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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2000 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
<TABLE>
<S> <C>
Delaware 22-3178468
(State of organization) (I.R.S. Employer Identification Number)
</TABLE>
9410 Key West Avenue, Rockville, Maryland 20850-3331
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrant's telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares of the registrant's common stock outstanding on June 30,
2000 was 54,853,965.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six months
ended June 30, 2000 and 1999.................................................... 3
Balance Sheets at June 30, 2000 and December 31, 1999................................ 4
Statements of Cash Flows for the six months
ended June 30, 2000 and 1999.................................................... 5
Notes to Financial Statements........................................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
Item 6. Exhibits and Reports on Form 8-K..................................................... 12
Signatures........................................................................... 13
Exhibit Index........................................................................ Exhibit Volume
</TABLE>
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PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
(dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development
collaborative contracts................ $ 12,642 $ 14,798 $ 13,284 $ 16,220
------------------ ------------------ ------------------ ------------------
Costs and expenses:
Research and development.................. 21,723 14,896 41,237 28,270
General and administrative................ 6,504 4,181 12,520 6,967
------------------ ------------------ ------------------ ------------------
Total costs and expenses.......... 28,227 19,077 53,757 35,237
------------------ ------------------ ------------------ ------------------
Income (loss) from operations................ (15,585) (4,279) (40,473) (19,017)
Interest income.............................. 13,241 2,396 23,015 4,908
Interest expense............................. (6,424) (140) (9,390) (167)
Debt conversion expenses..................... -0- -0- (50,818) -0-
------------------ ------------------ ------------------ ------------------
Income (loss) before taxes................... (8,768) (2,023) (77,666) (14,276)
Provision for income taxes................... 225 225 225 225
------------------ ------------------ ------------------ ------------------
Net income (loss)............................ $ (8,993) $ (2,248) $ (77,891) $ (14,501)
================== ================== ================== ==================
Net income (loss) per share,
basic and diluted........................ $ (0.16) $ (0.05) $ (1.47) $ (0.32)
================== ================== ================== ==================
Weighted average shares outstanding,
basic and diluted........................ 54,630,542 45,862,956 53,075,314 45,758,232
================== ================== ================== ==================
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ---------------------
ASSETS (dollars in thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 258,967 $ 180,839
Short-term investments................................................. 582,467 273,716
Prepaid expenses and other current assets.............................. 19,229 4,294
------------------ ---------------------
Total current assets.............................................. 860,663 458,849
Long-term investments........................................................ 107,200 17,709
Property, plant and equipment (net of accumulated depreciation) 29,723 25,557
Restricted investments....................................................... 11,960 11,637
Other assets................................................................. 37,325 13,973
------------------ ---------------------
TOTAL ASSETS...................................................... $ 1,046,871 $ 527,725
================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt...................................... $ 444 $ 444
Accounts payable and accrued expenses.................................. 15,631 7,511
Accrued payroll and related taxes...................................... 11,170 2,380
Deferred revenues...................................................... 3,568 3,568
------------------ ---------------------
Total current liabilities......................................... 30,813 13,903
Long-term debt, net of current portion....................................... 532,951 326,336
Deferred revenues............................................................ 16,691 17,975
Other liabilities............................................................ 482 443
------------------ ---------------------
Total liabilities................................................. 580,937 358,657
------------------ ---------------------
Stockholders' Equity:
Common stock........................................................... 549 466
Additional paid-in capital............................................. 639,442 299,791
Unearned portion of compensatory stock options......................... (239) (335)
Retained earnings (deficit)............................................ (198,764) (120,873)
Accumulated other comprehensive income (loss).......................... 24,946 (9,981)
------------------ ---------------------
Total stockholders' equity........................................ 465,934 169,068
------------------ ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,046,871 $ 527,725
================== =====================
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
