-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MqedFnCwG4JAUgyIki+XC78S4+rU+QpsAAPyEcYUKtV/JLW9JkdFZuzzr7TxFKCH Ih2IqFFpXpOYwiVS3IBUbA== 0000927016-01-503721.txt : 20020410 0000927016-01-503721.hdr.sgml : 20020410 ACCESSION NUMBER: 0000927016-01-503721 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENOME THERAPEUTICS CORP CENTRAL INDEX KEY: 0000356830 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042297484 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10824 FILM NUMBER: 1784226 BUSINESS ADDRESS: STREET 1: 1OO BEAVER ST CITY: WALTHAM STATE: MA ZIP: 02453 BUSINESS PHONE: 7813982300 MAIL ADDRESS: STREET 1: 100 BEAVER STREET CITY: WALTHAM STATE: MA ZIP: 02453 FORMER COMPANY: FORMER CONFORMED NAME: COLLABORATIVE RESEARCH INC DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 29, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No: 0-10824 ------- GENOME THERAPEUTICS CORP. ------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2297484 - ------------------------------- ---------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 100 BEAVER STREET; ----------------- WALTHAM, MASSACHUSETTS 02453 ------- ------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300 -------------- 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK 22,765,285 ------------ ---------- $.10 PAR VALUE Outstanding November 9, 2001 -------------- --------------------------- Genome Therapeutics Corp. and Subsidiary Index to Financial Information and Other Information Page Part I Financial Information (unaudited): Consolidated Condensed Balance Sheets as of December 31, 2000 and September 29, 2001 3 Consolidated Statements of Operations for the four week period ended June 23, 2001 and the thirteen and thirty-nine week periods ended September 23, 2000 and September 29, 2001 4 Consolidated Statements of Cash Flows for the four week period ended June 23, 2001 and the thirty-nine week periods ended September 23, 2000 and September 29, 2001 5 Notes to Consolidated Condensed Financial Statements 6-13 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-19 Part II Other Information: Other Information 20 Signature 21 2 GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------------------- December 31, September 29, 2000 2001 (Unaudited) - --------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $10,095,817 $26,147,252 Marketable securities 51,743,917 31,327,186 Interest receivable 1,466,808 870,756 Accounts receivable 827,106 288,446 Unbilled costs and fees 796,072 422,154 Prepaid expenses and other current assets 900,547 1,039,985 ------------ ------------ Total current assets 65,830,267 60,095,779 Equipment, furniture and leasehold improvements, at cost: Laboratory and scientific equipment 18,823,063 20,559,610 Leasehold improvements 8,302,308 8,759,588 Equipment and furniture 1,134,320 1,267,854 ------------ ------------ 28,259,691 30,587,052 Less accumulated depreciation and amortization 15,225,148 18,010,641 ------------ ------------ 13,034,543 12,576,411 Restricted cash 200,000 200,000 Long-term marketable securities 10,970,153 14,850,174 Other assets 216,041 234,723 ------------ ------------ Total assets $90,251,004 $87,957,087 ------------ ------------ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $1,296,511 $1,536,313 Accrued expenses 3,712,757 3,673,659 Deferred revenue 4,720,234 2,588,564 Current maturities of long-term obligations 4,499,696 3,917,290 ------------ ------------ Total current liabilities 14,229,198 11,715,826 Long-term obligations, net of current maturities 3,334,354 2,587,860 Stockholders' equity 72,687,452 73,653,401 ------------ ------------ Total liabilities and stockholders' equity $90,251,004 $87,957,087 ------------ ------------
See Notes to Consolidated Condensed Financial Statements. GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------- Four Week Period Ended Thirteen Week Period Ended Thirty-Nine Week Period Ended June 23, 2001 Sept. 23, 2000 Sept. 29, 2001 Sept. 23, 2000 Sept. 29, 2001 - ----------------------------------------------------------------------------------------------- ---------------------------------- Revenues: Contract research, licenses, milestones and subscription fees $ 7,226,276 $ 5,924,851 $ 7,378,035 $ 19,108,981 $ 26,858,162 Costs and Expenses: Research and development 2,337,214 6,505,355 9,880,970 19,275,547 25,253,739 Selling, general and administrative 863,752 1,711,451 2,559,004 4,745,539 6,384,359 ----------- ------------ ------------ ------------- ------------- Total costs and expenses 3,200,966 8,216,806 12,439,974 24,021,086 31,638,098 Income (Loss) from operations 4,025,310 (2,291,955) (5,061,939) (4,912,105) (4,779,936) Interest income 303,975 1,180,363 1,055,631 2,100,165 3,186,149 Interest expense (80,568) (210,751) (174,269) (627,107) (555,734) ----------- ------------ ------------ ------------- ------------- Net interest income 223,407 969,612 881,362 1,473,058 2,630,415 ----------- ------------ ------------ ------------- ------------- Net Income (loss) 4,248,717 ($1,322,343) ($4,180,577) ($3,439,047) ($2,149,521) ----------- ------------ ------------ ------------- ------------- Net Income (Loss) per Common Share: Basic $0.19 ($0.06) ($0.18) ($0.16) ($0.10) ----------- ------------ ------------ ------------- ------------- Diluted $0.18 ($0.06) ($0.18) ($0.16) ($0.10) ----------- ------------ ------------ ------------- ------------- Weighted average common shares outstanding: Basic 22,484,080 22,163,366 22,685,660 21,030,081 22,515,638 ----------- ------------ ------------ ------------- ------------- Diluted 23,850,825 22,163,366 22,685,660 21,030,081 22,515,638 ----------- ------------ ------------ ------------- -------------
See Notes to Consolidated Condensed Financial Statements. GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------- Four Week Period Ended Thirty-nine Week Periods Ended June 23, September 23, September 29, 2001 2000 2001 - ------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income (loss) $4,248,717 ($3,439,047) ($2,149,521) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 372,775 3,319,675 3,601,072 Loss on disposal of fixed assets 868 71,975 27,083 Stock-based compensation expense 41,307 736,695 418,079 Changes in assets and liabilities: Interest receivable (85,894) (168,022) 596,052 Accounts receivable (102,585) 728,658 538,660 Unbilled costs and fees 188,028 1,413,792 373,918 Prepaid expenses and other current assets 127,810 71,719 (139,438) Accounts payable (416,932) 325,398 239,802 Accrued expenses 151,164 510,562 (39,098) Deferred revenue (1,090,465) (1,974,660) (2,131,670) -------------- -------------- ------------ Total adjustments (813,924) 5,035,792 3,484,460 -------------- -------------- ------------ Net cash provided by operating activities 3,434,793 1,596,745 1,334,939 -------------- -------------- ------------ Cash Flows from Investing Activities: Purchases of marketable securities (6,044,095) (39,934,348) (33,446,290) Maturities of marketable securities 2,886,000 24,578,316 49,983,000 Purchases of equipment, furniture and leasehold improvements (139,494) 732,050 (408,582) (Increase) decrease in other assets 2,875 37,542 (18,682) -------------- -------------- ------------ Net cash (used in) provided by investing activities (3,294,714) (14,586,440) 16,109,446 -------------- -------------- ------------ Cash Flows from Financing Activities: Proceeds from sale of common stock 0 44,722,729 1,509,084 Proceeds from exercise of stock options 43,084 3,281,755 871,228 Proceeds from employee stock purchase plan 0 215,556 317,079 Payments on long-term obligations (328,844) (3,366,543) (4,090,341) -------------- -------------- ------------ Net cash (used in) provided by financing activities (285,760) 44,853,497 (1,392,950) -------------- -------------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents (145,681) 31,863,802 16,051,435 Cash and Cash Equivalents, at beginning of period 20,201,979 5,015,574 10,095,817 -------------- -------------- ------------ Cash and Cash Equivalents, at end of period $20,056,298 $36,879,376 $26,147,252 -------------- -------------- ------------ Supplemental Disclosure of Cash Flow Information: Interest paid during period $80,568 $627,107 $555,734 -------------- -------------- ------------ Income taxes paid during period $12,500 $9,262 $50,000 -------------- -------------- ------------ Supplemental Disclosure of Non-cash Investing and Financing Activities: Equipment acquired under capital lease obligations $0 $3,394,937 $2,761,441 -------------- -------------- ------------
See Notes to Consolidated Condensed Financial Statements. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated condensed financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The accompanying consolidated condensed financial statements should be read in conjunction with the Company's Form 10-K, which was filed with the Securities and Exchange Commission on November 22, 2000. On July 24, 2001 the Board of Directors of Genome Therapeutics Corp. approved a change of the Company's fiscal year end from August 31 to December 31, as of the fiscal year ended December 31, 2000. A transition report on Form 10-Q covering the transition period from September 1, 2000 through December 31, 2000, was filed with the Securities and Exchange Commission on September 7, 2001; this filing included financial statements restated to provide financial information for the four months ended December 31, 2000 and 1999. The Company has included financial information for the four week period ended June 23, 2001 in this Form 10-Q filing since this information was not included in past quarterly filings with the Securities and Exchange Commission due to the change in the Company's fiscal year end, as mentioned above. 2. REVENUE RECOGNITION Revenues consist of contract research, non-refundable license fees, milestone payments and subscription fees from the PathoGenomeTM Database. These revenues are derived from alliances with pharmaceutical companies, government grants and contracts, and fees received from custom gene sequencing and analysis. The Company follows the provisions of Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition. In accordance with SAB No. 101, revenues from contract research derived from alliances with pharmaceutical companies, from government grants and contracts, and from custom gene sequencing and analysis are recognized over the respective contract periods as the services are provided. Non-refundable license fees are recognized ratably over the life of the alliance. Subscription fees from the PathoGenome Database are recognized ratably over the life of the subscription. Milestone payments, that are deemed to be substantive from research and development alliances, are recognized when they are achieved. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts billed and received prior to revenue recognition. 3. NET LOSS PER COMMON SHARE The Company applies Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which establishes standards for computing and presenting earnings per share. Basic earnings per share was determined by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per share was determined by dividing net income by the weighted average common and common equivalent shares outstanding during the period using the treasury stock method. Antidilutive securities which consist of stock options, restricted stock and directors' deferred stock that were not included in diluted net loss per common share were 3,328,233 and 2,422,116 at September 29, 2001 and September 23, 2000, respectively. 6 4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At December 31, 2000 and September 29, 2001, the Company's cash equivalents and marketable securities are classified as held-to- maturity, as the Company has the positive intent and ability to hold these securities to maturity. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. Marketable securities are investment securities with original maturities of greater than three months. Cash equivalents are carried at cost, which approximates market value, and consist of money market funds, repurchase agreements and debt securities. Marketable securities are recorded at amortized cost, which approximates market value. The Company has not recorded any realized gains or losses on its marketable securities. Marketable securities consist of commercial paper and U.S. government debt securities. The average maturity of the Company's marketable securities is approximately 9 months at September 29, 2001. At December 31, 2000 and September 29, 2001, the Company's cash, cash equivalents and marketable securities consisted of the following:
December 31, September 29, 2000 2001 ------------ ------------- Cash and Cash Equivalents: Cash.............................................. $ 9,245,817 $24,147,252 Debt securities................................... 850,000 2,000,000 ------------ ------------- Total cash and cash equivalents........... $10,095,817 $26,147,252 ------------ ------------- Marketable Securities: Short-term securities............................. $51,743,917 $31,327,186 Long-term securities.............................. 10,970,153 14,850,174 ------------ ------------- Total marketable securities............... $62,714,070 $46,177,360 ------------ -------------
The Company has $200,000 in restricted cash in connection with certain long-term obligations at December 31, 2000 and September 29, 2001 (see Note 9). 5. CONCENTRATION OF CREDIT RISK SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet or concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains its cash, cash equivalents and marketable securities balances with several nonaffiliated institutions. The following table summarizes the number of customers that individually comprise greater than 10% of total revenues and their aggregate percentage of the Company's total revenues:
Percentage of Number of Total Revenues Significant ----------------------- Customers A B C ---------------- --- --- --- Thirteen week period ended: September 23, 2000........................... 2 33% 35% 6% September 29, 2001........................... 2 53% 31% 5% Thirty-nine week period ended: September 23, 2000........................... 2 34% 35% 6% September 29, 2001........................... 3 37% 26% 23%
7 The following table summarizes the number of customers that individually comprise greater than 10% of total accounts receivable and their aggregate percentage of the Company's total accounts receivable:
Percentage of Number of Total Accounts Receivable Significant ------------------------------------- As of: Customers A B C D --------------- -------- ------- ------ ------- September 23, 2000..................... 2 37% 55% 0% 0% September 29, 2001..................... 3 34% 6% 15% 19%
6. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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. 7. COMPREHENSIVE LOSS The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's total comprehensive net income (loss) for the four week period ended June 23, 2001 and for the thirteen and thirty-nine week periods ended September 23, 2000 and September 29, 2001 were the same as reported net income (loss) for those periods. 8. SEGMENT REPORTING The Company applies SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company's chief decision makers, as defined under SFAS No. 131, are the chief executive officer and chief financial officer. To date, the Company has viewed its operations and manages its business as principally one operating segment. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segment. All of the Company's revenues are generated in the United States and all of its assets are located in the United States. 9. LONG-TERM OBLIGATIONS On February 23, 2000, the Company entered into an equipment line of credit under which it may finance up to $4,000,000 of laboratory, computer and office equipment. On December 18, 2000, the Company increased the line of credit by $2,712,000 to $6,712,000. The Company, at its discretion, can enter into either an operating or capital lease. Borrowings under operating leases are payable in 24 monthly installments and capital leases are payable in 36 monthly installments. As of 8 September 29, 2001, the Company has entered into $256,000 in operating leases and $6,456,000 in capital leases. The interest rates under the capital leases range from 7.50% to 10.37%. In addition, the Company had entered into other capital lease arrangements under which it financed approximately $15,060,000 of laboratory, computer and office equipment, as well as facility renovations. These leases are payable in 36 to 48 monthly installments from date of initiation. Interest rates range from 7.63% to 10.28%. Under several agreements, we are required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth and debt service coverage. As of September 29, 2001, the Company was in compliance with all of these covenants. The Company had no additional borrowing capacity under these capital lease agreements at September 29, 2001. 10. ALLIANCES (A) ASTRAZENECA In August 1995, the Company entered into a strategic alliance with AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and diagnostic products effective against peptic ulcers or any other disease caused by H. pylori. The Company granted Astra exclusive access to the Company's H. pylori genomic sequence database and exclusive worldwide rights to make, use and sell products based on the Company's H. pylori technology. The agreement provided for a four-year research alliance to further develop and annotate the Company's H. pylori genomic sequence database, identify therapeutic and vaccine targets and develop appropriate biological assays. In August 1999, the Company successfully concluded its portion of the research alliance and transitioned the program to AstraZeneca for pre-clinical testing. Under this agreement, Astra agreed to pay the Company, subject to the achievement of certain product development milestones, up to $23.3 million (and possibly a greater amount if more than one product is developed under the agreement) in license fees, expense allowances, research funding and milestone payments. The Company received $13.5 million in license fees, expense allowances, milestone payments and research funding under the Astra agreement through September 29, 2001. The Company will also be entitled to receive royalties on Astra's sale of products protected by the claims of patents licensed exclusively to Astra by the Company pursuant to the agreement or the discovery of which was enabled in a significant manner by the genomic database licensed to Astra by the Company. The Company has the right, under certain circumstances, to convert Astra's license to a nonexclusive license in the event that Astra is not actively pursuing commercialization of the technology. For the disclosed thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $0 and $6,000, respectively, under this agreement. (B) SCHERING-PLOUGH In December 1995, the Company entered into a strategic alliance and license agreement with Schering Corporation and Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by Schering-Plough of the genomic sequence of Staph. aureus to identify and validate new gene targets for development of drugs to target Staph. aureus and other pathogens that have become resistant to current antibiotics. As part of this agreement, the Company granted Schering-Plough exclusive access to the Company's proprietary Staph. aureus genomic sequence database. The Company also granted Schering-Plough a nonexclusive license to use the Company's bioinformatics systems for Schering- Plough's internal use in connection with the genomic databases licensed to Schering-Plough under the agreement and other genomic databases Schering-Plough develops or acquires. The Company also agreed to undertake certain research efforts to identify bacteria-specific genes essential to microbial survival and to develop biological assays to be used by Schering-Plough in screening natural product and compound libraries to identify antibiotics with new mechanisms of action. 9 Under this agreement, Schering-Plough paid an initial license fee and will fund the research program through December 31, 2001. Under this agreement, Schering-Plough agreed to pay the Company a minimum of $21.9 million in an up- front license fee, research funding and milestone payments. Subject to the achievement of additional product development milestones, Schering-Plough agreed to pay the Company up to an additional $24 million in milestone payments. The agreement grants Schering-Plough exclusive worldwide rights to make, use and sell pharmaceutical and vaccine products based on the genomic sequence databases licensed to Schering-Plough by the Company and on the technology developed in the course of the research program. The Company will be entitled to receive royalties on Schering-Plough's sale of therapeutic products and vaccines developed using the technology licensed from the Company. A total of $21.3 million had been received through September 29, 2001. For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $426,000 and $441,000, respectively, under this agreement, which consisted of contract research revenue. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $1,275,000 and $1,420,000, respectively, under this agreement, which consisted of contract research revenue. In December 1996, the Company entered into its second strategic alliance and license agreement with Schering-Plough. This agreement calls for the use of genomics to discover new pharmaceutical products for treating asthma. As part of the agreement, the Company will employ its high-throughput disease gene identification, bioinformatics, and genomics sequencing capabilities to identify genes and associated proteins that can be utilized by Schering-Plough to develop pharmaceuticals and vaccines for treating asthma. Under this agreement, the Company has granted Schering-Plough exclusive access to (i) certain gene sequence databases made available under this research program, (ii) information made available to the Company under certain third-party research agreements, and (iii) an exclusive worldwide right and license to make, use and sell pharmaceutical and vaccine products based on the rights to develop and commercialize diagnostic products that may result from this alliance. Under this agreement, Schering-Plough paid an initial license fee and an expense allowance to the Company. Schering-Plough agreed to fund the research program through at least December 2001. In addition, upon completion of certain scientific developments, Schering-Plough will make milestone payments, as well as pay royalties based upon sales of therapeutics products developed from this collaboration. If all milestones are met and the research program continues for its full term, total payments to the Company will approximate $75.9 million, excluding royalties. Of the total potential payments, approximately $31.4 million represents license fees and research payments, and $44.5 million represent milestone payments based on achievement of research and product development milestones. A total of $33.3 million has been received through September 29, 2001. For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $1,499,000 and $1,145,000, respectively, under this agreement, which consisted of contract research revenue. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $3,607,000 and $3,492,000, respectively, under this agreement, which consisted of contract research revenue and milestone payments. On September 1997, the Company entered into a third strategic alliance and license agreement with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infections. Under the agreement, the Company will employ its bioinformatics, high- throughput sequencing and functional genomics capabilities to identify and validate genes and associated proteins as drug discovery targets that can be utilized by Schering-Plough to develop novel antifungal treatments. 10 Schering-Plough will receive exclusive access to the genomic information developed in the alliance related to two fungal pathogens, Candida albicans and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide right to make, use and sell products based on the technology developed during the course of the research program. In return, Schering-Plough agreed to fund a research program through December 2001. If all milestones are met and the research program continues for its full term, total payments to the Company will approximate $32.7 million, excluding royalties. Of the total potential payments, $9.7 million represents contract research payments and $23.0 million represents milestone payments based on achievement of research and product development milestones. A total of $12.2 million has been received through September 29, 2001. Additionally, the Company entered into a subscription agreement with Schering-Plough to provide Schering-Plough with nonexclusive access to the Company's proprietary genome sequence database, PathoGenome, and associated information relating to microbial organisms (see Note 11). For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $356,000 and $482,000, respectively, under this agreement, which consisted of contract research revenue. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $1,169,000 and $1,530,000, respectively, under this agreement, which consisted of contract research revenue. (C) NATIONAL HUMAN GENOME RESEARCH INSTITUTE In July 1999, the Company was named as one of the nationally funded DNA sequencing centers of the international Human Genome Project. The Company is participating as part of an international consortium in a full-scale effort to sequence the human genome. The Company is entitled to receive research and development funding from the National Human Genome Research Institute (NHGRI) of up to $17.4 million over a forty-four month period, of which $14.1 million is appropriated through February 2002. In October 1999, the NHGRI named the Company as a pilot center to the Mouse Genome Sequencing Network. The Company is entitled to receive $13.4 million in funding over three years with respect to this agreement, of which $9.3 million is appropriated through November 2001. In August 2000, the Company was named one of two primary centers for the Rat Sequencing Program from NHGRI. As part of the agreement, we will use remaining funding under the mouse award, as well as a portion of the remaining funding under the human award, to participate in this rat genome initiative. For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $3,551,000 and $1,804,000, respectively, under these agreements. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $9,191,000 and $6,087,000, respectively, under these agreements. Funding under our government grants and research contracts is subject to appropriation each year by the U.S. Congress and can be discontinued or reduced at any time. In addition, we cannot be certain that we will receive additional grants or contracts in the future. (D) BIOMERIEUX ALLIANCE In September 1999, the Company entered into a strategic alliance with bioMerieux to develop, manufacture and sell in vitro diagnostic products for human clinical and industrial applications. As part of the alliance, bioMerieux purchased a subscription to the Company's PathoGenome Database (see Note 11), paid an up-front license fee, agreed to fund a research program for at least four years and pay royalties on future products. In addition, bioMerieux purchased $3.75 million of the Company's common stock. The total amount of research and development funding, excluding subscription fees, approximates $5.2 million for the four-year term of this agreement. The research and development funding will be recognized ratably over the four-year term of the agreement. 11 For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $297,000 for each period under this agreement, which consisted of contract research revenue and amortization of an up-front license fee. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $900,000 for each period under this agreement, which consisted of contract research revenue and amortization of an up-front license fee. A total of $3.2 million has been received through September 29, 2001. (E) WYETH-AYERST LABORATORIES In December 1999, the Company entered into a strategic alliance with Wyeth- Ayerst Laboratories to develop novel therapeutics for the prevention and treatment of osteoporosis. The alliance will focus on developing therapeutics utilizing targets based on the characterization of a gene associated with a unique high bone mass trait. The agreement provides for the Company to employ its established capabilities in positional cloning, bioinformatics and functional genomics in conjunction with Wyeth-Ayerst's drug discovery capabilities and its expertise in bone biology and the osteoporotic disease process to develop new pharmaceuticals. Under the terms of the agreement, Wyeth-Ayerst paid the Company an up-front license fee, and funded a multi-year research program, which includes milestone payments and royalties on sales of therapeutics products developed from this alliance. If the research program continues for its full term and substantially all of the milestone payments are met, total payments to the Company, excluding royalties, would exceed $118 million. The Company recorded revenue of $375,000 for both thirteen-week periods ended September 29, 2001 and September 23, 2000, under this agreement, which consisted of contract research revenue and amortization of an up-front license fee. For the thirty-nine week period ended September 29, 2001, the Company recorded revenue of $6,125,000 under this agreement, which consisted of contract research revenue, amortization of an up-front license fee and a $5.0 million milestone payment. For the thirty-nine week period ended September 23, 2000, the Company recorded revenue of $1,125,000 under this agreement, which consisted of contract research revenue and amortization of an up-front license fee. A total of $7.8 million has been received through September 29, 2001. 11. DATABASE SUBSCRIPTIONS The Company has entered into a number of PathoGenomeTM Database subscriptions. The database subscriptions provide nonexclusive access to the Company's proprietary genome sequence database, PathoGenome Database, and associated information relating to microbial organisms. These agreements call for the Company to provide periodic data updates, analysis tools and software support. Under the subscription agreements, the customer pays an annual subscription fee and will pay royalties on any molecules developed as a result of access to the information provided by the PathoGenome Database. The Company retains all rights associated with protein therapeutic, diagnostic and vaccine use of bacterial genes or gene products. For the thirteen-week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $412,000 and $950,000, respectively, under these agreements. For the thirty-nine week periods ended September 29, 2001 and September 23, 2000, the Company recorded revenue of $2,071,000 and $3,012,000, respectively, under these agreements. 