-----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, AffcbBIQyaFV+dfNc2CsvcDgc8QE9vlgtlSzmx0GOsj4C+Qh8N4WPsGZe/gtsHOz EVzAkO0OBQdK6onjF0PePw== 0000950135-96-005167.txt : 19961202 0000950135-96-005167.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950135-96-005167 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10824 FILM NUMBER: 96674098 BUSINESS ADDRESS: STREET 1: 1OO BEAVER ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178935007 MAIL ADDRESS: STREET 1: 100 BEAVER STREET CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: COLLABORATIVE RESEARCH INC DATE OF NAME CHANGE: 19920703 10-K 1 GENOME THERAPEUTICS FORM 10-K 1 2925 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE --- ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended: AUGUST 31, 1996 --------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. For the transition period from __________ to __________. Commission file number: 0-10824 ------- GENOME THERAPEUTICS CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2297484 ------------- ---------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154 - ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (617) 398-2300 ------------- Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $.10 PAR VALUE ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] 2 The aggregate market value of the voting stock held by non-affiliates of the registrant as of November 25, 1996 was approximately $129,258,765. The number of shares outstanding of the registrant's common stock as of November 25, 1996 was 17,503,230. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for use at its Special Meeting of Shareholders in lieu of an Annual Meeting to be held on February 7, 1997 are incorporated by reference into Part III. 2 3 PART I ------ Item 1. BUSINESS -------- OVERVIEW Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the field of genomics -- the identification and characterization of genes. The Company has over ten years of experience in positional cloning, having served as one of the primary researchers under genome programs sponsored by the United States government, and has developed numerous techniques and tools that are widely used in this field. GTC's commercial gene discovery strategy capitalizes on its pioneering work in genomics by applying its high-throughput sequencing technology and positional cloning, its experience and skills in pathogen functional genomics and its bioinformatics capabilities. The two areas of focus are: the discovery and characterization of (i) genes of pathogens that are responsible for many serious diseases and (ii) human disease genes. The Company believes that its genomic discoveries may lead to the development of novel therapeutics, vaccines and diagnostic products by it and its strategic partners. In 1995, the Company entered into two corporate collaborations in connection with its pathogen gene discovery programs, an agreement with Astra and an agreement with Schering-Plough. SCIENTIFIC BACKGROUND Human disease is caused by a variety of factors, including genetic defects, pathogens and environmental factors, with many of the most common life-threatening and chronic diseases believed to have a genetic basis. Genes, which define the inherited characteristics of an organism, are found in all living cells (e.g., human, animal and pathogen cells). Each gene codes for a specific protein that performs a specific function in the body, such as the production of insulin. In humans, a defect in a gene, or the absence of a critical gene, may lead to overproduction, underproduction, improper function or absence of a protein resulting in the onset of disease or an undesirable physical condition. Genetic defects can be inherited or can accumulate during the lifetime of an individual. Human diseases caused by pathogens also have a genetic foundation in that specific genes in the pathogen are required for that organism to survive and infect its human host. The genetic content of an organism consists of DNA, a chemically complex material comprised of four different nucleotides (adenine, guanine, cytosine, and thymine) which are the building blocks of DNA. The sequence in which these nucleotides are linked together in a molecule of DNA determines the informational content of genes. The entire genetic content of an organism, including humans, is referred to as its genome. The human genome consists of 23 pairs of chromosomes. These chromosomes contain approximately 100,000 human genes distributed over approximately three billion nucleotides. Human genes are found in the chromosomes as coding regions of DNA ("exons") interrupted by non-coding regions of DNA ("introns"). The number of exons found in human genes can be quite large as can be the distance between exons. The function of the majority of human DNA is unknown. The DNA sequence of a human gene is transcribed into a messenger RNA molecule ("mRNA") which is processed to contain only the exon sequences. The information in the mRNA molecule is, in turn, translated into a protein product. 3 4 Genomes of pathogens are significantly less complex than the human genome and generally consist of a single chromosome containing several thousand genes distributed over millions of nucleotides. The majority of DNA in pathogens typically is comprised of genes as uninterrupted DNA sequences. Proteins expressed by genes are the targets of most current drugs. As a result, the identification of human disease genes and the protein product of these genes may lead to new therapeutics and diagnostic tests. In the case of diseases caused by pathogens, the identification of the biologically important genes of the pathogen may lead to the development of new drugs and vaccines to combat the pathogen. Moreover, because of the simpler nature of the genomes of pathogens relative to the human genome, efforts to identify and characterize pathogen genes may lead to product development candidates more quickly than human gene discovery efforts. The two principal technologies currently being used to discover genes are sequencing and positional cloning. Sequencing Sequencing is the process of identifying genes through the determination of the order or sequence of nucleotides in DNA fragments. In recent years, high-throughput procedures, such as those being employed by the Company, have been developed which now enable sequencing to be performed on a larger scale and with greater speed than was previously possible. There are generally two ways of applying high-throughput sequencing to discover genes: random discovery and targeted discovery. In random discovery, high-throughput sequencing is used to identify the genes in a genome without regard to the function of the genes. In targeted discovery, high-throughput sequencing