
properties or funds of Landlord or against any assets, properties or funds of
(i) any employee or agent of Landlord (or any director, officer, legal
representative, successor, or assign of any thereof), or (ii) any other Person
affiliated with any of the foregoing, including without limitation, the State of
Maryland or any department, agency or instrumentality thereof; and Landlord
shall have no other liability, legal, moral or otherwise, to Tenant, or any
other person, in connection with the Land, the Improvements, the Leased
Premises, this Lease, or any other agreement or document executed in connection
with or relating to this Lease. In no event shall Landlord be required to pay
any claim under this Lease or under any other agreement or document executed in
connection with or related to this Lease from any of its own funds.
(d) Landlord shall not be required to do any act whatsoever or
exercise any diligence whatsoever, other than to perform its limited obligations
under the Lease Documents, the Bond Documents and the Credit Facility Documents,
to mitigate any damages of Tenant or any other person, if any Event of Default
shall occur under this Lease or any other agreement or document executed in
connection with or relating to this Lease.
29. Separability. Each and every covenant and agreement contained in
this Lease is, and shall be construed to be, a separate and independent covenant
and agreement, and the breach of any such covenant or agreement by Landlord
shall not discharge or relieve Tenant from any of its obligations under this
Lease. If any term or provision of this Lease or the application thereof to any
Person or circumstances shall to any extent be invalid and unenforceable, the
remainder of this Lease, or the application of such term or provision to persons
or circumstances other than those as to which it is invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Lease shall
be valid and shall be enforced to the extent permitted by Law.
30. Subordination.
(a) This Lease is subject and subordinate to the lien,
provisions, operation and effect of the Deed of Trust and 1997 Deeds of Trust or
other security instruments which may now or hereafter encumber the Improvements
or the Land or any interest therein (collectively, "Encumbrances"), to all funds
and indebtedness intended to be secured thereby, and to all renewals,
extensions, modifications, recastings or refinancings thereof. The holder of any
Encumbrance to which this Lease is subordinate shall have the right (subject to
any required approval of the holders of any superior Encumbrance) at any time to
declare this Lease to be superior to the lien, provisions, operation and effect
of such Encumbrance, and Tenant shall execute, acknowledge and deliver all
documents required by such holder in confirmation thereof. Simultaneous with the
execution hereof, Landlord, Tenant, the State and the Banks shall execute the
Assignments. In the event that the Additional Improvements and/or the Land
become subject to an
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Encumbrance after the date hereof, Landlord agrees to obtain a non-disturbance
agreement from the holder of such Encumbrance, in such holder's standard form,
provided that Tenant shall pay or reimburse Landlord for any costs associated
with such efforts and agrees to execute such agreement in order to confirm the
subordination of this Lease to the Encumbrance, if requested by the holder of
such Encumbrance.
(b) Tenant shall at Landlord's request promptly execute any
requisite or appropriate document confirming such subordination. Tenant waives
the provisions of any Law now or hereinafter in effect which may give or purport
to give Tenant any right to terminate or otherwise adversely affect this Lease
and Tenant's obligations hereunder in the event any foreclosure proceeding is
prosecuted or completed or in the event the Additional Improvements, the Land or
Landlord's interest therein is transferred by foreclosure, by deed in lieu of
foreclosure or otherwise. At the request of such transferee, Tenant shall attorn
to such transferee and shall recognize such transferee as the Landlord under
this Lease. Tenant agrees that upon any such attornment, such transferee shall
not be (i) bound by any payment of Basic Rent or Additional Rent more than one
month in advance, except prepayments in the nature of security for the
performance by Tenant of its obligations under this Lease, but only to the
extent such prepayments have been delivered to such transferee, (ii) bound by
any amendment of this Lease made without the consent of the holder of each
Encumbrance existing as of the date of such amendment, (iii) liable for damages
for any breach, act or omission of any prior landlord, or (iv) subject to any
offsets or defenses which Tenant might have against any prior landlord;
provided, however, that after succeeding to Landlord's interest under this
Lease, such transferee shall agree to perform in accordance with the terms of
this Lease all obligations of Landlord arising after the date of transfer.
Within five days after the request of such transferee, Tenant shall execute,
acknowledge and deliver any requisite or appropriate document submitted to
Tenant confirming such attornment.