12. PRODUCT DEVELOPMENT On October 8, 2001, subsequent to quarter-end, the Company had acquired an exclusive license in the United States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A 12 (Biosearch Italia). The Company will assume responsibility for the product development in the United States of Ramoplanin, currently in Phase III clinical trials. The agreement provides the Company with exclusive rights to develop and market oral Ramoplanin in the U.S. and Canada. Biosearch Italia will provide the bulk material for manufacture of the product and will retain all other rights to market and sell Ramoplanin. Under the terms of the agreement, the Company has paid Biosearch Italia an initial license fee of $2 million and is obligated to make payments of up to $8 million in a combination of cash and notes convertible into Company stock upon the achievement of specified milestones. In addition to purchasing bulk material from Biosearch Italia, the Company will fund the completion of clinical trials and pay a royalty on product sales. The combined total of bulk sales costs and royalties is expected to be 26% of the Company's net product sales. 13. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combination, and SFAS No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. Statement No. 142 discusses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition and also how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Beginning on January 1, 2002, with the adoption of Statement No. 142, goodwill and certain purchased intangibles existing on June 30, 2001, will no longer be subject to amortization over their estimated useful life. Rather the goodwill and certain purchased intangibles will be subject to an assessment for impairment based on fair value. The provisions of Statement No. 142 are required to be applied starting with the fiscal years beginning after December 15, 2001. The Company does not expect adoption of these statements to have a material impact on its financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Under this statement it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect adoption of this statement to have a material impact on its financial position or results of operations. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Genome Therapeutics Corp. ("we", "our", or "us") is a leader in the commercialization of genomics-based drug discovery. We have over ten years of experience in genomics research and have been one of the original recipients of funding from the United States government under its genome programs. Our commercial strategy is to use our genomics and related proprietary technologies to identify and validate novel drug targets for commercialization. Our two areas of scientific focus are the discovery and characterization of novel targets for human diseases and infectious diseases. We also commercialize our sequencing capabilities through our GenomeVisionTM Services business, which we established in July 1999 to provide high quality, industrial scale sequencing to pharmaceutical and biotechnology companies on a fee for service basis. In May 1997, we introduced a non-exclusive genetic database, the PathoGenomeTM Database, which provides subscribers with genetic information to identify gene targets. We believe that our genomic discoveries and information from our database will lead to the development of novel therapeutics, vaccines, and diagnostic products. To complement these established genomics programs, we expanded our drug discovery pipeline in October 2001 with the acquisition of Ramoplanin, a novel anti-infective in Phase III clinical trials for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE). We receive payments from our strategic partners based on license fees, contract research and milestone payments during the term of the alliance. In addition, subscribers to our PathoGenome Database pay access fees for the information they obtain. Once a product resulting from a research alliance or a subscriber's use of the PathoGenome Database is commercialized, we are entitled to receive royalty payments based upon product revenues. We anticipate that our alliances will result in the discovery and commercialization of novel pharmaceutical, vaccine and diagnostic products. In order for a product to be commercialized based on our research, it will be necessary for the strategic partners to conduct preclinical tests and clinical trials, obtain regulatory clearances, manufacture, sell, and distribute the product. Accordingly, we do not expect to receive royalties from these alliances for many years, if at all. Additionally, we sell, as a contract service business, high quality genomic sequencing information to third parties, including pharmaceutical companies, biotechnology companies, governmental agencies, and academic institutions. Our primary sources of revenue are from alliance agreements with pharmaceutical company partners, subscription agreements to our PathoGenome Database and government research grants and contracts. Currently, we have seven strategic research alliances. In August 1995, we entered into an alliance with AstraZeneca to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infections or any other disease caused by H. pylori. In August 1999, the sponsored research under the alliance concluded and the program transitioned into AstraZeneca's pipeline. We are entitled to receive additional milestone payments and royalties based upon the development by AstraZeneca of any products from the research alliance. We entered into an alliance with Schering-Plough in December 1995. Under this alliance, Schering-Plough can use our Staph. aureus genomic database to identify new gene targets for the development of novel antibiotics. In December 1996, we entered into our second research alliance with Schering-Plough to identify genes and associated proteins that Schering-Plough can utilize to develop new pharmaceuticals for treating asthma. In September 1997, we established our third research alliance with Schering-Plough for the development of new pharmaceutical products to treat fungal infections. In September 1999, we entered into a strategic alliance with bioMerieux to develop, manufacture and sell in vitro pathogen diagnostic products for human clinical and industrial applications. As part of the strategic alliance, bioMerieux purchased a subscription to our PathoGenome Database and made an equity investment. In December 1999, we entered into a strategic alliance with Wyeth-Ayerst to develop drugs based on our genetic research to treat osteoporosis. In May 1997, we introduced our PathoGenome Database and sold our first subscription. Since that date, we have continued to contract with subscribers on a non-exclusive basis, and, as of September 29, 2001, we had a total of seven subscribers. Under our agreements, the subscribers receive non-exclusive access to information relating to microbial organisms in our PathoGenome 14 Database. Subscriptions to the database generate revenue over the term of the subscription with the potential for royalty payments to us from future product sales. Since 1989, the United States government has awarded us a number of research grants and contracts related to government genomics programs. The scope of the research covered by grants and contracts encompasses technology development, sequencing production, technology automation, and disease gene identification. These programs strengthen our genomics technology base and enhance the expertise of our scientific personnel. In July 1999, the government named us as one of the nationally funded DNA sequencing centers of the international Human Genome Project. We are participating in an international consortium in a full-scale effort to sequence the human genome. We will receive funding from the National Human Genome Research Institute (NHGRI) under the Human Genome Project of up to $17.4 million over a forty-four month period, of which $14.1 million is appropriated through February 2002. In October 1999, NHGRI appointed us as one of the initial centers in the Mouse Genome Sequencing Network. The NHGRI agreed to provide us with funding under this program of up to $13.4 million over a three-year period, of which $9.3 million is appropriated through November 2001. In August 2000, we were named as one of two primary centers for the Rat Sequencing Program by NHGRI. As part of the agreement, we switched our focus from the mouse genome to the rat genome and agreed to use all remaining funding under the mouse genome award and a portion of the remaining funding under the human genome award to participate in the rat genome initiative. These programs are subject to annual appropriations by the government based upon the availability of government funds and the achievement by us of certain milestones. On October 8, 2001, subsequent to quarter-end, we acquired an exclusive license in the United States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A (Biosearch Italia). We will assume responsibility for the product development in the United States of Ramoplanin, currently in Phase III clinical trials. The agreement provides us with exclusive rights to develop and market oral Ramoplanin in the U.S. and Canada. Biosearch Italia will provide the bulk material for manufacture of the product and will retain all other rights to market and sell Ramoplanin. In addition to purchasing bulk material from Biosearch Italia, we will fund the completion of clinical trials, make payments upon achievements of specified milestones and pay a royalty to Biosearch Italia on product sales. We have incurred significant operating losses since our inception. As of September 29, 2001, we had an accumulated deficit of approximately $74 million. Our losses are primarily from costs associated with prior operating businesses and research and development expenses. These costs have often exceeded our revenues generated by our alliances, subscription agreements and government contracts and grants. Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the timing, amount and type of funding. We expect to incur additional operating losses in the future. We are subject to risks common to companies in our industry including unproven technology and business strategy, reliance upon collaborative partners and others, rapid technological change, history of operating losses, need for future capital, competition, patent and proprietary rights, dependence on key personnel, uncertainty of regulatory approval, uncertainty of pharmaceutical pricing, healthcare reform and related matters, availability of, and competition for, unique family resources, and volatility of our stock. RESULTS OF OPERATIONS THIRTEEN-WEEK PERIODS ENDED SEPTEMBER 23, 2000 AND SEPTEMBER 29, 2001 REVENUES Contract research, licenses, milestones and subscription fees increased 25% from $5,925,000 for the thirteen-week period ended September 23, 2000 to $7,378,000 for the thirteen-week period ended September 29, 2001. The increase in contract research, licenses, milestones and subscription fees was primarily attributable to an increase in revenue recognized under our GenomeVision Services 15 business, which provides sequencing services for the National Human Genome Research Institute as a participant in the International Human Genome Project and the Rat Genome Sequencing projects, as well as our biotechnology and pharmaceutical customers. COSTS AND EXPENSES Total costs and expenses increased 51% from $8,217,000 for the thirteen- week period ended September 23, 2000 to $12,440,000 for the thirteen-week period ended September 29, 2001. Research and development expense, which includes internal research and development and research funded pursuant to arrangements with our strategic alliances, commercial sequencing customers and the U.S. government, increased 52% from $6,505,000 in the thirteen-week period ended September 23, 2000 to $9,881,000 for the thirteen-week period ended September 29, 2001. The increase was primarily due to an increase in costs and expenses associated with an expansion of our internal research programs, specifically in the area of infectious diseases and human gene discovery, as well as an increase in revenues derived from our GenomeVision Services business, as mentioned above. The increase consisted of an increase in payroll and related expenses, laboratory supplies and overhead expenses related to our operations. Selling, general and administrative expenses increased 50% from $1,711,000 for the thirteen-week period ended September 23, 2000 to $2,559,000 for the thirteen-week period ended September 29, 2001 reflecting primarily an expansion in the areas of corporate development, sales and marketing and clinical development. The increase consisted of an increase in payroll and related expenses, as well as recruiting and consulting expenses. INTEREST INCOME AND EXPENSE Interest income decreased 11% from $1,180,000 for the thirteen-week period ended September 23, 2000 to $1,056,000 for the same period ended September 29, 2001, reflecting primarily a lower interest earned on investments. Interest expense decreased 18% from $211,000 for thirteen-week period ended September 23, 2000 to $174,000 for the same period ended September 29, 2001, due primarily to a decrease in outstanding balances under our long-term obligations. THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 23, 2000 AND SEPTEMBER 29, 2001 REVENUES Contract research, licenses, milestones and subscription fees increased 41% from $19,109,000 for the thirty-nine week period ended September 23, 2000 to $26,858,000 for the thirty-nine week period ended September 29, 2001. The increase was primarily attributable to a $5 million milestone payment received in June 2001 from our strategic partner, Wyeth-Ayerst, associated with the identification of a high bone mass gene under our osteoporosis program. The increase in contract research, licenses, milestones and subscription fees was also due to an increase in revenue recognized under our GenomeVision Services business, which provides sequencing services for the National Human Genome Research Institute as a participant in the International Human Genome Project and the Rat Genome Sequencing projects, as well as our biotechnology and pharmaceutical customers. COSTS AND EXPENSES Total costs and expenses increased 32% from $24,021,000 for the thirty-nine week period ended September 23, 2000 to $31,638,000 for the thirty-nine week period ended September 29, 2001. Research and development expense, which includes internal research and development and research funded pursuant to arrangements with our strategic alliances, commercial sequencing customers and the U.S. government, increased by 31% from $19,276,000 for the thirty-nine week period ended September 23, 2000 to $25,254,000 for the thirty-nine week period ended September 29, 2001. The increase was primarily attributable to an expansion of our internal research programs, specifically in 16 the area of infectious diseases and human gene discovery, as well as an increase in revenues derived from our GenomeVision Services business, as mentioned above. The increase consisted of an increase in payroll and related expenses, laboratory supplies and overhead expenses related to our operations. Selling, general and administrative expenses increased 35% from $4,746,000 for the thirty-nine week period ended September 23, 2000 to $6,384,000 for the thirty-nine week period ended September 29, 2001 reflecting primarily an expansion in the areas of corporate development, sales and marketing and clinical development. The increase consisted of an increase in payroll and related expenses, as well as recruiting and consulting expenses. INTEREST INCOME AND EXPENSE Interest income increased 52% from $2,100,000 for the thirty-nine week period ended September 23, 2000 to $3,186,000 for the same period ended September 29, 2001, reflecting primarily an increase in funds available for investment. The increase in funds available for investment was primarily due to proceeds received last year from the sale of common stock. Interest expense decreased 11% from $627,000 for the thirty-nine week period ended September 23, 2000 to $556,000 for the same period ended September 29, 2001 due primarily to a decrease in outstanding balances under our long-term obligations. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of cash have been payments received from strategic alliances, subscription fees, government grants and contracts, borrowings under equipment lending facilities and capital leases and proceeds from the sale of equity securities. As of September 29, 2001, we had cash, cash equivalents, restricted cash, and short-term and long-term marketable securities of approximately $72,525,000. In July 2001, we sold 127,500 shares of common stock in a series of transactions through the NASDAQ National Market, resulting in net proceeds of $1,672,000. In fiscal 2000, we sold 1,500,000 shares of common stock in a series of transactions through the NASDAQ National Market, resulting in net proceeds of $44,723,000. During fiscal 2000, we issued 1,532,302 shares of common stock related to the exercise of stock options, resulting in net proceeds of approximately $4,155,000. In fiscal 2000, we also sold 678,610 shares of common stock to bioMerieux, a strategic alliance partner, resulting in net proceeds of approximately $3,732,000. For the thirty-nine week period ended September 29, 2001, we issued 342,893 shares of common stock related to the exercise of stock options and the employee stock purchase plan, resulting in proceeds received of $1,188,000. We have various arrangements under which we financed certain office and laboratory equipment and leasehold improvements. At September 29, 2001, we had an aggregate of $6,505,000 outstanding under our borrowing arrangements, which are repayable over the next 36 months, of which $3,917,000 is repayable within the next 12 months. Under these arrangements, we are required to maintain certain financial ratios, including minimum levels of tangible net worth, total indebtedness to tangible net worth, minimum cash level, debt service coverage and minimum restricted cash balances. As of September 29, 2001, the Company was in compliance with all of these covenants. The Company had no additional borrowing capacity under these capital lease agreements at September 29, 2001. Our operating activities provided cash of $1,335,000 for the thirty-nine week period ended September 29, 2001, primarily due to a decrease in interest receivable, accounts receivable and unbilled costs & fees, an increase in accounts payable, as well as noncash expenditures such as depreciation and amortization, stock-based compensation expense, and loss on disposal of fixed assets. Cash provided by operations for the thirty-nine week period ended September 29, 2001 was partially offset by our net loss, and an increase in prepaid expenses and other current assets, as well as a decrease in deferred revenue. Our operating activities provided cash of $1,597,000 for the thirty- nine week period ended September 23, 2000, primarily due to a decrease in accounts receivable, unbilled costs & fees, an increase in accounts payable and accrued expenses, as well as noncash expenditures 17 such as depreciation and amortization, stock-based compensation expense, and loss on disposal of fixed assets. Cash provided by operations for the thirty- nine week period ended September 23, 2000 was partially offset by our net loss, and a decrease in deferred revenue. Our investing activities provided cash of $16,109,000 for the thirty-nine week period ended September 29, 2001 from the conversion of marketable securities to cash and cash equivalents, partially offset by the purchase of marketable securities and property and equipment. Our investing activities used cash of $14,586,000 for the thirty-nine week period ended September 23, 2000 from the purchase of marketable securities, partially offset by the conversion of marketable securities to cash and cash equivalents and net proceeds received under equipment finance arrangments. Capital expenditures, including property and equipment acquired under capital leases, totaled $3,395,000 for the thirty-nine week period ended September 29, 2001. Purchases consisted primarily of laboratory and computer equipment. We currently estimate that we will acquire an additional $1,500,000 in capital property and equipment in fiscal 2001 consisting primarily of computer, laboratory equipment, and additions to leasehold improvement. We intend to finance the majority of capital purchases made during the fourth quarter of fiscal 2001 under new equipment financing arrangements, yet to be negotiated. Our financing activities used cash of $1,393,000 for the thirty-nine week period ended September 29, 2001, primarily for payments of long-term obligations, partially offset by proceeds received from the sale of equity securities, exercise of stock options, and the sale of common stock under the employee stock purchase plan. Our financing activities provided cash of approximately $44,853,000 for the thirty-nine week period ended September 23, 2000, primarily from the sale of equity securities, exercise of stock options, sale of common stock under the employee stock purchase plan, net of payments of long-term obligations. At August 31, 2000, we had net operating loss and tax credit (investment and research) carryforwards of $87,055,000 and $3,071,000, respectively, available to reduce federal taxable income and federal income taxes, respectively, if any. Net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited, in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. Additionally, certain of these losses are expiring due to the limitations of the carryforwards period. We expect development expenditures associated with the acquisition of Ramoplanin to be approximately $15-20 million through the end of 2002. We believe that under our current rate of investment in both clinical development and genomics research and development, our existing capital resources are adequate for the foreseeable future. There is no assurance, however, that changes in our plans or events affecting our operations will not result in accelerated or unexpected expenditures. We may seek additional funding in the future through public or private financing. Additional financing may not be available when needed, or if available, it may not be on terms acceptable to us. To the extent that we raise additional capital by issuing equity or convertible debt securities, ownership dilution to stockholders will result. We do not currently use derivative financial instruments. We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited. This Form 10-Q and documents we have filed with the Securities and Exchange Commission contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements represent our management's judgement regarding future events. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "plan," "expect," "intend," "anticipate," "estimate," and similar words, although some forward-looking statements are expressed differently. All forward-looking statements, other than statements of historical fact, included in this report regarding our financial 18 position, business strategy and plans or objectives for future operations are forward-looking statements. We cannot guarantee the accuracy of the forward- looking statements, nor do we plan to update these forward-looking statements. You should be aware that our actual results could differ materially from those contained in the forward looking statements due to a number of risks affecting our business, including the ability of the Company and its alliance partners to (i) successfully develop products based on the Company's genomic information, (ii) obtain the necessary governmental approvals, (iii) effectively commercialize any products developed before its competitors and (iv) obtain and enforce intellectual property rights, as well as the risk factors set forth in the Exhibit 99 to the Company's Annual Report on Form 10-K for the year ended August 31, 2000 and those set forth in other filings that we may make with the Securities and Exchange Commission from time to time. 19 Part II Item 1. Legal Proceedings ----------------- None Item 2. Changes In Securities --------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits: --------- 3.1 By-laws of Genome Therapeutics Corp. (amended through July 24, 2001) 10.2 Employment letter with Steven M. Rauscher, dated June 15, 2001 10.3 Employment letter with Stephen Cohen, dated June 15, 2001 10.5 Employment letter with Richard Labaudinere, PhD, dated June 15, 2001 b) Reports on Form 8-K ------------------- Report on Form 8-K filed on July 2, 2001 to report the Company's engagement letter with Tucker Anthony Sutro to retain Tucker Anthony as our non-exclusive agent in connection with the sale of up to 1,950,000 registered shares of Genome Therapeutics Corp. Report on Form 8-K filed on July 9, 2001 to report the Company's press release announcing the financial results for the third quarter of its fiscal 2001. Report on Form 8-K filed on July 16, 2001 to report the Company's press release announcing the extension of its collaboration with Wyeth-Ayerst Laboratories. Report on Form 8-K filed on August 9, 2001 to report that the Company's Board of Directors had approved a change in the Company's fiscal year from August 31 to December 31, as of fiscal year ended December 31, 2000. 20 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized who also serves in the capacity of principal financial officer. Genome Therapeutics Corp. /s/ Stephen Cohen -------------------------- Stephen Cohen, SVP & CFO (Principal Financial Officer) Date: November 13, 2001 21 EX-3.1 3 dex31.txt BY-LAWS Exhibit 3.1 ----------- (As amended through July 24, 2001) BYLAWS of GENOME THERAPEUTICS CORP. Section 1. ARTICLES OF ORGANIZATION The name and purposes of the corporation shall be as set forth in the articles of organization. These bylaws, the powers of the corporation and of its directors and stockholders, or of any class of stockholders if there shall be more than one class of stock, and all matters concerning the conduct and regulation of the business and affairs of the corporation shall be subject to such provisions in regard thereto, if any, as are set forth in the articles of organization as from time to time in effect. Section 2. STOCKHOLDERS 2.1. Annual Meeting. The annual meeting of the stockholders shall be held at 10:00 A.M. on the third Tuesday in October in each year, unless a different hour is fixed by the president or the directors. If that day be a legal holiday at the place where the meeting is to be held, the meeting shall be held on the next succeeding day not a legal holiday at such place. Purposes for which an annual meeting is to be held, additional to those prescribed by law, by the articles of organization or by these bylaws, may be specified by the president or by the directors. 2.2. Special Meeting in Place of Annual Meeting. If no annual meeting has been held in accordance with the foregoing provisions, a special meeting of the stockholders may be held in place thereof, and any action taken at such special meeting shall have the same force and effect as if taken at the annual meeting, and in such case all references in these bylaws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. Any such special meeting shall be called as provided in Section 2.3. 2.3. Special Meetings. A special meeting of the stockholders may be called at any time by the president or by the directors. Each call of a meeting shall state the place, date, hour and purposes of the meeting. 2.4. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the corporation in Massachusetts or, to the extent permitted by the articles of organization, at such other place within the United States as shall be fixed by the president or the directors. Any adjourned session of any meeting of the stockholders shall be held at the same city or town as the initial session, or within Massachusetts, in either case at the place designated in the vote of adjournment. 2.5. Notice of Meetings. A written notice of each meeting of stockholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the articles of organization or by these bylaws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the clerk or an assistant clerk or by an officer designated by the directors. Whenever notice of a meeting is required to be given to a stockholder under any provision of the Business Corporation Law of the Commonwealth of Massachusetts or of the articles of organization or these bylaws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. 2.6. Quorum of Stockholders. At any meeting of the stockholders, a quorum shall consist of a majority in interest of all stock issued and outstanding and entitled to vote at the meeting, except when a larger quorum is required by law, by the articles of organization or by these bylaws. Stock owned directly or indirectly by the corporation, if any, shall not be deemed outstanding for this purpose. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 2.7. Action by Vote. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office, and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the articles of organization or by these bylaws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 2.8. Voting. Stockholders entitled to vote shall have one vote for each share of stock entitled to vote held by them of record according to the records of the corporation, unless otherwise provided by the articles of organization. The corporation shall not, directly or indirectly, vote any share of its own stock. The provisions of Chapter 110D of the Massachusetts General Laws shall not apply to the Company. The provisions of Chapter 110F of the Massachusetts General Laws shall not apply to the Company. 2.9. Action by Writing. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 2.10. Proxies. To the extent permitted by law, stockholders entitled to vote may vote either in person or by proxy. No proxy dated more than six months before the meeting named therein shall be valid. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. -2- Section 3. BOARD OF DIRECTORS 3.1. Number. At the annual meeting of stockholders such stockholders as have the right to vote for the election of directors shall fix the number of directors at not less than three nor more than nine directors and shall elect the number of directors so fixed; provided, however, that the number of directors shall be fixed at not less than two whenever there shall be only two stockholders and not less than one whenever there shall be only one stockholder. The number of directors may be increased at any time or from time to time either by the stockholders or by the directors by vote of a majority of the directors then in office. The number of directors may be decreased to any number permitted by law at any time or from time to time either by the stockholders or by the directors by a vote of a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or disqualification of one or more directors. No director need be a stockholder. 