is used to identify the genes in a specific chromosomal region or tissue after the region or the tissue has been implicated in or associated with a specific disease. High-throughput sequencing offers a practical way of randomly identifying all of the genes in a pathogen because the genomes of pathogens consist of relatively small numbers of uninterrupted gene sequences. In contrast, the human genome is very large with only small portions of the DNA containing genes which are present as interrupted DNA sequences. As a result, although high-throughput sequencing of the DNA in a particular chromosomal region is used in human gene discovery, sequencing of all of the DNA in the human genome is not a practical means to identify large numbers of human genes. Instead, several groups are randomly discovering large numbers of human genes by sequencing expressed copies of genes, which contain only exons and are called cDNA, which they synthesize from mRNA. Although random discovery permits the rapid identification of pathogen and human genes, it generally does not provide an understanding of the function of a gene or of the gene's role in a particular disease. Any determination of function, or "characterization," of randomly discovered genes is dependent on the detection of structural similarities, or homology, existing between the protein product of such sequenced genes and genes with a known function. Targeted gene discovery by high-throughput sequencing of human DNA typically is applied as part of positional cloning (described below) after a specific chromosomal region has been identified which is believed to contain a particular gene. In this targeted gene discovery procedure, the entire 4 5 chromosomal region is sequenced in an effort to identify, from all the genes present in that region, the one gene located in that region which is responsible for causing the specific disease. Another type of targeted gene discovery involves the use of high-throughput sequencing of cDNA to identify genes believed to cause or maintain a particular disease. In this procedure, which is referred to as "comparative gene expression," mRNA present in healthy and diseased tissues is converted into cDNA and then sequenced to identify the genes whose protein product is present in each. Candidate genes responsible for causing or maintaining the disease are identified by comparing which genes are expressing or producing their protein product and at what level this expression is occurring in both the healthy and diseased tissue. Positional Cloning Positional cloning is the process of analyzing disease inheritance patterns to identify the genes responsible for causing human disease. The first step in positional cloning is the identification of individual families or genetically homogeneous populations in which the occurrence of the disease in individuals within such families or populations is substantially higher than in the general population. Blood samples are collected from individuals within the family or population to provide DNA to be used to identify the region on a particular chromosome where the disease-causing gene is located. This process is referred to as "genetic linkage mapping." In genetic linkage mapping, DNA probes are used to detect genetic markers, regions of DNA that vary in sequence content from person to person. The position of these genetic markers on a chromosome, as detected by the DNA probes, constitutes a genetic linkage map of the chromosome. The chromosomal regions which are initially examined are those regions which have been identified as containing genes that are likely candidates for causing or predisposing an individual to the disease. Because only a limited number of human genes have been mapped to date, most genetic mapping is done genome-wide with a set of DNA probes that span the genome. By following the inheritance patterns of genetic markers and looking for the coinheritance of the genetic markers and the disease, the gene responsible for causing or predisposing an individual to that disease can be located within a specific chromosomal region. Using additional DNA probes, the chromosomal region containing the targeted disease gene can be narrowed to a region consisting of approximately 1,000,000 to 3,000,000 nucleotides in size containing between approximately 30 and 100 genes. Next, libraries comprised of large DNA fragments are examined to find those fragments which contain pieces of DNA from the relevant chromosomal region. The aligning of these DNA fragments so that their resulting order represents how these DNA fragments are related to each other in the relevant chromosomal region is called physical mapping. The physical map of the relevant chromosomal region can then be used to identify the genes which are contained within the region. These genes can be identified in two ways. First, "exon trapping" is used, whereby individual exons within this chromosomal region can be isolated and then used to obtain a complete copy of the gene from a cDNA library. Alternatively or in combination with exon trapping, the DNA of the chromosomal region can be sequenced using high-throughput procedures and, through the use of special computer software, the exons which are contained within the chromosomal region can be predicted. This sequencing information is then used to search cDNA libraries for DNA fragments which contain these presumed exons. 5 6 Each gene identified through this process is a candidate for causing the disease. By determining the sequence of these genes in individuals with the disease and comparing it to the sequence of that gene from healthy individuals, the gene involved in the disease can be identified. DNA sequence differences, which are only found in individuals who have inherited the disease, identify the gene which is believed to be responsible for causing the disease. COMPANY TECHNOLOGY The Company applies its proprietary technologies and know-how in high-throughput sequencing and positional cloning in its gene discovery programs. In its pathogen programs, the Company uses its high- throughput sequencing capabilities to sequence the genomes of pathogens. In its human gene discovery programs, the Company combines its proprietary positional cloning capabilities, together with its high-throughput sequencing capabilities, in its efforts to identify and characterize human genes associated with disease. Both the Company's pathogen and human genomics programs utilize substantial bioinformatics skills to identify genes, tentatively assign them a likely function, and possibly select genes as targets for drug and vaccine development. In its pathogen program, the Company has fully developed functional genomics and drug discovery skills, including drug discovery target validation (via gene "knock-outs") and high-throughput drug discovery assay development. A similar set of functional genomics and drug discovery skills is currently being built in the Company's human genomics program. High-Throughput Sequencing GTC uses an automated process using DNA sequencers, robotics and computers to sequence and analyze genes in its discovery research programs. The Company has reduced its reliance on the multiplex sequencing technology as its primary means to sequence DNA and has transitioned to the use of automated, high-throughput fluorescent-based sequencers. Using its sequencing technology, the Company has randomly sequenced the genomes of H. pylori, Staph. aureus, Streptococcus pneumoniae, and portions of the genomes of other pathogens. The Company has also sequenced a 60,000 nucleotide region of human chromosome 4 thought to contain the gene responsible for FSHD and a 40,000 nucleotide region on human chromosome 10 which was subsequently determined by a third party to contain the gene responsible for a type of thyroid cancer. Positional Cloning The Company has over 10 years of experience in various aspects of positional cloning. GTC was one of the pioneers in the use of genetic linkage mapping and developed numerous techniques and tools that are widely used in the positional cloning field. GTC has considerable experience in identifying genetic markers for specific chromosomal regions. This ability is needed when additional genetic markers are required to narrow the size of the chromosomal region believed to contain the disease gene. The Company also has several libraries of large DNA fragments arranged in a format which facilitates the isolation of DNA fragments from a specific chromosomal region. These libraries are used to develop physical maps of chromosomal regions thought to contain disease genes. In addition, the Company uses specialized tools to trap the exons present in large DNA fragments. These tools are used to isolate exons from the genes present in chromosomal regions believed to contain disease genes. 6 7 Bioinformatics The process of identifying and characterizing genes generates vast amounts of data which must be organized and managed. Such data result from genetic linkage and physical mapping, DNA sequencing and biological experiments performed on identified genes. The use of computers, software and databases to track, process, store, retrieve and analyze data generated by genomic research is referred to as "bioinformatics," which is an emerging subspecialty of genomics and a key capability of any participant in the field. Because of its early work in large-scale genetic linkage analysis, GTC was one of the first companies to develop significant bioinformatics capabilities. The Company continually refines its bioinformatics systems. The Company currently is focusing these efforts in four areas: upgrading and standardizing its bioinformatics hardware and software; developing enhanced data management systems; expanding its software engineering capabilities; and expanding its resources in computational molecular biology. These enhancements are expected to result in more effective data management by allowing for higher-throughput sequencing, providing for smooth integration of laboratory automation, supporting more rapid analyses and comparison of genomic data and facilitating the identification of gene targets for the development of therapeutic, vaccine and diagnostic products. As part of its enhancement of its bioinformatics capabilities, the Company continues to increase the number of its bioinformatics personnel. Functional Genomics (Pathogen) Once the genome of a pathogen has been sequenced, the Company uses its bioinformatics expertise and the information in its proprietary and public databases to identify and locate the genes within the genome and assign features to the genes which helps identify their likely function. Relying on these assigned functions and using the criteria for the product to be developed (drug or vaccine; narrow or broad spectrum), the Company examines sequences form the genomes of various pathogens in its proprietary and public databases and from human cDNAs and the entire genome of Saccharomyces cerevisiae (bakers yeast) to select genes as potential targets for drug or vaccine development The criteria used for selecting gene targets against which small molecules (drugs) will be developed include such features as essentiality, uniqueness, and assayability. The gene should be essential for the survival of the organism. The gene or its protein product should have novel biochemistry or special characteristics to make it unique to the organism(s) against which the drug is to be active. In order to reduce possible side effects, such genes should be absent or have little homology to genes found in humans. The gene or its protein product should have general features which make it possible to construct high-throughput screening assays. If protein or polypeptide vaccines are to be developed, then the criteria used for selecting gene targets include such features as whether the protein product is likely to be secreted or found on the cell surface or in the membrane of the organism or shows homology to a major antigen in other organisms. For small molecule targets , the transition from bioinformatics to functional genomics begins by demonstrating that the gene is essential for the viability or virulence of the organism. That is, is the gene required for the survival of the organism on a culture plate (in vitro) or in an animal model (in vivo). To determine the essentiality of a gene, the Company has developed high-throughput techniques for either directly or randomly inactivating, i.e. "knocking-out", specific genes within the genome of a 7 8 pathogen. After targets have been validated for their biological relevance, the Company then develops screening assays for these targets. These assays include conventional biochemical assays in which the gene target is over-expressed in a recombinant host and the protein product is purified and used to develop a non-cellular, high-throughput assay. Assay systems for gene targets of unknown function include the construction of an over or under-expressing strain for use in high-throughput bio- or genetic whole cell assays. For vaccine targets, functional genomics begins with the demonstration that the gene product is not subject to significant antigenic variation between strains or under different growth conditions. Gene targets are then over-expressed in a recombinant host, and the resulting protein product is purified for testing in an appropriate animal model. Functional Genomics (Human) In many cases, the protein products of a gene or genes causing a human disease are pharmaceutically not suitable