(c) If any prospective or current holder of an Encumbrance
requires that modifications to this Lease be obtained, and provided that such
modifications (i) are reasonable, (ii) do not adversely affect in a material
manner Tenant's use of the Leased Premises for the Permitted Use, (iii) do not
increase the rent and other sums to be paid by Tenant, (iv) do not change
Tenant's affirmative or negative covenants set forth herein, or (v) affect
Tenant's option to purchase the Leased Premises as provided in Paragraph 6(b),
then Landlord may submit to Tenant an amendment to this Lease incorporating such
required modifications, and Tenant shall execute, acknowledge and deliver such
amendment to Landlord within five days after Tenant's receipt thereof.
31. Binding Effect. All of the covenants, conditions and obligations
contained in this Lease shall be binding upon and inure to the benefit of the
respective successors and assigns of Landlord and Tenant to the same extent as
if each successor and assign were in each case named as a party to this Lease.
This Lease may not be
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changed, modified or discharged except by a writing signed by Landlord and
Tenant and consented to by the Credit Facility Providers, the State and MIDFA.
32. Headings. The headings to the various paragraphs of this Lease
have been inserted for convenient reference only and shall not to any extent
have the effect of modifying, amending or changing the expressed terms and
provisions of this Lease.
33. Environmental Matters.
(a) As used in this Paragraph 33, the following items shall
have meanings set forth below:
(i) "CAA" - shall mean the Clean Air Act, codified at 42
U.S.C. sections 7401, et seq., as amended.
(ii) "CERCLA" - shall mean the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, codified at 42 U.S.C.
sections 9601, et seq., as amended.
(iii) "CWA" - shall mean the Clean Water Act, codified at
33 U.S.C. 1251; et seq., as amended.
(iv) "Environmental Laws" - shall mean CERCLA, HMTA, RCRA,
CAA, CWA, TSCA, RHA and the Right-to-Know Act and all other federal, local and
municipal laws, statutes, ordinances and codes, guidelines and standards
relating to health, safety, sanitation, and the protection of the environment or
governing the use, storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Materials, including, without
limitation, laws and regulations regarding the discharge of water or other
materials or fluids into waterways, and the rules, regulations, guidelines,
decisions, orders and directives of federal, local and municipal governmental
agencies, authorities and courts with respect thereto presently in effect or
hereafter enacted, promulgated or implemented.
(v) "Environmental Permits" - shall mean all permits,
licenses, approvals, authorizations, consents or registrations required by any
applicable Environmental Laws, on either an individual or group basis, in
connection with the construction, ownership, use or operation of the Land or the
Improvements, or the storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Materials related to the Land.
(vi) "Hazardous Materials" - shall mean, without
limitation, flammables, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum or petroleum
based or related substances, hydrocarbons or like substances and their additives
or constituents, and any substances now or hereafter defined as "hazardous
substances," "extremely hazardous substances," "hazardous wastes" or "toxic
chemicals" in CERCLA, HMTA, RCRA, CAA, CWA, TSCA, RHA, the Right-To-Know Act, or
any so-called "superfund"
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or "superlien" law or the regulations promulgated pursuant thereto, or any other
applicable federal, state or local law, common law, code, rule, regulation,
order, or ordinance, presently in effect or hereafter enacted, promulgated or
implemented.
(vii) "HMTA" - shall mean the Hazardous Materials
Transportation Act, codified at 49 U.S.C. sections 1801, et seq., as amended.
(viii) "RCRA" - shall mean the Resource Conservation and
Recovery Act of 1976, codified at 42 U.S.C. sections 6901, et seq., as amended.
(ix) "Release" - shall have the same meaning as given to
that term in CERCLA, as amended, and the regulations promulgated thereunder.
(x) "RHA" shall mean the Rivers and Harbors Appropriation
Act, codified at 33 U.S.C. sections 401, et seq., as amended.
(xi) "Right-To-Know Act" - shall mean the Emergency
Planning and Community Right-To-Know Act, codified at 42 U.S.C. sections 11001,
et seq., as amended.
(xii) "TSCA" - shall mean the Toxic Substances Control Act,
codified at 15 U.S.C. sections 2601, et seq., as amended.