3.2. Tenure. Except as otherwise provided by law, by the articles of organization or by these bylaws, each director shall hold office until the next annual meeting of the stockholders and until his successor is duly elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. 3.3. Powers. Except as reserved to the stockholders by law, by the articles of organization or by these bylaws, the business of the corporation shall be managed by the directors who shall have and may exercise all the powers of the corporation. In particular, and without limiting the generality of the foregoing, the directors may at any time issue all or from time to time any part of the unissued capital stock of the corporation from time to time f authorized under the articles of organization and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner i of allocating such consideration between capital and surplus. 3.4. Committees. The directors may, by vote of a majority of the directors then in office, elect from their number an executive committee and other committees and delegate to any such committee or committees some or all of the powers of the directors except those which by law, by the articles of organization or by these bylaws they are prohibited from delegating. Except as the directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the directors or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these bylaws for the conduct of business by the directors. 3.5. Regular Meetings. Regular meetings of the directors may be held without call or notice at such places and at such times as the directors may from time to time determine, provided that reasonable notice of the first regular meeting following any such determination shall be given to absent directors: A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of the stockholders. 3.6. Special Meetings. Special meetings of the directors may be held at any time and at any place designated in the call of the meeting, when called by the chairman of the board, if any, -3- the president or the treasurer or by two or more directors, reasonable notice thereof being given to each director by the secretary or an assistant secretary, or, if there be none, by the clerk or an assistant clerk, or by the officer or one of the directors calling the meeting. 3.7. Notice. It shall be sufficient notice to a director to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.8. Quorum. At any meeting of the directors a majority of the directors then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.9. Action by Vote. When a quorum is present at any meeting, a majority of the directors present may take any action, except when a larger vote is required by law, by the articles of organization or by these bylaws. 3.10. Action by Writing. Unless the articles of organization otherwise provide, any action required or permitted to be taken at any meeting of the directors may be taken without a meeting if all the directors consent to the action in writing and the written consents are filed with the records of the meetings of the directors. Such consents shall be treated for all purposes as a vote taken at a meeting. 3.11. Presence Through Communications Equipment. Unless otherwise provided by law or the articles of organization, members of the board of directors may participate in a meeting of such board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. Section 4. OFFICERS AND AGENTS 4.1. Enumeration; Qualification. The officers of the corporation shall be a president, a treasurer, a clerk, and such other officers, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion elect or appoint. The corporation may also have such agents, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion appoint. Any officer may be but none need be a director or stockholder. The clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process. Any two or more offices may be held by the same person. Any officer may be required by the directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the directors may determine. -4- 4.2. Powers. Subject to law, to the articles of organization and to the other provisions of these bylaws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the directors may from time to time designate. 4.3. Election. The president, the treasurer and the clerk shall be elected annually by the directors at their first meeting following the annual meeting of the stockholders. Other officers, if any, may be elected or appointed by the board of directors at said meeting or at any other time. 4.4. Tenure. Except as otherwise provided by law or by the articles of organization or by these bylaws, the president, the treasurer and the clerk shall hold office until the first meeting of the directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified, and each other officer shall hold office until the first meeting of the directors following the next annual meeting of the stockholders unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the directors. 4.5. Chief Executive Officer. The chief executive officer of the corporation shall be the chairman of the board, if any, the president or such other officer as is designated by the directors and shall, subject to the control of the directors, have general charge and supervision of the business of the corporation and, except as the directors shall otherwise determine, preside at all meetings of the stockholders and of the directors. If no such designation is made, the president shall be the chief executive officer. 4.6. Chairman of the Board. If a chairman of the board of directors is elected, he shall have the duties and powers specified in these bylaws and shall have such other duties and powers as may be determined by the directors. 4.7. President and Vice Presidents. The president shall have the duties and powers specified in these bylaws and shall have such other duties and powers as may be determined by the directors. Any vice presidents shall have such duties and powers as shall be designated from time to time by the directors. 4.8. Treasurer and Assistant Treasurers. Except as the directors shall otherwise determine, the treasurer shall be the chief financial and accounting officer of the corporation and shall be in charge of its funds and valuable papers, books of account and accounting records, and shall have such other duties and powers as may be designated from time to time by the directors. Any assistant treasurers shall have such duties and powers as shall be designated from time to time by the directors. -5- 4.9. Clerk and Assistant Clerks. The clerk shall record all proceedings of the stockholders in a book or series of books to be kept therefor, which book or books shall be kept at the principal office of the corporation or at the office of its transfer agent or of its clerk and shall be open at all reasonable times to the inspection of any stockholder. In the absence of the clerk from any meeting of stockholders, an assistant clerk, or if there be none or he is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof in the aforesaid book. Unless a transfer agent has been appointed the clerk shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders and the amount of stock held by each. If no secretary is elected, the clerk shall keep a true record of the proceedings of all meetings of the directors and in his absence from any such meeting an assistant clerk, or if there be none or he is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof. Any assistant clerks shall have such other duties and powers as shall be designated from time to time by the directors. 4.10. Secretary and Assistant Secretaries. If a secretary is elected, he shall keep a true record of the proceedings of all meetings of the directors and in his absence from any such meeting an assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof. Any assistant secretaries shall have such other duties and powers as shall be designated from time to time by the directors. Section 5. RESIGNATIONS AND REMOVALS Any director or officer may resign at any time by delivering his resignation in writing to the chairman of the board, if any, the president, the treasurer or the clerk or to a meeting of the directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time. A director (including persons elected by directors to fill vacancies in the board) may be removed from office (a) with or without cause by the vote of the holders of a majority of the shares issued and outstanding and entitled to vote in the election of directors, provided that the directors of a class elected by a particular class of stockholders may be removed only by the vote of the holders of a majority of the shares of such class, or (b) with cause by the vote of a majority of the directors then in office. The directors may remove any officer elected by them with or without cause by the vote of a majority of the directors then in office. A director or officer may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him. No director or officer resigning, and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director or officer removed, shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless in the case of a resignation, the directors, or in the case of a removal, the body acting on the removal, shall in their or its discretion provide for compensation. -6- Section 6. VACANCIES Any vacancy in the board of directors, including a vacancy resulting from the enlargement of the board, may be filled by the stockholders or, in the absence of stockholder action, by the directors by vote of a majority of the directors then in office. If the office of the president or the treasurer or the clerk becomes vacant, the directors may elect a successor. If the office of any other officer becomes vacant, the directors may elect or appoint a successor by vote of a majority of the directors present. Each such successor shall hold office for the unexpired term, and in the case of the president, the treasurer and the clerk, until his successor is chosen and qualified, or in each case until he sooner dies, resigns, is removed or becomes disqualified. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number. Section 7. CAPITAL STOCK 7.1. Number and Par Value. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue shall be as stated in the articles of organization. 7.2. Fractional Shares. The corporation shall not issue fractional shares of stock but may issue scrip in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon surrender of such scrip aggregating a full share, the terms and conditions and manner of issue of such scrip to be fixed by the directors. 7.3. Stock Certificates. Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, be prescribed from time to time by the directors. Such certificate shall be signed by the president or a vice president and by the treasurer or an assistant treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. 7.4. Loss of Certificates. In the case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such conditions as the directors may prescribe. Section 8. TRANSFER OF SHARES OF STOCK 8.1. Transfer on Books. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the directors or the transfer agent of the corporation may reasonably require. Except as may be otherwise required by law, by the articles of organization or by these bylaws, the corporation shall be -7- entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these bylaws. It shall be the duty of each stockholder to notify the corporation of his post office address. 8.2. Record Date and Closing Transfer Books. The directors may fix in advance a time, which shall not be more than sixty days before the date of any meeting of stockholders or the date for the payment of any dividend or making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date; or without fixing such record date the directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed: (1) The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given. (2) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors acts with respect thereto. Section 9. INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the extent legally permissible, indemnify each of its directors and officers (including persons who serve at its request as directors, officers or trustees of another organization in which it has any interest, as a shareholder, creditor or otherwise) against all liabilities and- expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a director, officer or trustee, except with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such indemnification: (a) by a disinterested majority of the directors then in office; or (b) by a majority of the disinterested directors then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; or (c) by -8- the holders of a majority of the outstanding stock at the time entitled to vote- for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this section. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director or officer may be entitled. As used in this section, the terms "director" and "officer" include their respective heirs, executors and administrators, and an "interested" director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending. Nothing contained in this section shall affect any rights to indemnification to which corporate personnel other than directors and officers may be entitled by contract or otherwise under law. Section 10. CORPORATE SEAL The seal of the corporation, shall, subject to alteration by the directors, consist of a flat-faced circular die with the word "Massachusetts", together with the name of the corporation and the year of its organization, cut or engraved thereon. Section 11. EXECUTION OF PAPERS Except as the directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation shall be signed by the president or by one of the vice presidents or by the treasurer. Section 12. FISCAL YEAR The fiscal year of the corporation shall end on December 31 of each year. Section 13. AMENDMENTS These bylaws may be altered, amended or repealed at any annual or special meeting of the stockholders called for the purpose, of which the notice shall specify the subject matter of the proposed alteration, amendment or repeal or the sections to be affected thereby, by vote of the stockholders. These bylaws may also be altered, amended or repealed by vote of a majority of the directors then in office, except that the directors shall not take any action which provides for indemnification of directors nor any action to amend this Section 13, and except that the directors shall not take any action unless permitted by law. Any bylaw so altered, amended or repealed by the directors may be further altered or amended or reinstated by the stockholders in the above manner. -9- EX-10.2 4 dex102.txt RAUSCHER EMPLOYMENT LETTER Exhibit 10.2 ------------ May 9,2001 Mr. Steven M. Rauscher 312 Carlisle Lane Lake Forest, IL 60045 Dear Steven: This letter will confirm our offer to you of employment with Genome Therapeutics Corp. (the "Company"), under the terms and conditions that follow: 1. POSITION AND DUTIES. Effective October 26, 2000, you will be employed by the Company as its President and Chief Executive Officer reporting directly to the Board of Directors of the Company (the "Board"). You will have all powers and duties consistent with this position including the power to be the principal decision maker for the Company, subject to the direction of the Board. You agree that, while employed by the Company, you will devote substantially your full business time and your best efforts to fulfill faithfully, responsibly and to the best of your ability your duties under this agreement. Subject to Board review and approval, time and efforts devoted to membership on boards of other non-competing corporations will be deemed time and efforts in fulfilling your duties under this agreement and otherwise related to the Company's business and affairs. You warrant that you are free to enter into and fully perform this agreement and are not subject to any employment, confidentiality, non- competition or other agreement which conflicts with this agreement. 