-------------- --------------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................... $ (77,891) $ (14,501)
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................. (5,912) 407
Depreciation and amortization................................................ 5,026 3,395
Inducement costs paid in the form of common stock............................ 19,433 -0-
Loss (gain) on disposal of fixed assets...................................... 8 -0-
Compensation expense related to stock options................................ 96 23
Changes in operating assets and liabilities:
Prepaid expenses and other current assets................................. (14,833) (7,806)
Other assets.............................................................. (17,627) (2,089)
Accounts payable and accrued expenses..................................... 8,963 1,095
Accrued payroll and related taxes......................................... 8,790 984
Deferred revenues......................................................... (1,284) (2,529)
Other liabilities......................................................... 39 (19)
-------------- --------------
Net cash provided by (used in) operating activities.......................... (75,192) (21,040)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment............................. (8,961) (5,281)
Purchase of short-term investments and marketable securities..................... (389,756) (48,560)
Purchase of long-term investment................................................. (54,744) -0-
Proceeds from sales and maturities of short-term investments and
marketable securities........................................................ 86,999 48,547
-------------- --------------
Net cash provided by (used in) investing activities.......................... (366,462) (5,294)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt (net of expenses)....................... 508,620 97,000
Restricted investments........................................................... (323) (146)
Proceeds from issuance of common stock (net of expenses)......................... 11,485 5,102
-------------- --------------
Net cash provided by (used in) financing activities.......................... 519,782 101,956
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 78,128 75,622
Cash and cash equivalents - beginning of period...................................... 180,839 16,139
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD............................................ $ 258,967 $ 91,761
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................................... $ 30,084 $ 36
Income taxes................................................................. -0- 75
</TABLE>
See accompanying notes to financial statements.
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SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS):
In January 2000, the Company converted $118,285 of 5 1/2% Convertible
Subordinated Notes Due 2006 into common stock and incurred $19,433 in inducement
costs paid in the form of common stock as an inducement to convert. In addition,
the Company reclassified $3,470 of unamortized debt financing costs associated
with these notes to stockholders' equity as part of the conversion.
In March 2000, the Company converted $200,000 of 5% Convertible Subordinated
Notes Due 2006 into common stock. In connection with this conversion, the
Company made a $30,000 cash "make-whole" payment. In addition, the Company
reclassified $6,037 of unamortized debt financing costs associated with these
notes to stockholders' equity as part of the conversion.
See accompanying notes to financial statements
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2000
(In thousands, except share data)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Human Genome
Sciences, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the
results of operations for the three and six month periods ended June
30, 2000 and 1999, the Company's financial position at June 30, 2000,
and the cash flows for the six month periods ended June 30, 2000 and
1999. These adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from
the interim financial statements presented in this Quarterly Report on
Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 1999 Annual Report on Form 10-K and the
Company's March 31, 2000 Quarterly Report on Form 10-Q.
The results of operations for the three and six month periods ended
June 30, 2000 are not necessarily indicative of future financial
results.
Share and per share amounts have been restated to reflect a two-for-one
stock split paid in the form of a stock dividend on January 28, 2000.
NOTE 2. COMPREHENSIVE INCOME (LOSS)
During the three and six month periods ended June 30, 2000 and 1999,
total comprehensive income (loss) amounted to:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (8,993) $ (2,248) $ (77,891) $ (14,501)
Unrealized gain (loss) on
short-term investments (64) (1,091) 183 (1,367)
Unrealized gain (loss) on
long-term investments 18,363 (3,985) 34,744 (9,076)
----------- ----------- ------------ ------------------
Total comprehensive income (loss) $ 9,306 $ (7,324) $ (42,964) $ (24,944)
=========== =========== ============ ==================
</TABLE>
NOTE 3. 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 was delayed from a second quarter effective date and is now
effective the fourth fiscal quarter of fiscal years beginning after
December 15, 1999, which is the fourth quarter of 2000 for the Company,
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
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2000
(In thousands, except share data)
NOTE 3. NEW SEC INTERPRETATIONS, CONTINUED
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.