as drug discovery targets. Therefore, new targets need to be identified, based on a thorough understanding of the gene's functions, including interaction with other proteins and genes. Thus, in order to bridge the gap between gene discovery and drug discovery target identification, the Company has created a new department of Functional Genomics. This department will focus on new technologies to accelerate the functional analysis of important disease genes, including high-throughput signaling pathway analyses in mammalian and non-mammalian systems, gene knock-outs and transgenics. This will be complemented with high-throughput drug discovery assay development skills which are already implemented in the Company's pathogen program. GTC STRATEGY The Company's objective is to use its sequencing, positional cloning, functional genomics and bioinformatics capabilities to identify gene targets for the development of novel therapeutic, vaccine and diagnostic products in collaboration with pharmaceutical and biotechnology company partners. The Company is using the following strategies to achieve this objective: Sequencing of Pathogens Over the past four years, the Company has devoted a significant portion of its resources to, and obtained considerable experience in, sequencing the genomes of pathogens. The Company has randomly sequenced the genomes of H. pylori, Staph. aureus, Streptococcus pneumoniae, and portions of the genomes of other disease-causing pathogens. The Company plans to continue to identify and characterize genes of these and other pathogens for which the Company believes new or improved therapeutic, vaccine or diagnostic products represent a significant commercial opportunity. In particular, the Company plans to focus its efforts on pathogens where the incidence of antibiotic resistance or other factors limit the use or efficacy of currently available therapies, creating a need for novel antibiotics and vaccines. The Company believes its pathogen gene discovery programs will lead to product development candidates more quickly than human gene discovery efforts. 8 9 Discovery of Human Disease Genes In the human gene discovery area, the Company plans to build on its decade of experience and knowledge in positional cloning, genotyping, sequencing and bioinformatics capabilities by obtaining exclusive rights to collections of DNA samples from relevant family resources in order to map, identify and characterize genes responsible for selected human diseases. The Company actively seeks collaborations with clinicians and academic researchers to obtain these rights. The Company believes that access to these family and other resources will bolster its existing human gene discovery programs and enable it to initiate additional programs directed at human genes associated with significant diseases. Strategic Collaborations The Company continues to seek strategic collaborations with pharmaceutical and biotechnology companies for the development and commercialization of products based on the Company's genomic discoveries. This strategy is designed to provide the Company access to the scientific and product development expertise of its partners and permit the Company to benefit from the commercialization of products based on the Company's gene discoveries without incurring the substantial costs required for pharmaceutical product development and commercialization. The Company generally expects to license (either exclusively or non-exclusively) to its partners most rights to therapeutic products and vaccines (and, depending upon the gene, diagnostic products) which may be developed from the particular genetic database licensed-out by the Company. In exchange, the Company generally expects to receive a combination of up-front license fees, research funding, milestone payments and royalty payments on product sales. To date, the Company has entered into two collaborations relating to pathogens, one with Astra for the development of therapeutic, diagnostic and vaccine products effective against gastrointestinal infections and other diseases caused by H. pylori, and one with Schering-Plough providing for the use by Schering-Plough of the genomic sequence of Staph. aureus to identify new gene targets for the development of antibiotics and vaccines effective against drug resistant infectious organisms. Government Grants and Contracts The Company has served as one of the primary researchers under genomic programs sponsored by the United States government and actively seeks to continue its participation in government sponsored genomics research programs. These programs add to the Company's genomics technology base and increase the number and enhance the expertise of its scientific personnel. From January 1991 through August 1996, the United States government awarded the Company grants and contracts providing for aggregate payments over their terms of approximately $37 million. Moreover, subject to certain rights of the government, under most of these programs the Company becomes the owner of any resulting discoveries or inventions. Non-Exclusive Database Subscriptions GTC has recently developed a database of genomic information from over a dozen pathogens and fungi, PathoGenome[Trademark]. This database is available through non-exclusive subscriptions to pharmaceutical and other drug discovery companies. Together with the sequence modules, GTC will 9 10 offer some functional genomics modules which would allow for exclusive collaborations. As of November 27, 1996, the Company had not sold any subscriptions to the PathoGenome[Trademark] database. Drug Development Programs In order to maximize the commercial utilization of novel drug discovery targets derived from GTC's genomics approach, our alliance strategy with pharmaceutical companies will be complemented by internal drug discovery programs. These internal drug discovery efforts will initially be focused on the Pathogen area, since GTC has extensive expertise in this field based on our existing pharmaceutical alliances. The non-exclusive business strategy of the PathoGenome[Trademark] database allows GTC to choose its own drug discovery targets. The Company's internal programs will include drug discovery target validation through gene knock-outs, protein expression and purification, development of high-throughput assays, and -- via external collaborations -- lead compound identification and lead optimization. In the second phase of the Company's drug development program, the expertise from the Pathogen drug discovery efforts will be transferred to select targets derived from its Human Genetics and Functional Genomics Program. GENE DISCOVERY PROGRAMS The Company is currently conducting gene discovery programs directed at both pathogen genes and human