2. COMPENSATION AND BENEFITS. During your employment, as compensation for all services performed by you for the Company and its subsidiaries, the Company will provide you the following pay and benefits: a. BASE SALARY. The Company will pay you a base salary at the rate of Three Hundred Sixty Thousand Dollars ($360,000) per year, payable in accordance with the Company's regular payroll practices and subject to increase from time to time by the Board of Directors of the Company (the "Board") in its discretion (such base salary as in effect from time to time, the "Base Salary"). b. BONUS COMPENSATION. Beginning in fiscal year 2001, you will be eligible to receive an annual management incentive bonus based on the Company's achievement of enhanced share value and certain other operating and financial goals set by the Board. The amount of this bonus, if any, will be determined by the Board and will range from 0 - 40% of your Base Salary. The Company acknowledges that the Board has approved an initial target incentive of $108,000 for fiscal year 2001 if all target goals are met. Subject to Board approval, half of any annual bonus will be paid in cash and half will be paid in options on the Company's common stock. c. RESTRICTED STOCK AND STOCK OPTIONS. On October 26, 2000, you were granted: (i) 24,000 shares of restricted common stock of the Company; and (ii) options on 540,000 shares of the Company's common stock, which grants are subject to the vesting and other terms set forth in your Restricted Stock and Stock Option Award Agreements. d. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. You will be entitled to participate in all employee benefit plans from time to time in effect on the same basis as other executive employees of the Company, except to the extent such plans are duplicative of benefits otherwise provided to you under this agreement. Your participation will be subject to the terms of the applicable plan documents and applicable Company policies. e. VACATIONS AND OTHER BENEFITS. You will be entitled to five (5) weeks of vacation per year, in addition to holidays observed by the Company. Vacation may be taken at such times and intervals as you shall determine, subject to the business needs of the Company. Up to two weeks of unused vacation in any year may be carried over into the next year but any such carry-over shall not be cumulative (i.e., no more than two weeks may be carried over in any given year). In addition, the Company will pay for you to have an annual comprehensive medical exam. Also, the Company will obtain and pay the premiums on a life insurance policy covering you with a benefit payable to your named beneficiaries of at least One Million Eighty Thousand Dollars ($1,080,000). The Company shall also provide you with a cellular telephone and a reasonably acceptable home personal computer. f. EXPENSE REIMBURSEMENT. The Company shall reimburse you, upon proper accounting, for reasonable business expenses and disbursements you incur in the course of the performance of your duties under this agreement. The Company shall make an annual payment of $10,000 in lieu of automobile, health or other club allowance. In addition, the Company shall pay you any additional amount necessary to compensate you for any tax you may incur by reason of such reimbursement payment (the "Gross Up Amount") and any additional amount necessary to compensate you for any tax incurred by reason of payment of the Gross Up Amount. g. RELOCATION REIMBURSEMENT. The Company shall reimburse you, upon proper accounting, for reasonable and customary expenses up to $100,000 incurred by you in the course of relocating to the Boston, Massachusetts area. In addition, the Company shall pay you any additional amount necessary to compensate you for any tax you may incur by reason of such reimbursement payment (the "Gross Up Payment") and any additional amount necessary to compensate you for any tax incurred by you by reason of the Gross Up Payment. You must submit all claims for reimbursement under this paragraph by July 1, 2002. The Company shall not have any obligation to pay any claims pursuant to this paragraph after such date. 2 3. CONFIDENTIAL INFORMATION AND RESTRICTED ACTIVITIES. You acknowledge that, in consideration for your employment with the Company, you have agreed to and executed a joinder dated November 17, 2000 to Genome Therapeutics' Intellectual Property Policy, including Appendix I thereof ("Invention, Assignment, Non-Disclosure and Covenant Not To Compete"), which imposes certain non-competition, non-solicitation and non-disclosure restrictions on you (such joinder referred to hereinafter as the "Intellectual Property and Non-Compete Agreement"). 4. TERMINATION OF EMPLOYMENT. Your employment under this agreement shall continue until one party delivers to the other party a written notice of termination setting forth the reason, if any, for the termination. If you terminate your employment without Good Reason (as defined below), you will give the Company two month's written notice. a. If this agreement is terminated by reason of your death or disability, the Company shall pay or provide to you, or to your heirs or estate in the event of your death, (i) all Accrued Obligations (as defined below) in a lump sum in cash within thirty (30) days after the Termination Date (as defined below), (ii) all benefits accrued by you as of the Termination Date under all qualified and non-qualified retirement, pension, profit sharing and similar plans of the Company in the time and manner provided under the terms of such plans, and (iii) your pro rata bonus entitlement. If the agreement is terminated by reason of your disability, the Company will continue to pay, for twelve (12) months from the Termination Date (A) your Base Salary in effect on the Termination Date and (B) all amounts and other benefits to which you would have been entitled if you had continued to be employed by the Company for such 12- month period. You will be deemed to be disabled upon the earlier of (i) the end of a six (6) consecutive month period during which, by reason of physical or mental injury or disease, you are unable to perform substantially all your usual and customary duties under this agreement and (ii) the date that a reputable physician selected jointly by the Board and yourself (or if you are clearly unqualified to make a selection, the person then authorized to make health care decisions on your behalf, or if none, your spouse) determines in writing that you will, by reason of physical or mental injury or disease, be unable to perform substantially all of your usual and customary duties under this agreement for a period of at least six (6) consecutive months. Upon the Board's reasonable request, you will submit to a medical examination for the purpose of determining the existence, nature and extent of any such disability, and the Board shall promptly give you written notice of any determination of your disability and of the decision of the Board to terminate your employment by reason thereof. All payments made by the Company under this paragraph 4.a. will be reduced dollar-for-dollar by the amount of disability benefits, if any, paid to you in accordance with any disability policy or program of the Company. Except as otherwise provided by law, all other obligations of the Company under this agreement shall cease forthwith. b. If you are discharged for Cause (as defined below) or you resign without Good Reason, the Company shall (i) pay you all Accrued Obligations in a lump sum in cash within thirty (30) days after the Termination Date, and (ii) provide all benefits 3 accrued as of the Termination Date under all qualified and non-qualified retirement, pension, profit sharing and similar plans of the Company in the manner and time provided under the terms of such plans and arrangements. Except as otherwise provided by law, all other obligations of the Company under this agreement shall cease forthwith. c. If you are discharged without Cause or resign with Good Reason, then the Company shall (i) pay all Accrued Obligations in a lump sum in cash within thirty (30) days after the Termination Date, (ii) continue to pay your Base Salary and provide all other benefits in paragraph 2 of this agreement for the lesser of twelve (12) months after the Termination Date or the period of time that it takes you to find comparable employment (such lesser period being the "Severance Period"), and (iii) provide all benefits accrued as of the end of the Severance Period under all qualified and non-qualified retirement, pension, profit sharing and similar plans of the Company in the time and manner provided under the terms of such plans. Except as otherwise provided by law, all other obligations of the Company under this agreement shall cease forthwith. d. If within two years of a Change of Control (as defined below) of the Company, (i) you are terminated other than for Cause, or (ii) you terminate your employment with the surviving company due to the fact that (a) the surviving company takes any action that results in a material diminution in your position, authority or duties as such position, authority or duties existed immediately prior to the Change of Control or (b) the surviving company takes any action that would require you to have your principal place of work changed to any location outside a thirty-five mile radius of the City of Boston, then, in the case of either (i) or (ii), the Company will continue to pay your Base Salary in effect on the Termination Date and provide you with the benefits set forth in paragraph 2 of this agreement for a period of eighteen (18) months from the Termination Date. The Company will also pay you on the Termination Date any Base Salary earned but not paid through the Termination Date. In addition, your remaining unvested options and non-exercisable restricted shares will immediately fully vest and become exercisable for a period equal to the lesser of two years from the Termination Date or until the final exercise date of the options as determined in the applicable stock option agreement between yourself and the Company. All severance payments will be payable in accordance with the normal payroll practices of the Company. If you are eligible for severance payments under this paragraph 4.d., then the provisions of paragraph 4.c. above shall not apply to such termination. e. For purposes of this agreement, the following capitalized terms have the meaning as set forth below: (i) "Accrued Obligations" shall mean, as of the Termination Date, the sum of (A) your Base Salary through the Termination Date to the extent not theretofore paid, (B) the amount of any bonus, vested incentive compensation, deferred compensation and other cash compensation accrued as of the Termination Date to the extent not theretofore paid, and (C) any vacation pay, expense reimbursements and other cash entitlements accrued as of the Termination Date to 4 the extent not theretofore paid. Amounts shall be deemed to accrue ratably over the period during which they are earned. (ii) "Cause" shall mean: (i) your material failure to perform (other than by reason of disability), or material negligence in the performance of, your duties and responsibilities to the Company or any of its subsidiaries; (ii) your material breach of this agreement or any other agreement between you and the Company or any of its subsidiaries; (iii) the commission of a felony or other crime involving an act of moral turpitude; or (iv) a material act of dishonesty or breach of trust on your part resulting or intended to result, directly or indirectly, in a personal gain or enrichment at the expense of the Company. (iii) A "Change of Control" shall be deemed to have occurred if and when: (i) the Company executes an agreement of acquisition, merger, or consolidation which contemplates that after the effective date provided for in the agreement, all or substantially all of the business and/or assets of the Company shall be controlled by another corporation or other entity; provided, however, for purposes of this clause (i) that (A) if such an agreement requires as a condition precedent approval by the Company's shareholders of the agreement or transaction, a Change of Control shall not be deemed to have taken place unless and until such approval is secured, and (B) if immediately after such effective date the voting shareholders of such other corporation or entity shall be substantially the same as the voting shareholders of the Company immediately prior to such effective date, the execution of such agreement shall not, by itself, constitute a "Change of Control;" (ii) any "person" (as such term is used in Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner, directly or indirectly, of securities of the Company that represent 35% or more of the votes that could then be cast in an election for members of the Company's Board; or (iii) during any period of 24 consecutive months, commencing after the effective date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Company shall cease to constitute at least a majority of the Company's Board, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two thirds of (A) the directors then in office who were directors at the beginning of the 24-month period, or (B) the directors specified in clause (A) plus directors whose election has been so approved by directors specified in clause (A). (iv) "Good Reason" shall mean: (i) any action by the Company that results in a material diminution in your position, authority or duties with the Company, excluding any isolated, insubstantial or inadvertent action not taken in bad faith and which is promptly remedied by the Company; (ii) material failure of the Company to provide you compensation and benefits in accordance with the terms of paragraph 2 of this agreement for more than ten business days after notice from you specifying in reasonable detail the nature of the failure or (iii) a Change of Control. 5 (v) "Termination Date" shall mean (A) in the event of discharge for Cause or resignation for Good Reason, the date a Notice of Termination is received by the non-terminating party, (B) in the event of a discharge without Cause or resignation without Good Reason, the date specified in the written notice to the non-terminating party, which date shall be no less than thirty (30) days from the date of such written notice, (C) in the event of your death, the date of your death, and (D) in the event of termination of your employment by reason of disability, the date you receive written notice of such termination (or, if later, six (6) months from the date your disability began). 