NOTE 4. COLLABORATIVE AGREEMENTS
On February 29, 2000, the Company entered into 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 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 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.
In March 2000, the Company paid $12,000 in licensing fees to CAT, which
includes research support at CAT for ten years to help them to develop
the Company's human antibody products. In April 2000, the Company
purchased 1,670,000 ordinary shares of CAT for the sterling equivalent
of approximately $54,744, giving the Company an equity stake of
approximately six percent in CAT.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues. We had revenues of $12.6 million for the three months ended June
30, 2000 compared with revenues of $14.8 million for the three months ended June
30, 1999. Revenues for both the three months ended June 30, 2000 and June 30,
1999 represented primarily the recognition of $7.5 million in revenue from
Schering Corporation and Schering Plough Ltd., $4.5 million in revenue from
Sanofi-Synthelabo S.A., and $0.6 million in revenue from Transgene, S.A.
Revenues for the six months ended June 30, 2000, consisted of $12.0 million in
annual license fees and research payments from collaborations with Schering and
Synthelabo and $1.3 million in revenue recognized from Transgene, S.A. Revenues
for the six months ended June 30, 1999, consisted of $12.0 million in annual
license fees and research payments from collaborations with Schering and
Synthelabo and $4.2 million in license fees and milestone payments from other
collaborators, including the recognition of $1.3 million from Transgene, S.A.
We expect that our revenues may be limited to annual license fees and
research payments from our collaborations with Schering, Synthelabo and Merck
KgaA, interest income, payments under existing collaboration agreements which
are contingent on meeting certain product milestones, license fees, proceeds
from the sale of rights and other payments from other collaborators and
licensees under existing or future arrangements, to the extent that we enter
into any such further arrangements. Revenues from Schering, Synthelabo and Merck
will substantially conclude during fiscal year 2000.
Expenses. Research and development expenses were $21.7 million for the three
months ended June 30, 2000 compared to $14.9 million for the three months ended
June 30, 1999. For the six months ended June 30, 2000, research and development
expenses increased to $41.2 million from $28.3 million for the six months ended
June 30, 1999. The increase is due primarily to increased expenditures in
preclinical research, as well as increased operational costs related to our
leased 84,000 square foot manufacturing and process development facility and
increased expenditures in clinical trial research.
General and administrative expenses increased to $6.5 million for the three
months ended June 30, 2000 from $4.2 million for the three months ended June 30,
1999. General and administrative expenses increased to $12.5 million for the six
months ended June 30, 2000 from $7.0 million for the six months ended June 30,
1999. The increase for the three and six month periods ended June 30, 2000
resulted generally from higher legal expenses associated with filing and
prosecuting a larger number of patent applications relating to genes and
proteins we discovered, along with transaction-related expenses in support of
our expanding activities. Interest income increased for the three and six month
periods ended June 30, 2000 compared to the three and six month periods ended
June 30, 1999 due to higher cash balances. Interest expense increased for the
three and six month periods due primarily to the issuance of $525.0 million of
convertible subordinated notes during the first quarter of fiscal 2000 along
with interest expense associated with previously-issued convertible subordinated
notes that were converted to equity during the first quarter of fiscal 2000.
Debt conversion expenses of $50.8 million for the six months ended June 30,
2000 relate to the first quarter of fiscal 2000 conversion costs of $318.3
million aggregate principal amount of convertible subordinated notes into
equity. We converted $118.3 million of our $125.0 million aggregate principal
amount of 5 1/2% Notes Due 2006 to common stock at a cost of $20.8 million,
substantially all of which was paid in the form of common stock. In addition, we
converted all of our $200.0 million aggregate principal amount of 5% Notes Due
2006 to common stock at a cost of $30.0 million, all of which was paid in cash.