(b) Tenant shall comply at all times and in all respects with
the provisions of all Environmental Laws and Environmental Permits, and shall
not commit any actions or omissions that result in the incurrence of any
liability under such Environmental Laws or Environmental Permits. Tenant will
not allow, cause or permit any Hazardous Materials to be deposited on or under
the Land, or otherwise Released or threatened to be Released from or on the
Land, or otherwise Released or threatened to be Released from or on the Land or
the Improvements or the Additional Improvements, by any Person whatsoever except
as normally and properly used in the construction and operation of the
Improvements and the Additional Improvements in compliance with all
Environmental Laws. Tenant shall conduct all of its activities on the Land and
the Improvements and the Additional Improvements, including, without limitation,
the off-site disposal of any Hazardous Materials originating on or from the Land
or the Improvements or the Additional Improvements, in compliance with all
Environmental Laws. Tenant shall obtain, whenever necessary and in its own name,
appropriate Environmental Permits for its operations and shall comply in all
respects with the requirements of such Environmental Permits.
(c) Tenant hereby agrees to indemnify, hold harmless and defend
Landlord, the Trustee, the Credit Facility Providers, the State and MIDFA, and
their partners, officers, directors, lenders, agents and employees from and
against any and all claims, losses, damages, liabilities, penalties, costs,
assessments, expenses, demands, fines or liabilities of whatever kind or nature,
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including, without limitation, costs, expenses (including expense of posting a
bond) and liabilities imposed upon Landlord pursuant to any indenture or other
document, in any way relating to or arising out of:
(i) The Release or threat of Release of any Hazardous
Materials in, on, above, from or under the Land or Improvements or the
Additional Improvements during the Term hereof;
(ii) Any activity by any party on, off or within the Land
or the Improvements or the Additional Improvements in connection with the use,
handling, treatment, monitoring, removal, storage, decontamination, clean up,
testing, transportation or disposal of any Hazardous Materials located at any
time on, within or under the Land or the Improvements or the Additional
Improvements and introduced onto the Land or the Improvements or the Additional
Improvements at any time on or after the commencement of the Term and prior to
the expiration or other termination of this Lease;
(iii) The use, handling, treatment, monitoring, removal,
storage, decontamination, clean-up, testing, transportation or disposal of
any Hazardous Materials on, under or within the Land or the Improvements or the
Additional Improvements which were introduced onto the Land or into the
Improvements or the Additional Improvements at any time on or after the
commencement of the Term and prior to the expiration or other termination of
this Lease;
(iv) The performance by Tenant or any other Person acting
on behalf of Tenant during the Term of any inspection, investigation, audit,
study, sampling, testing, removal, containment or other remedial action or other
clean-up related to Hazardous Materials on, above, within, related to, or
affected by, the Land or the Improvements;
(v) The imposition, recording or filing of any lien
(including, without limitation, a so-called "superlien") against the Land or the
Improvements or the Additional Improvements as a result of the incurrence by any
party of any claims, expenses, demands, losses, costs, fines or liabilities of
whatever kind or nature with respect to any actual, suspected or threatened
Release of Hazardous Materials or environmental condition, on, above, within,
related to, or affected by, the Land or the Improvements or the Additional
Improvements at any time after the Lease Commencement Date and prior to the
expiration or other termination of this Lease; or
(vi) The violation by Tenant of any applicable
Environmental Laws or Environmental Permits with respect to the Land or the
Improvements or the Additional Improvements. The provisions of this subparagraph
(c) shall survive the expiration or any other termination of this Lease.
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(d) Landlord has delivered to Tenant an undated "Phase I"
environmental report referred to as "Phase I Environmental Assessment Results
Belward Research Campus, Parcel A, Montgomery County, MD", prepared in June/July
1997 by ManTech Environmental Corporation, as supplemented by the reliance
letter from ManTech Environmental Corporation dated as of December 23, 1997 and
the letter from Apex Environmental, Inc. dated as of December 23, 1997, and as
further supplemented by the letter from ManTech Environmental Corporation dated
as of December 21, 1999, indicating any presence of any Hazardous Materials on,
above or below the Land, or of the Release or threat of Release of any Hazardous
Materials existing prior to the commencement of the Term.