disease genes. The factors the Company considers in determining whether to initiate these programs include the projected commercial potential, the effectiveness of current therapies, the likelihood of attracting a pharmaceutical or biotechnology company as a collaborator, the status of competitive programs and anticipated development costs. Pathogen Programs Antibiotics are the standard therapy for bacterial and fungal infections. During the twelve month period ended August 1996, approximately 300 million prescriptions for antibiotics were written in the United States for such infections and approximately $7 billion was expended in the United States for oral and injectable antibiotics. The approximately 100 antibiotics in use in the United States today are primarily variations of a small number of original antibiotic compounds. In the past decade, a growing number of infections have been caused by pathogens which are becoming resistant to an increasing number of currently available antibiotics. This problem of growing resistance to antibiotics is particularly problematic in the approximately 6,500 acute care hospitals in the United States in which approximately 2.1 million patients each year develop infections. Examples of pathogens that have exhibited resistance to a number of current antibiotics include Staph., M. tuberculosis, Streptococcus pneumonia, and Enterococcus. To date, the primary response of pharmaceutical companies to the resistance problem has been to modify existing antibiotics. However, in many cases, the pathogens that are the targets of these antibiotics have further mutated, often quite rapidly, and thereby developed resistance to the modified antibiotics. The Company believes that the development of novel antibiotics and vaccines based on new pathogen targets identified using genomic information may be less prone to the rapid development of resistance than antibiotics that are only modified versions of existing drugs. Helicobacter pylori. H. pylori is the pathogen believed responsible for causing 90% of duodenal peptic ulcers, the most common type of ulcer, and 70% of gastric peptic ulcers. Peptic ulcer disease is a chronic inflammatory condition of the stomach and duodenum. Although frequently asymptomatic, all 10 11 persons infected by H. pylori have chronic gastric inflammation (gastritis). It is estimated that approximately 4.5 million people suffer from active peptic ulcers each year, and approximately 500,000 new cases are diagnosed annually in the United States. Approximately 600,000 patients are hospitalized each year in the United States for peptic ulcer disease. Serious complications occur in approximately one-third of these cases, including intestinal obstruction, upper gastrointestinal hemorrhage and perforation. Further, each year over 6,000 deaths in the United States are directly caused by ulcer disease, and peptic ulcers are a contributing factor in an additional 11,000 deaths. Approximately 10% of the population in the United States will develop peptic ulcer disease during their lifetimes. Studies have also linked H. pylori with the development of certain stomach cancers and coronary heart disease. The most common medication for treating peptic ulcers are anti-secretory drugs, such as H2 antagonists (e.g., Tagamet and Zantac), and proton pump inhibitors (e.g., Prilosec[Trademark]). Although anti-secretory drugs reduce ulcer symptoms by inhibiting gastric acid secretion, they do not eradicate the H. pylori which is the primary cause of the disease. In 1994, the market for such drugs for the treatment of ulcers totaled approximately $7 billion worldwide. An approach being developed to treat recurrent peptic ulcer disease recognizes the role of H. pylori and involves the administration of antibiotics, often in combination with bismuth or anti-secretory drugs. The most effective antibiotic treatments may be complicated by the need to treat for prolonged periods with multiple drugs, by side effects and problems with patient compliance, by relapses if treatment is interrupted, and by the development of antibiotic-resistant strains of the bacteria. Using its sequencing technology, the Company completed the random sequencing of the genome of a clinical isolate of H. pylori in December 1994. Under its agreement with Astra, the Company is identifying the genes critical to the survival of H. pylori and proteins on the surface of the bacterium that are believed to be likely targets for therapeutic products and vaccines, respectively. See "Collaborative Agreements -- Pharmaceutical Company Collaborations." Staphylococcus aureus. Staph. is the most common cause of skin, wound and blood infections. Staph. infections are typically treated with antibiotics. The percentage of Staph. isolates resistant to penicillin and certain other antibiotics increased from 2.4% in 1975 to 29% by 1991. Moreover, clinical isolates of Staph. exist which are resistant to all known antibiotics other than vancomycin. Vancomycin resistance has appeared in Enterococcus, a pathogen related to Staph., which has raised the possibility that untreatable strains of Staph. could appear. Using its high-throughput sequencing capabilities, the Company has randomly sequenced the genome of a clinical isolate of methicillin-resistant Staph. Under its agreement with Schering-Plough, the Company is using the sequence of Staph. aureus to identify and validate gene targets for the development of new small molecules to treat pathogens which have become resistant to current antibiotics. Mycobacterium tuberculosis. M. tuberculosis is the pathogen responsible for causing tuberculosis. The clinical manifestations of tuberculosis include: pulmonary tuberculosis, the most highly infectious form; tuberculous meningitis, the major form causing mortality in children; and disseminated tuberculosis of bone or other internal organs, forms increasingly found in AIDS patients where it causes chronic wasting and debilitation. Approximately one-third of the world's population is infected with M. tuberculosis, but harbors the pathogen in an inactive form. Such individuals have a 10% lifetime risk of developing the disease. The fatality rate of untreated tuberculosis is between 40% and 60%. Each year, there are an estimated 8 million new cases of tuberculosis worldwide and 2.9 million deaths from the disease, making tuberculosis the leading cause of death in the world from a single pathogen. While the disease is primarily associated with the developing world, tuberculosis is not uncommon in immuno- 11 12 compromised patients, including cancer and AIDS patients. In the United States, outbreaks of infection have occurred in health care workers and residents of homeless shelters and prisons. The primary treatment for tuberculosis