Net Income. We recorded a net loss of $9.0 million, or $0.16 per share, for
the three months ended June 30, 2000 compared to a net loss of $2.2 million, or
$0.05 per share, for the three months ended June 30, 1999. The increased loss
for the three month period of 2000 reflects the increased investment in the
development of preclinical and clinical drug candidates, the operation of the
manufacturing and process development facility,
9
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and increased general and administrative activities, partially offset by
increased net interest income. For the six months ended June 30, 2000, we
reported a net loss of $77.9 million, or $1.47 per share, compared to a net loss
of $14.5 million, or $0.32 per share, for the six months ended June 30, 1999.
The increased loss for the six month period ended June 30, 2000 compared to the
prior year is due primarily to the expense of $50.8 million, or $0.96 per share,
relating to the conversion of convertible subordinated notes into equity.
Excluding the debt conversion expenses, our net loss for the six months ended
June 30, 2000 would have been $27.1 million, or $0.51 per share, compared to
$14.5 million, or $0.32 per share, for the six months ended June 30, 1999. This
increase is due primarily to increased expenditures in preclinical research and
other increases described above for the three months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $829.9 million at June 30, 2000 as compared to
$444.9 million at December 31, 1999. The increase resulted from the placement of
$525.0 million of convertible subordinated notes partially offset by the net
operating loss generated during the six month period, our $54.7 million
investment in CAT, our capital expenditures, and our $30.0 million cash
"make-whole" payment in connection with the conversion of $200.0 million of
convertible subordinated notes into equity.
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 and antibody product candidates.
We expect that our existing funds, interest income, and committed license
fees and research payments from existing collaboration agreements will be
sufficient to fund our operations for the foreseeable future. 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,
the magnitude of those programs, our ability to establish additional
collaborative and licensing arrangements, the cost involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and competing
technological and market developments.
Our funds are currently invested in U.S. Treasury and government agency
obligations, high grade corporate debt securities and commercial paper. Such
investments reflect our policy regarding the investment of liquid assets, which
is to seek a reasonable rate of return consistent with an emphasis on safety,
liquidity and preservation of capital.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including statements concerning
future collaboration agreements, royalties and other payments under
collaboration agreements, and product development and sales and other statements
are forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected in
the forward looking statements as a result of risks and uncertainties, including
but not limited to, the following: 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.
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ITEM 3. 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
June 30, 2000. We believe that any market change related to our U.S. securities
held as of June 30, 2000 is not material to our financial statements. As of June
30, 2000, the carrying values of our equity investments in Transgene and
Cambridge Antibody Technology were approximately $31.4 million and $75.8
million, respectively. Our investment in Transgene is subject to equity market
risk. Our investment in CAT is denominated in pounds sterling and is subject to
both foreign currency risk as well as equity market risk.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders, held on May 24, 2000, the
following members were re-elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld
---------------------- --------------------
<S> <C> <C>
TERMS EXPIRING IN 2003
William A. Haseltine, Ph.D. 47,887,502 57,775
Laura D'Andrea Tyson, Ph.D. 47,887,866 57,411
Robert D. Hormats 47,887,902 57,375
Alan G. Spoon 47,888,002 57,275
</TABLE>
The following proposals were approved at our Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
----------------- ---------------- -------------
<S> <C> <C> <C>
1. Adoption of the 2000 Stock
Incentive Plan. 19,602,387 14,231,210 337,280
2. Adoption of the Employee Stock
Purchase Plan. 33,639,855 364,777 167,606
3. Ratification of the selection of
Ernst & Young, LLP as independent
auditors for the fiscal year ending
December 31, 2000. 47,889,083 28,938 27,256
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
3.2 By-laws
27.1 Financial data schedule
-----------------------------
(b) Reports on Form 8-K
None
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC.
BY: /s/ William A. Haseltine, Ph.D.
---------------------------------------
William A. Haseltine, Ph.D.
Chairman & Chief Executive Officer
BY: /s/ Steven C. Mayer
---------------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: August 3, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Page Number
-----------
<S> <C>
3.2 By-laws
27.1 Financial data schedule
</TABLE>
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