(e) Unless Tenant purchases the Leased Premises as provided in
Paragraph 6(b), no less than nine months prior to the expiration of the Term
hereof, Tenant shall cause to be prepared, by an environmental consultant
reasonably acceptable to Landlord, an environmental assessment of the Land and
the Improvements and the Additional Improvements (the "Assessment"), which shall
identify the presence or probable presence of any Hazardous Materials on, above
or below the Land or the Improvements or the Additional Improvements, or the
Release or threat of Release of any Hazardous Materials or any violation of any
Environmental Laws with respect to the Land and the Improvements and the
Additional Improvements or Tenant's operations thereon or therein. To the extent
that the Assessment identifies any such Hazardous Materials, Releases or
threatened Releases or violations, Tenant shall take all such measures,
including, without limitation, any and all such measures as shall be recommended
by such environmental consultant, to remove, remedy and/or cure such condition,
so that, by the end of the Term hereof, no Hazardous Materials shall be present
on, above, within or under the Land or the Improvements or the Additional
Improvements, no Release or threat of Release of Hazardous Materials exists, and
no violation of Environmental Laws shall exist with respect to the Land or the
Improvements or the Additional Improvements or Tenant's operations thereon or
therein. Any such response actions undertaken by Tenant shall comply fully with
all applicable Environmental Laws. If Tenant fails to provide the Assessment to
Landlord by the date that is nine months prior to the expiration of the Term, or
fails to take such recommended measures and to remove any Hazardous Materials
and comply with all Environmental Laws as aforesaid, Landlord may, but shall not
be obligated to, have such Assessment prepared and such removal and/or remedial
measures undertaken at the expense of Tenant, the costs of which shall be
considered Additional Rent hereunder. The foregoing provisions of this
subparagraph (e) shall survive the expiration or any other termination of this
Lease and shall not be construed to relieve Tenant in any way of its continuing
obligations throughout the Term to comply with the provisions of subparagraph
(b) above.
(f) Unless Tenant purchases the Leased Premises as provided in
Paragraph 6(b), as a condition of any termination of this Lease, Tenant shall
cause to be prepared, by an environmental consultant reasonably acceptable to
Landlord, an Assessment which shall identify the presence or probable presence
of any Hazardous Materials on, above or below the Land or the Improvements or
the
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Additional Improvements, or the Release or threat of Release of any Hazardous
Materials or any violation of any Environmental Laws with respect to the Land
and the Improvements and the Additional Improvements or Tenant's operations
thereon or therein. To the extent that the Assessment identifies any such
Hazardous Materials, Releases or threatened Releases or violations, Tenant shall
take all such measures, including, without limitation, any and all such measures
as shall be recommended by such environmental consultant, to remove, remedy
and/or cure such condition, so that, as soon as practicable after the
termination of this Lease, no Hazardous Materials shall be present on, above,
within or under the Land or the Improvements or the Additional Improvements, no
Release or threat of Release of Hazardous Materials exists, and no violation of
Environmental Laws shall exist with respect to the Land or the Improvements or
the Additional Improvements or Tenant's operations thereon or therein. Any such
response actions undertaken by Tenant shall comply fully with all applicable
Environmental Laws. If Tenant fails to engage an environmental consultant to
provide the Assessment to Landlord within fifteen (15) days of the event which
causes or permits termination of this Lease, or fails to take such recommended
measures and to remove any Hazardous Materials and comply with all Environmental
Laws as aforesaid, Landlord may, but shall not be obligated to, have such
Assessment prepared and such removal and/or remedial measures undertaken at the
expense of Tenant, the costs of which shall be considered Additional Rent
hereunder. The foregoing provisions of this subparagraph (f) shall survive the
expiration or any other termination of this Lease and shall not be construed to
relieve Tenant in any way of its continuing obligations throughout the Term to
comply with the provisions of subparagraph (b) above.
34. Quiet Enjoyment. So long as no Event of Default exists hereunder,
and subject to the terms of this Lease, the Deed of Trust, the 1997 Deeds of
Trust, any Encumbrance, and any other matters of record, Landlord warrants
peaceful and quiet occupation and enjoyment of the Leased Premises by Tenant,
free of hindrance by Landlord or anyone claiming by or through Landlord.