is the use of antibiotics. A problem of effectively treating tuberculosis with antibiotics is compliance with the long drug treatment regimens, often as long as six months. In addition, strains of M. tuberculosis have become resistant to isoniazid and rifampicin, two principal antibiotics used to treat tuberculosis. M. bovis vaccine, the most widely used vaccine in the world, protects against disseminated tuberculosis and tuberculosis meningitis in children. However, in clinical trials this vaccine has been shown to be only partially effective against pulmonary tuberculosis in adults. Using its high-throughput sequencing technology, the Company has sequenced over 800,000 bases of the genome of M. tuberculosis, which the Company estimates represents approximately 20% of the total genome of this pathogen. See "Collaborative Agreements--Government Collaborations." HUMAN GENE DISCOVERY PROGRAMS GTC has initiated a variety of programs to identify human genes that are responsible for various diseases. In some of these programs, the Company is using positional cloning strategies, while in others it is employing a multi-faceted approach incorporating positional cloning and comparative gene expression. The Company's current primary human gene discovery programs are directed at asthma, cancer, osteoporosis and neuropsychiatric disorders. Asthma. Asthma is a significant health problem that affects approximately 5% of the U.S. population. Both twin and family studies suggest a strong genetic component in the etiology of the disease. Despite a clear genetic contribution to the disease, no consistent mode of inheritance has been observed, suggesting that multiple genetic factors as well as environmental influences play a role. The Company has initiated a research program to use positional cloning strategies to identify genes involved in the etiology of asthma. Newly identified asthma genes will facilitate the development of superior diagnostics and novel therapeutic agents. This program is being conducted in collaboration with a leading academic asthma research center which provides access to appropriate family resources and clinical insight to asthma pathophysiology. Osteoporosis. Osteoporosis is a major health problem that affects roughly 50% of post-menopausal women and nearly 25% of elderly men. In the U.S. alone, there are in excess of 1.3 million osteoporotic bone fractures per year. As defined by low bone mineral density, both twin and family studies suggest a strong genetic component to the disease. The Company has initiated a research program to identify genes involved in the etiology of osteoporosis. Given the complex nature of this disorder, and the lack of information about biochemical defects involved, the Company is using a multi-faceted approach including positional cloning and comparative gene expression strategies to identify osteoporosis genes. The Company expects the identification of genes regulating bone density and disease progression will significantly influence the development of diagnostic tests and the discovery of novel therapeutic agents. Prostate Cancer. Cytogenetic studies suggest the presence of tumor suppressor genes on human chromosome 10 involved in prostate, endometrial and breast cancer. The Company is employing a variety of mapping and gene identification technologies to clone these cancer genes. Candidate tumor 12 13 variety of mapping and gene identification technologies to clone these cancer genes. Candidate tumor suppressor genes will be analyzed functionally to dissect signal transduction pathways to facilitate identification of drug discovery targets. Other Programs. The Company is also conducting preliminary research on schizophrenia and manic depressive illness. These neuropsychiatric disorders affect large numbers of people in the U.S. and throughout the world and are believed to have a genetic basis. The Company is currently evaluating various family resources for research on these diseases and may expand its research in this area. COLLABORATIVE AGREEMENTS An important part of the Company's strategy is to pursue strategic collaborations with pharmaceutical and biotechnology companies for the development and commercialization of products based on the Company's genomic discoveries. The Company also plans to continue to seek government grants and research contracts related to the Company's technology and research programs. Pharmaceutical Company Collaborations Astra. In August 1995, the Company entered into a collaboration agreement with Astra to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infections 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 also provides for a four-year research collaboration to further develop and annotate the Company's H. pylori genomic sequence database, identify therapeutic and vaccine targets and develop appropriate biological assays. This research is being directed by a Joint Management Committee and a Joint Research Committee, each consisting of representatives from both parties. Under this agreement, Astra agreed to pay the Company a minimum of approximately $11 million and, subject to the achievement of certain product development milestones, up to approximately $22 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. Of such fees, $500,000 are creditable against any future royalties payable to GTC by Astra under the agreement. The Company received approximately $8.0 million in license fees, expense allowances and research funding under the Astra agreement through August 31, 1996. For the Company's fiscal years ended August 31, 1995 and 1996, revenue recognized by the Company under its agreement with Astra accounted for approximately 31% and 21%, respectively, of the Company's total revenue. Astra is obligated to provide funding for the research program for a minimum of two and one-half years; Astra may terminate the research collaboration at any time after the second year on six months' notice. The Company will also be entitled to receive royalties on Astra's sale of any products (i) protected by the claims of patents licensed exclusively to Astra by the Company pursuant to the agreement, or (ii) the discovery of which was enabled in a significant manner by the genomic database licensed to Astra by the Company. GTC has the right under certain circumstances to convert Astra's license to a nonexclusive license in the event Astra is not actively pursuing commercialization of the licensed technology. 