5. MISCELLANEOUS. This agreement sets forth the entire agreement between you and the Company and replaces all prior and contemporaneous communications, agreements and understandings, written or oral, with respect to the terms and conditions of your employment; provided, however, that you and the Company acknowledge and agree that the Intellectual Property and Non-Competition Agreement shall remain in full force and effect. This agreement may not be modified or amended, and no breach shall be deemed to be waived, unless agreed to in writing by you and an expressly authorized representative of the Board. This agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. All payments made hereunder shall be net of any tax or other amount required to be withheld by the Company by law. Neither you nor the Company may make any assignment of this agreement or any interest in it, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this agreement without your consent to one of its subsidiaries or to any Person that acquires substantially all the assets of the Company, by means of a merger or otherwise. Your obligations to the Company under the Intellectual Property and Non-Competition Agreement shall remain in full force and effect. 6. NOTICES. Any notices provided for in this agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, and addressed to you at your last known address on the books of the Company or, in the case of the Company, to it at its principal place of business, attention of the Chairman of the Board, or to such other address as either party may specify by notice to the other actually received. 7. BINDING EFFECT. This agreement shall be binding upon and inure to the benefit of your heirs and representatives and the successors and assigns of the Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to you, expressly to assume and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform this agreement if no such 6 succession had taken place. Regardless of whether such agreement is executed, this agreement shall be binding upon any successor of the Company in accordance with the operation of law and such successor shall be deemed the "Company" for purposes of this agreement. If the foregoing is acceptable to you, please sign this letter in the space provided and return it to me no later than May 23, 2001. At the time you sign and return it this letter will take effect as a binding agreement between you and the Company on the basis set forth above. The enclosed copy is for your records. Sincerely yours, Accepted and Agreed: Robert J. Hennessey -------------------- Chairman of the Board Steven M. Rauscher Date: -------------------- Norbert Riedel, Ph.D. Chairman of the Compensation Committee 7 EX-10.3 5 dex103.txt COHEN EMPLOYMENT LETTER Exhibit 10.3 ------------ June 15, 2001 Mr. Stephen Cohen 101 Melrose Street Arlington, MA 02474 Dear Stephen: This letter will confirm our offer to you of employment with Genome Therapeutics Corp. (the "Company"), under the terms and conditions that follow: 1. POSITION AND DUTIES. Effective January 22, 2001, you will be employed by the Company, on a full-time basis as its Senior Vice President and Chief Financial Officer. You agree to perform the duties of your position and such other duties as may reasonably be assigned to you from time to time. You also agree that, while employed by the Company, you will devote your full business time and your best efforts, skill and knowledge exclusively to the advancement of the business and interests of the Company and its subsidiaries and to the discharge of your duties and responsibilities for them. You warrant that you are free to enter into and fully perform this agreement and are not subject to any employment, confidentiality, non-competition or other agreement which conflicts with this agreement. 2. COMPENSATION AND BENEFITS. During your employment, as compensation for all services performed by you for the Company and its subsidiaries, the Company will provide you the following pay and benefits: a. BASE SALARY. The Company will pay you a base salary at the rate of Two Hundred and Ten Thousand Dollars ($210,000) per year, payable in accordance with the regular payroll practices of the Company and subject to increase from time to time by the Board of Directors of the Company (the "Board") in its discretion (such base salary as in effect from time to time, the "Base Salary"). b. BONUS COMPENSATION. During employment, you will be considered annually for a bonus of up to thirty percent (30%) of your Base Salary. For fiscal year 2001, your target bonus shall be pro-rated for the part of the fiscal year for which you were employed by the Company. It is anticipated that the Company's fiscal year will be changed to a December 31 year end. Bonus awards will be determined by the Board, based on your performance and that of the Company against goals established annually by the Board after consultation with you. Subject to Board approval, half of any annual bonus will be paid in cash and half will be paid in options on the Company's common stock. c. OPTION GRANTS. As a bonus for commencing employment with the Company, you have received a non-qualified stock option covering 19,164 shares of the Company's common stock with an exercise price of $2.46 per share. The Company has also granted to you an additional non-qualified stock option covering 75,000 shares of the Company's common stock with an exercise price of $8.20 per share. The terms of these options are governed by stock option agreements between the Company and you. d. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. You will be entitled to participate in all employee benefit plans from time to time in effect on the same basis as other executive employees of the Company, except to the extent such plans are duplicative of benefits otherwise provided to you under this agreement. Your participation will be subject to the terms of the applicable plan documents and applicable Company policies. e. VACATIONS AND OTHER BENEFITS. You will be entitled to four (4) weeks of vacation per year, in addition to holidays observed by the Company. Vacation may be taken at such times and intervals as you shall determine, subject to the business needs of the Company. In addition, the Company shall provide you with a cellular telephone and related service plan. f. RELOCATION EXPENSE REIMBURSEMENT. The Company shall reimburse you, upon proper accounting, for reasonable and customary expenses up to $75,000 incurred by you in the course of relocating to the Boston, Massachusetts area, including travel expenses arising from trips to Chicago to visit your wife and/or trips by your wife to the Boston area. In addition, the Company shall pay you such additional amount as is necessary to compensate you for any tax you may incur by reason of such reimbursement payment. Your rights to seek reimbursement pursuant to this Paragraph 2(f) shall expire on January 22, 2002; provided, that you shall have rights to reimbursement in accordance with this Paragraph for any expenses incurred prior to such date so long as you submit a reasonably detailed reimbursement request within thirty days following January 22, 2002. 3. CONFIDENTIAL INFORMATION AND RESTRICTED ACTIVITIES. You acknowledge that, in consideration for your employment with the Company, you have agreed to and executed a joinder dated March 19, 2001 to Genome Therapeutics' Intellectual Property Policy, including Appendix I thereof ("Invention, Assignment, Non- Disclosure and Covenant Not To Compete"), which imposes certain non-competition, non-solicitation and non-disclosure restrictions on you (such joinder being referred to herein as the "Intellectual Property and Non-Compete Agreement"). 4. TERMINATION OF EMPLOYMENT; SEVERANCE. Your employment under this agreement shall continue until one party delivers to the other party a written notice of termination setting forth the reason, if any, for the termination. If you terminate your 2 employment without Good Reason (as defined below), you will give the Company two month's written notice. a. In the event of termination of your employment by the Company other than for Cause (as defined below) or your termination of employment for Good Reason, the Company will: (i) continue to pay you your Base Salary and provide you with the benefits set forth in Paragraph 2(d) hereof for the lesser of (x) a period of nine (9) months from the date of termination or (y) such period of time that it takes you to find comparable employment; (ii) pay you on the date of termination any Base Salary earned but not paid through the date of termination; and (iii) pay you any bonus to which you are entitled in accordance with Paragraph 2(b) above, prorated to the date of termination and payable at the time such bonuses are payable to Company executives generally. All severance payments will be payable in accordance with the normal payroll practices of the Company. b. In the event of termination of your employment by the Company for Cause or termination by you other than for Good Reason, the Company will have no further obligations to you other than paying you any Base Salary earned but not paid through the date of termination. c. If within two years of a Change of Control (as defined in Exhibit A hereto) of the Company, (i) you are terminated other than for Cause, or (ii) you terminate your employment with the surviving company due to the fact that (a) the surviving company takes any action that results in a material diminution in your position, authority or duties as such position, authority or duties existed immediately prior to the Change of Control or (b) the surviving company takes any action that would require you to have your principal place of work changed to any location outside a thirty-five mile radius of the City of Boston, then, in the case of either (i) or (ii), the Company will continue to pay your Base Salary (as in effect at the time of your termination) and provide you with the benefits set forth in Paragraph 2(d) above for a period of twelve (12) months from the date of termination. The Company will also pay you on the date of termination any Base Salary earned but not paid through the date of termination. All severance payments will be payable in accordance with the normal payroll practices of the Company. If you are eligible for severance payments under this Paragraph 4(c) upon termination, then the provisions of Paragraph 4(a) above shall not apply to such termination. d. For purposes of this agreement, "Cause" shall mean: (i) your material failure to perform (other than by reason of disability), or material negligence in the performance of, your duties and responsibilities to the Company or any of its subsidiaries; (ii) your material breach of this agreement or any other agreement between you and the Company or any of its subsidiaries; (iii) the commission of a felony or other crime involving an act of moral turpitude; or (iv) a material act of dishonesty or breach of 3 trust on your part resulting or intended to result, directly or indirectly, in a personal gain or enrichment at the expense of the Company. e. For purposes of this agreement, "Good Reason" shall mean: (i) any action by the Company that results in a material diminution in your position, authority or duties with the Company, excluding any isolated, insubstantial or inadvertent action not taken in bad faith and which is promptly remedied by the Company; (ii) material failure of the Company to provide you compensation and benefits in accordance with the terms of Paragraph 2, above, for more than ten business days after notice from you specifying in reasonable detail the nature of the failure or (iii) a Change of Control. f. This agreement shall automatically terminate in the event of your death during employment. In the event you become disabled during employment and, as a result, are unable, in the reasonable judgment of the Board, to continue to perform substantially all of your duties and responsibilities under this agreement, the Company will continue to pay you your Base Salary and to provide you benefits in accordance with Paragraph 2(d) above, to the extent permitted by plan terms, for up to twenty-six (26) weeks of disability during any period of three hundred and sixty-five (365) consecutive calendar days. The obligations of the Company to make payments to you due to disability pursuant to this Paragraph 4(f) shall be reduced by the amount of any payments you receive pursuant to the Company's disability insurance policy. If you are, in the reasonable judgment of the Board, unable to return to work after twenty-six (26) weeks of disability, the Company may terminate your employment, upon notice to you. 5. MISCELLANEOUS. This agreement sets forth the entire agreement between you and the Company and replaces all prior and contemporaneous communications, agreements and understandings, written or oral, with respect to the terms and conditions of your employment; provided, that, you and the Company acknowledge and agree that the Intellectual Property and Non-Competition Agreement shall remain in full force and effect. This agreement may not be modified or amended, and no breach shall be deemed to be waived, unless agreed to in writing by you and an expressly authorized representative of the Board. This agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. All payments made hereunder shall be net of any tax or other amount required to be withheld by the Company by law. Neither you nor the Company may make any assignment of this agreement or any interest in it, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this agreement without your consent to one of its subsidiaries or to any Person that acquires substantially all the assets of the Company, by means of a merger or otherwise. Your obligations to the Company under the Intellectual Property and Non-Competition Agreement shall survive the termination of this agreement. 4 6. NOTICES. Any notices provided for in this agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, and addressed to you at your last known address on the books of the Company or, in the case of the Company, to it at its principal place of business, attention of the Chief Executive Officer, or to such other address as either party may specify by notice to the other actually received. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of your heirs and representatives and the successors and assigns of the Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to you, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement if no such succession had taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor of the Company in accordance with the operation of law and such successor shall be deemed the "Company" for purposes of this Agreement. If the foregoing is acceptable to you, please sign this letter in the space provided and return it to me no later than June 29, 2001. At the time you sign and return it this letter will take effect as a binding agreement between you and the Company on the basis set forth above. The enclosed copy is for your records. Sincerely yours, Accepted and Agreed: Steven M. Rauscher ------------------------------ President and Chief Executive Officer Stephen Cohen Date: ------------------------- 5 Definition of Change of Control A "Change of Control" shall be deemed to have occurred if and when: (i) the Company executes an agreement of acquisition, merger, or consolidation which contemplates that after the effective date provided for in the agreement, all or substantially all of the business and/or assets of the Company shall be controlled by another corporation or other entity; PROVIDED, HOWEVER, for purposes of this clause (i) that (A) if such an agreement requires as a condition precedent approval by the Company's shareholders of the agreement or transaction, a Change of Control shall not be deemed to have taken place unless and until such approval is secured and, (B) if immediately after such effective date the voting shareholders of such other corporation or entity shall be substantially the same as the voting shareholders of the Company immediately prior to such effective date, the execution of such agreement shall not, by itself, constitute a "Change of Control;" (ii) any "person" (as such term is used in Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner, directly or indirectly, of securities of the Company that represent 35% or more of the votes that could then be cast in an election for members of the Company's Board; or (iii) during any period of 24 consecutive months, commencing after the effective date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Company shall cease to constitute at least a majority of the Company's Board, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two thirds of (A) the directors then in office who were directors at the beginning of the 24-month period, or (B) the directors specified in clause (A) plus directors whose election has been so approved by directors specified in clause (A). 