35. Dealings With Credit Facility Providers. Notwithstanding any other
provision of this Lease, the Bond Documents and the Credit Facility Documents,
as between Tenant and the Credit Facility Providers, Tenant shall deal solely
and directly with Allfirst, or any other Credit Facility Provider which issues a
Credit Facility in substitution for the Allfirst Letter of Credit, in connection
with all matters relating to the transactions contemplated by this Lease, the
Bond Documents and the Credit Facility Documents, and Tenant shall be entitled
to rely upon any consents, waivers or approvals given by Allfirst, or any other
Credit Facility Provider which issues a Credit Facility in substitution for the
Allfirst Letter of Credit, without any need to inquire as to any consents
thereto by any other Credit Facility Provider.
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36. Miscellaneous.
57
<PAGE> 60
(a) This Lease may be executed in any number of counterparts,
each of which shall be an original, but all of which shall together constitute
one and the same instrument.
(b) References to the masculine shall include the feminine and
neuter and the plural shall include the singular, as the context may require.
(c) This Lease shall be construed and enforced in accordance
with the Law of the State of Maryland.
(d) Time is of the essence with respect to each and every
provision of this Lease.
(e) With respect to any provision of this Lease which requires
Landlord to not unreasonably withhold its consent or approval, if in connection
therewith Landlord is obligated under the Deed of Trust, the 1997 Deeds of
Trust, the Credit Facility Documents, the Bond Documents, the State Loan
Documents or applicable Law to obtain the consent or approval of MIDFA, the
Trustee, the Credit Facility Providers, the State or any other third party, then
Landlord's failure to provide consent or failure to otherwise act in a
reasonable manner because of its inability to obtain the consent or approval of
Landlord, MIDFA, the Credit Facility Providers, the State or other third party
shall not be deemed unreasonable, so long as Landlord has made a good faith
effort to obtain such consent.
(f) Upon the satisfaction of the Deed of Trust and the 1997
Deeds of Trust, references in this Lease to the Credit Facility Providers, the
Trustee, MIDFA, the State, the Credit Facilities, the Credit Facility Agreement,
the Deed of Trust, the 1997 Deeds of Trust and the Credit Facility Documents
shall be ineffective, and Tenant shall no longer be obligated to comply with the
covenants contained in Paragraphs 26(g), (h), (i) or (j) and in Paragraph 27.
(g) The parties hereto acknowledge that the provisions of this
Lease have been tailored to specific financing accommodations provided by
Landlord, the Credit Facility Providers, the State and MIDFA, including the
Bonds and the Credit Facilities pursuant to the terms of the Bond Documents and
the Credit Facility Documents. In the event it becomes necessary to replace all
or any portion of these accommodations, Landlord shall exert good faith efforts
to obtain financing on the best terms available. Landlord and Tenant agree to
negotiate in good faith to amend this Lease to re-tailor this Lease to suit such
replacement financing, upon terms mutually agreeable to Landlord, Tenant and the
financial institution providing or participating in such financing and it is
acknowledged and agreed that Tenant's rental obligations hereunder will be
restructured to provide for the payment of all interest and all related expenses
of such replacement financing in the event such interest and related expenses
under the replacement financing are not identical to those payable under the
Bonds and the Credit Facility Documents and the State Loan Documents. The
parties hereto also acknowledge that in the event it becomes necessary to
58
<PAGE> 61
obtain replacement financing for any reason other than (i) Landlord's
misappropriation of funds or (ii) a default by Landlord hereunder or under the
Bond Documents or the Credit Facility Documents not caused directly or
indirectly by the act or omission of Tenant, all expenses incurred by Landlord
in connection with such replacement financing shall be paid by Tenant as
Additional Rent.
(h) Landlord and Tenant hereby agree and consent that any
action or proceeding arising out of or brought to enforce the provisions of this
Lease may be brought in any appropriate court in Montgomery County, Maryland or
Baltimore City, Maryland, and by the execution of this Lease Landlord and Tenant
irrevocably consent to the jurisdiction of each such court.
(i) If for any reason Landlord or Tenant should become not
qualified to do business in the State, Landlord and Tenant hereby agree to
designate and appoint, without power of revocation, an agent for service of
process within the State, as the agent for Landlord or Tenant, as applicable,
upon whom may be served all process, pleadings, notice or other papers which may
be served upon Landlord or Tenant, as applicable, as a result of any of
Landlord's or Tenant's, as applicable, obligations under this Lease.