13 14 Schering-Plough. In December 1995, the Company entered into a collaboration and license agreement with Schering-Plough providing for the use by Schering-Plough of the genomic sequence of Staph. aureus to identify new gene targets for development of antibiotics effective against drug-resistant infectious organisms. As part of this agreement, the Company granted Schering-Plough exclusive access to certain of the Company's genomic sequence databases. The Company also granted Schering-Plough a non-exclusive 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. Under the agreement, Schering-Plough made an up-front payment to the Company of $3 million. In addition, upon completion of certain development milestones, Schering-Plough has agreed to pay the Company a minimum of an additional $10.3 million in research funding and milestone payments. Subject to the achievement of additional product development milestones and Schering-Plough's election to extend the research collaboration, Schering-Plough has agreed to pay the Company up to an additional approximately $40.5 million (inclusive of the $10.3 million referred to in the previous sentence) in research funding and milestone payments. The Company received approximately $7.9 million in up-front license fees, research funding and milestone payments through August 31, 1996. For the Company's fiscal year ended August 31, 1996, revenue recognized by the Company under its agreement with Schering-Plough accounted for approximately 37% of the Company's total revenue. 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. GTC has also granted Schering-Plough a right of first negotiation if during the term of the research plan GTC desires to enter into a collaboration with a third party with respect to the development or sale of any compounds which are targeted against, as their primary indication, the pathogen that is the principal subject of the Company's agreement with Schering-Plough. 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. Subject to certain limitations, GTC retained the rights to make, use, and sell diagnostic products developed based on the Company's genomic database licensed to Schering-Plough or the technology developed in the course of the research program. Government Collaborations Since 1989, the Company has been awarded a number of grants and contracts by various agencies of the United States government pursuant to the government's genomics programs. The scope of the research covered by the grants and contracts encompasses technology development, sequencing production, technology automation projects and positional cloning projects. Among other things, these grants and contracts have provided significant funds for the Company's M. tuberculosis, FSHD and manic depressive illness gene discovery programs. These grants and contracts represent an important aspect of the Company's strategy because they add to the Company's genomics technology and enable the Company to increase the number and enhance the expertise of its scientific personnel. 14 15 Under the Company's government grants, the Company has, subject to certain rights of the government described below, exclusive ownership rights to any commercial applications of inventions first reduced to practice under the grants, including all gene discoveries and technology improvements created or discovered. The Company is strongly encouraged under certain of the government grants to make data and materials resulting from the research public within 180 days from the date such data and materials are developed. Under the Company's government research contracts, the government has ownership rights in the data, clones, genes and other material derived from the material furnished to the Company by the government, and the Company has ownership rights in other inventions developed solely by the Company under the contracts. The government also retains certain rights, described below under the caption "Patents and Proprietary Technology", to the inventions first reduced to practice by the Company under the government grants and contracts. The Company currently has two principal government research contracts, one with the National Institute of Neurological Disorders and Stroke relating to the preparation of DNA samples for sequencing, the isolation of DNA fragments and genotyping, and one with the NIMH relating to the identification of genes responsible for manic depressive illness. See "Patent and Proprietary Technology" and "Human Gene Discovery Programs -- Other Programs." The Company's government grants and research contracts include both cost-plus-fixed-fee arrangements and fixed price contracts. Under cost-plus-fixed-fee arrangements, the Company receives reimbursement of its direct costs associated with the research, a portion of its indirect or overhead costs as well as fees in excess of such costs. The amount of overhead reimbursement varies with each contract. Under fixed price contracts, the Company agrees to perform a particular research plan for an agreed upon payment. From January 1991 through August 1996, the United States government awarded the Company grants and contracts providing for aggregate payments over their terms of approximately $37 million. These grants and research contracts are typically funded annually and are subject to the appropriation by the United States Congress of funding in each year. In addition, funding under these grants and contracts may be discontinued or reduced at any time by the United States Congress. For the Company's fiscal year ended August 31, 1996, the Company recognized revenue under its government collaborations of $6.8 million which accounted for approximately 32% of the Company's total revenue. PATENTS AND PROPRIETARY TECHNOLOGY The Company's commercial success will be dependent in part on its ability to obtain patent protection on genes, or products based on genes, discovered by it. The current criteria for obtaining patent protection for partially sequenced genes and for genes whose biological functions have not been characterized are unclear. The Company's current strategy is to apply for patent protection upon the identification of a novel gene or novel gene fragment and pursue claims to these gene sequences as well as equivalent sequences, such as substantially homologous sequences. Where the biological function of a gene or gene fragment has not been characterized at the time of filing a patent application, the Company intends to supplement such patent filing as soon as additional information with respect to the biological function of such gene or gene fragment is available. However, there can be no assurance that the Company will be able to obtain patent protection on such genes or gene fragments, and even if such patents are issued, the scope of the coverage or protection provided by any such patents is uncertain. In addition, there can be no assurance that any patents, if issued, will provide protection against any competitors, will provide the Company with competitive advantages, will provide protection for any 15 16 therapeutic, vaccine