6 EX-10.5 6 dex105.txt LABAUDINERE EMPLOYMENT LETTER Exhibit 10.5 ------------ June 15, 2001 Mr. Richard Labaudiniere, Ph.D. 258 Western Avenue Sherborn, MA 01770 Dear Richard: This letter will confirm our offer to you of employment with Genome Therapeutics Corp. (the "Company"), under the terms and conditions that follow: 1. POSITION AND DUTIES. Effective October 30, 2000, you will be employed by the Company, on a full-time basis as its Senior Vice President of Research and Development. You agree to perform the duties of your position and such other duties as may reasonably be assigned to you from time to time. You also agree that, while employed by the Company, you will devote your full business time and your best efforts, skill and knowledge exclusively to the advancement of the business and interests of the Company and its subsidiaries and to the discharge of your duties and responsibilities for them. You warrant that you are free to enter into and fully perform this agreement and are not subject to any employment, confidentiality, non-competition or other agreement which conflicts with this agreement. 2. COMPENSATION AND BENEFITS. During your employment, as compensation for all services performed by you for the Company and its subsidiaries, the Company will provide you the following pay and benefits: a. BASE SALARY. The Company will pay you a base salary at the rate of Two Hundred Thirty Thousand Dollars ($230,000) per year, payable in accordance with the regular payroll practices of the Company and subject to increase from time to time by the Board of Directors of the Company (the "Board") in its discretion (such base salary as in effect from time to time, the "Base Salary"). b. BONUS COMPENSATION. During your employment, pursuant to the Company's Management Incentive Plan, you will be considered annually for a bonus of up to thirty (30%) of your Base Salary. For fiscal year 2001, your target bonus shall be pro-rated for the part of the fiscal year for which you were employed by the Company. It is anticipated that the Company's fiscal year will be changed to a December 31 year end. Bonus awards will be determined by the Board, based on your performance and that of the Company against goals established annually by the Board after consultation with you. Subject to Board approval, half of any annual bonus will be paid in cash and half will be paid in options on the Company's common stock. c. STOCK OPTIONS. As a bonus for commencing employment with the Company, you have received a stock option covering 4,500 shares of the Company's common stock with an exercise price of $0.10 per share. The Company has also granted to you an additional stock option covering 100,000 shares of the Company's common stock with an exercise price of $14.375 per share. The terms of these options are governed by the Company's option plans and stock option agreements between the Company and you. d. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. You will be entitled to participate in all employee benefit plans from time to time in effect on the same basis as other executive employees of the Company, except to the extent such plans are duplicative of benefits otherwise provided to you under this agreement. Your participation will be subject to the terms of the applicable plan documents and applicable Company policies. e. VACATIONS AND OTHER BENEFITS: You will be entitled to four (4) weeks of vacation per year, in addition to holidays observed by the Company. Vacation may be taken at such times and intervals as you shall determine, subject to the business needs of the Company. In addition, the Company shall provide you with a cellular telephone and related service plan. f. RELOCATION EXPENSE REIMBURSEMENT. The Company shall reimburse you, upon proper accounting, for reasonable and customary expenses up to $75,000 incurred by you in the course of relocating to the Boston, Massachusetts area. In addition, the Company shall pay you such additional amount as is necessary to compensate you for any tax you may incur by reason of such reimbursement payment. Your rights to seek reimbursement pursuant to this paragraph shall expire on October 30, 2001; provided, however, that you shall have rights to reimbursement in accordance with this paragraph for any expenses incurred prior to such date so long as you submit a reasonably detailed reimbursement request within thirty days following October 30, 2001. g. CONFIDENTIAL INFORMATION AND RESTRICTED ACTIVITIES. You acknowledge that, in consideration for your employment with the Company, you have agreed to and executed a joinder dated April 5, 2001 to Genome Therapeutics' Intellectual Property Policy, including Appendix I thereof ("Invention, Assignment, Non-Disclosure and Covenant Not To Compete"), which imposes certain non-competition, non-solicitation and non-disclosure restrictions on you (such joinder referred to hereinafter as the "Intellectual Property and Non-Compete Agreement 3. TERMINATION OF EMPLOYMENT; SEVERANCE. Your employment under this agreement shall continue until one party delivers to the other party a written notice of termination setting forth the reason, if any, for the termination. If you terminate your employment without Good Reason (as defined below), you will give the Company two month's written notice. a. In the event of termination of your employment by the Company other than for Cause (as defined below) or your termination of employment for Good Reason, the Company will: (i) continue to pay you your Base Salary and provide you with 2 the benefits set forth in paragraph 2.d. hereof for the lesser of (x) a period of nine (9) months from the date of termination or (y) such period of time that it takes you to find comparable employment; (ii) pay you on the date of termination any Base Salary earned but not paid through the date of termination; and (iii) pay you any bonus to which you are entitled in accordance with paragraph 2.b. above, prorated to the date of termination and payable at the time such bonuses are payable to Company executives generally. All severance payments will be payable in accordance with the normal payroll practices of the Company. b. In the event of termination of your employment by the Company for Cause or termination by you other than for Good Reason, the Company will have no further obligations to you other than paying you any Base Salary earned but not paid through the date of termination. c. If within two years of a Change of Control (as defined in Exhibit A hereto) of the Company, (i) you are terminated other than for Cause, or (ii) you terminate your employment with the surviving company due to the fact that (a) the surviving company takes any action that results in a material diminution in your position, authority or duties as such position, authority or duties existed immediately prior to the Change of Control or (b) the surviving company takes any action that would require you to have your principal place of work changed to any location outside a thirty-five (35) mile radius of the City of Boston, then, in the case of either (i) or (ii), the Company will continue to pay your Base Salary (as in effect at the time of your termination) and provide you with the benefits set forth in paragraph 2.d. above for a period of twelve (12) months from the date of termination. The Company will also pay you on the date of termination any Base Salary earned but not paid through the date of termination. All severance payments will be payable in accordance with the normal payroll practices of the Company. If you are eligible for severance payments under this paragraph upon termination, then the provisions of paragraph 4.a. above shall not apply to such termination. d. For purposes of this agreement, "Cause" shall mean: (i) your material failure to perform (other than by reason of disability), or material negligence in the performance of, your duties and responsibilities to the Company or any of its subsidiaries; (ii) your material breach of this agreement or any other agreement between you and the Company or any of its subsidiaries; (iii) the commission of a felony or other crime involving an act of moral turpitude; or (iv) a material act of dishonesty or breach of trust on your part resulting or intended to result, directly or indirectly, in a personal gain or enrichment at the expense of the Company. e. For purposes of this agreement, "Good Reason" shall mean: (i) any action by the Company that results in a material diminution in your position, authority or duties with the Company, excluding any isolated, insubstantial or inadvertent action not taken in bad faith and which is promptly remedied by the Company; (ii) material failure of the Company to provide you compensation and benefits in accordance with the terms of paragraph 2 of this agreement for more than ten business days after notice from you specifying in reasonable detail the nature of the failure or (iii) a Change of Control. 3 f. This agreement shall automatically terminate in the event of your death during employment. In the event you become disabled during employment and, as a result, are unable, in the reasonable judgment of the Board, to continue to perform substantially all of your duties and responsibilities under this agreement, the Company will continue to pay you your Base Salary and to provide you benefits in accordance with paragraph 2.d. above, to the extent permitted by plan terms, for up to twenty-six (26) weeks of disability during any period of three hundred and sixty-five (365) consecutive calendar days. The obligations of the Company to make payments to you due to disability pursuant to this paragraph 4.f. shall be reduced by the amount of any payments you receive pursuant to the Company's disability insurance policy. If you are, in the reasonable judgment of the Board, unable to return to work after twenty-six (26) weeks of disability, the Company may terminate your employment, upon notice to you. 4. MISCELLANEOUS. This agreement sets forth the entire agreement between you and the Company and replaces all prior and contemporaneous communications, agreements and understandings, written or oral, with respect to the terms and conditions of your employment; provided, however, that you and the Company acknowledge and agree that the Intellectual Property and Non-Competition Agreement shall remain in full force and effect. This agreement may not be modified or amended, and no breach shall be deemed to be waived, unless agreed to in writing by you and an expressly authorized representative of the Board. This agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. All payments made hereunder shall be net of any tax or other amount required to be withheld by the Company by law. Neither you nor the Company may make any assignment of this agreement or any interest in it, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this agreement without your consent to one of its subsidiaries or to any Person that acquires substantially all the assets of the Company, by means of a merger or otherwise. Your obligations to the Company under the Intellectual Property and Non-Competition Agreement shall survive the termination of this agreement. 5. NOTICES. Any notices provided for in this agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, and addressed to you at your last known address on the books of the Company or, in the case of the Company, to it at its principal place of business, attention of the Chief Executive Officer, or to such other address as either party may specify by notice to the other actually received. 6. BINDING EFFECT. This agreement shall be binding upon and inure to the benefit of your heirs and representatives and the successors and assigns of the Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to 4 you, expressly to assume and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform this agreement if no such succession had taken place. Regardless of whether such agreement is executed, this agreement shall be binding upon any successor of the Company in accordance with the operation of law and such successor shall be deemed the "Company" for purposes of this agreement. If the foregoing is acceptable to you, please sign this letter in the space provided and return it to me no later than June 29, 2001. At the time you sign and return it this letter will take effect as a binding agreement between you and the Company on the basis set forth above. The enclosed copy is for your records. Sincerely yours, Accepted and Agreed: Steven M. Rauscher ---------------------------------- President and Chief Executive Officer Richard Labaudiniere, Ph.D. Date: ----------------------------- 5 Definition of Change of Control ------------------------------- A "Change of Control" shall be deemed to have occurred if and when: (i) the Company executes an agreement of acquisition, merger, or consolidation which contemplates that after the effective date provided for in the agreement, all or substantially all of the business and/or assets of the Company shall be controlled by another corporation or other entity; provided, however, for purposes of this clause (i) that (A) if such an agreement requires as a condition precedent approval by the Company's shareholders of the agreement or transaction, a Change of Control shall not be deemed to have taken place unless and until such approval is secured and, (B) if immediately after such effective date the voting shareholders of such other corporation or entity shall be substantially the same as the voting shareholders of the Company immediately prior to such effective date, the execution of such agreement shall not, by itself, constitute a "Change of Control;" (ii) any "person" (as such term is used in Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner, directly or indirectly, of securities of the Company that represent 35% or more of the votes that could then be cast in an election for members of the Company's Board; or (iii) during any period of 24 consecutive months, commencing after the effective date of this agreement, individuals who at the beginning of such 24-month period were directors of the Company shall cease to constitute at least a majority of the Company's Board, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two thirds of (A) the directors then in office who were directors at the beginning of the 24-month period, or (B) the directors specified in clause (A) plus directors whose election has been so approved by directors specified in clause (A). 6 -----END PRIVACY-ENHANCED MESSAGE-----