(j) Landlord and Tenant covenant that throughout the Term, if a
new agent for service of process within the State is designated pursuant to the
terms of subparagraph (i) above, Landlord or Tenant, as applicable, will
immediately file with the other party hereto the name and address of such new
agent and the date on which such appointment is to become effective.
(k) Landlord and Tenant hereby jointly waive trial by jury in
any action or proceeding to which Landlord and Tenant may be parties, arising
out of or in any way pertaining to this Lease. This waiver is knowingly,
willingly and voluntarily made by Landlord and Tenant, each of which hereby
represents that no representations of fact or opinion have been made by any
individual to induce this waiver of trial by jury or to in any way modify or
nullify its effect. Each of Landlord and Tenant further represents that it has
been represented in the signing of this Lease and in the making of this waiver
by independent legal counsel, selected of its own free will, and that it has had
the opportunity to discuss this waiver with counsel.
(l) Landlord has issued the Bonds to, inter alia, fund the
costs of the construction and equipping (but excluding the Tenant's Equipment)
of the Additional Improvements, and has created with the Trustee the Facility
Fund to pay for construction and other construction and Bond related expenses.
The Facility Fund is to be invested per Landlord's instructions in accordance
with the Indenture. In addition, with respect to the Bonds, Landlord agrees that
Landlord, upon Tenant's request, shall agree to procure substitute Credit
Facilities upon terms and conditions mutually satisfactory to Landlord and
Tenant.
59
<PAGE> 62
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
signed on their behalf, under seal, by their respective signatories thereunto
duly organized as of the date first above written.
WITNESS/ATTEST: MARYLAND ECONOMIC DEVELOPMENT
CORPORATION, Landlord
By: (SEAL)
- -------------------------------- -------------------------------
Hans F. Mayer
Executive Director
HUMAN GENOME SCIENCES, INC., Tenant
By: (SEAL)
- -------------------------------- -------------------------------
Steven C. Mayer
Senior Vice President
and Chief Financial Officer
60
<PAGE> 63
EXHIBIT A
DESCRIPTION OF LAND
Lot Number 1, in Block A in the subdivision known as "Lots 1 & 2, Block
A, Lot 1, Block B, Lots 1 & 2, Block C, THE JOHNS HOPKINS BELWARD RESEARCH
CAMPUS", as per plat thereof duly recorded in the Land Records of Montgomery
County, Maryland in Plat Book 186 at Plat 20556.
A-1
<PAGE> 64
EXHIBIT B
DESCRIPTION OF CONSTRUCTION CONTRACT
Agreement Between Owner and Construction Manager Where the Construction
Manager is Also the Constructor made as of the day of September, 1999, between
the Owner, Maryland Economic Development Corporation, by and through its
authorized representative, Human Genome Sciences, Inc., and the Construction
Manager, Gilbane ATS, a Division of Gilbane Building Company; executed by the
Owner on September 9, 1999, by the Owner's authorized representative on
September 3, 1999 and by the Construction Manager on September 9, 1999.
B-1
<PAGE> 65
EXHIBIT C
LIST OF TENANT'S EQUIPMENT
C-1
<PAGE> 66
EXHIBIT D
SCHEDULE OF OPTION PURCHASE PRICES
D-1
<PAGE> 67
EXHIBIT E
NOTICE AND PAYMENT ADDRESSES
If to Landlord:
Notices: Maryland Economic Development
Corporation
36 South Charles Street
Suite 2410
Baltimore, Maryland 21201
Attention: Hans F. Mayer,
Executive Director
with a copy to:
S. Nelson Weeks, Esquire
Ballard Spahr Andrews & Ingersoll, LLP
300 East Lombard Street
19th Floor
Baltimore, Maryland 21202
George W. Liebmann, Esquire
8 West Hamilton Street
Baltimore, Maryland 21201
Payments: Basic Rent
By Electronic Transfer:
Allfirst Bank
Baltimore, Maryland 21203
Account No. 191 1047 0
By Mail:
MEDCO
36 South Charles Street
Suite 2410
Baltimore, Maryland 21201
Attention: Hans F. Mayer
Executive Director
If to Tenant:
Notices: Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
Attention: Steven C. Mayer
Senior Vice President
and Chief Financial Officer
E-1
<PAGE> 68
with a copy to:
James H. Davis
Senior Vice President and General
Counsel and Secretary
Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
If to Allfirst:
Notices: If by mail:
Allfirst Bank
1410 Spring Hill Road
Suite 125
McLean, Virginia 22102
Attention: Joseph C. LeMense
Vice President
Allfirst Bank
International Operations
P.O. Box 17086
Mail Code 101-492
Baltimore, Maryland 21203
Attention: Letter of Credit Department
Otherwise:
Allfirst Bank
1410 Spring Hill Road
Suite 125
McLean, Virginia 22102
Attention: Joseph C. LeMense
Vice President
Allfirst Bank
International Operations
25 South Charles Street
15th Floor
Baltimore, Maryland 21201
Attention: Letter of Credit Department
with a copy to:
John A. Stalfort, Esquire
Miles & Stockbridge P.C.
10 Light Street, 8th Floor
Baltimore, Maryland 21202
E-2
<PAGE> 69
If to First Union:
Notices: If by mail:
First Union National Bank
1970 Chain Bridge Road, VA 1936
3rd Floor
McLean, Virginia 22102
Attention: Portfolio Management
Otherwise:
First Union National Bank
1970 Chain Bridge Road, 3rd Floor
McLean, Virginia 22102
Attention: Ms. Barbara Kauffmann Angel
Vice President
with a copy to:
Miller Abernethy, Esquire
Moore & Van Allen, PLLC
100 North Tryon Street, Floor 47
Charlotte, North Carolina 28202
If to MIDFA:
Notices: Maryland Industrial Development
Financing Authority
217 East Redwood Street
Redwood Tower, 22nd Floor
Baltimore, Maryland 21202
Attention: Executive Director
If to State:
Notices: Department of Business and Economic
Development
217 East Redwood Street, 22nd Floor
Baltimore, Maryland 21202
Attention: Director of Community
Financing Group Programs
E-3
<PAGE> 1
EXHBIT 12.1
<TABLE>
<CAPTION>
Ratio of Earnings to Fixed Charges
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense on
indebtedness
(including
amortization of debt
expense and discount) $ 14,146 $ 191 $ 446 $ 422 $ 566
Interest expense on
portion of rent
expense
representative
of interest 2,951 1,299 1,072 843 724
-------- -------- -------- ------- --------
Total Fixed Charges $ 17,097 $ 1,490 $ 1,518 $ 1,265 $ 1,290
======== ======== ======== ======= ========
Earnings (Loss):
Net loss before
provision for income
taxes $(41,944) $(22,957) $(21,148) $(7,559) $(32,719)
Fixed charges per
above 17,097 1,490 1,518 1,265 1,290
-------- -------- -------- ------- --------
Total Earnings (Loss) $(24,847) $(21,467) $(19,630) $(6,294) $(31,429)
======== ======== ======== ======= ========
Ratio of Earnings to
Fixed Charges (1.45) (14.41) (12.93) (4.98) (24.37)
======== ======== ======== ======= ========
Coverage deficiency $(41,944) $(22,957) $(21,148) $(7,559) $(32,719)
======== ======== ======== ======= ========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated February 9,
2000, with respect to the financial statements of Human Genome Sciences, Inc.
included in the Form 10-K for the year ended December 31, 1999, in the
following Registration Statements:
(1) Registration Statement Number 33-79020 on Form S-8
(2) Registration Statement Number 33-79022 on Form S-8
(3) Registration Statement Number 333-85319 on Form S-3
(4) Registration Statement Number 333-96387 on Form S-3
/s/ Ernst & Young LLP
McLean, Virginia
March 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 180,839
<SECURITIES> 273,716
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 458,849
<PP&E> 51,048
<DEPRECIATION> 25,491
<TOTAL-ASSETS> 527,725
<CURRENT-LIABILITIES> 13,903
<BONDS> 326,336
0
0
<COMMON> 466
<OTHER-SE> 168,602
<TOTAL-LIABILITY-AND-EQUITY> 527,725
<SALES> 0
<TOTAL-REVENUES> 24,524
<CGS> 0
<TOTAL-COSTS> 60,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,330
<INCOME-PRETAX> (41,944)
<INCOME-TAX> 225
<INCOME-CONTINUING> (42,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,169)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