or diagnostic products based on the Company's gene discoveries or will not be successfully challenged by others. Furthermore, others have filed and are likely to file in the future patent applications which have not yet been published covering genes or protein sequences similar or identical to the Company's. No assurance can be given that any such patent application will not have priority over patent applications filed by the Company or that any patent applications filed by the Company will result in issued patents. There have been, and continue to be, intensive discussions on the scope of patent protection for both gene fragments and full-length genes. In November 1995, the PTO scheduled a hearing and requested public comment on the patenting of a complete genome of an organism as well as the patenting of human gene fragments. Although the PTO canceled the hearings and request for comments, they may be rescheduled at a future date. There can be no assurance that these or other proposals will not result in changes in, or interpretations of, the patent laws which will adversely affect the Company's patent position. The PTO issued new Utility Guidelines in July 1995 that address the requirements for demonstrating utility, particularly in inventions relating to human therapeutics. While the guidelines do not require clinical efficacy data for issuance of patents for human therapeutics, the guidelines have been issued only recently and there can be no assurance that the PTO's interpretations of such guidelines, and any changes to such interpretations will not delay or adversely affect the Company's or its collaborators' ability to obtain patent protection. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. The Company has filed patent applications and will continue to do so with respect to a number of full length genes and corresponding proteins and partial genes resulting from its pathogens program. The Company plans to file foreign counterparts of these U.S. applications within the appropriate time frames. These applications seek to protect these full length and partial gene sequences and corresponding proteins, as well as equivalent sequences, such as substantially homologous sequences, and products derived therefrom and uses therefor. These applications also identify possible biological functions for the genes and gene fragments based in part on a comparison to genes or gene fragments included in public databases but do not contain any laboratory or clinical data with respect to such biological functions. Under the Company's government grants and contracts, the government has a statutory right to practice or have practiced, and, under certain circumstances (including inaction on the part of the Company or its licensees to achieve practical application of the invention or a need to alleviate public health or safety concerns not reasonably satisfied by the Company or its licensees), to grant to other parties licenses under any inventions first reduced to practice under the government grants and contracts. In addition, under the Company's government research contracts, the government has ownership rights in the data, clones, genes and other material derived from the material furnished to the Company by the government, and the Company has ownership rights in other technology developed solely by the Company under the contracts. Under the Company's CRADA with the NIH, any inventions or discoveries made in whole or in part by NIH researchers are the property, either solely or jointly with the Company, of NIH, and the Company has the right to negotiate with the NIH to obtain an exclusive license to such inventions and discoveries. The Company is also strongly encouraged under certain government grants to make data and materials resulting from the research public within 180 days from the date such data and materials are developed. If this requirement results in premature publication 16 17 of the Company's discoveries and inventions, the Company's ability to obtain patent protection for such discoveries and inventions may be adversely affected. The Company also relies on trade secret protection for its confidential and proprietary information. There can be no assurance that the Company can maintain adequate protection for its trade secrets or other proprietary information. In addition, while the Company has entered into proprietary information agreements with its employees, consultants and advisors, there can be no assurance that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. Moreover, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its trade secrets. COMPETITION The Company faces intense competition both with respect to its human gene and pathogen gene discovery programs. There is a finite number of genes in the human genome and the Company believes virtually all of such genes will be identified within two to three years albeit largely without known function. The Company also believes that the primary genes that cause or predispose individuals to most common diseases will be identified and characterized within five to eight years. In addition, the Company believes that the genomes of many commercially important pathogens will be sequenced within two to three years. Competitors of the Company include pharmaceutical and biotechnology companies both in the United States and abroad. In addition, significant research to identify and sequence genes is being conducted by universities, other non-profit research institutions and United States and foreign government-sponsored entities. A number of commercial, scientific and governmental entities are attempting to sequence human genes and the genomes of other organisms. Other entities are utilizing positional cloning to identify and characterize human disease genes. Certain of the Company's competitors' human gene programs are more advanced than the Company's and any one of these companies or other entities may discover and establish a competitive advantage in one or more pathogen development programs which the Company has commenced. The Company also faces competition in its human gene discovery programs in gaining access to family DNA samples for use in positional cloning. The Company believes that its ability to compete is dependent, in part, upon its ability to create and maintain advanced technology, the speed with which it can identify and characterize the genes involved in human diseases, the Company's ability to rapidly sequence the genomes of selected pathogens, its collaborators' ability to develop and commercialize therapeutic, vaccine and diagnostic products based upon the Company's gene discoveries, as well as its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary technology or processes and secure sufficient capital resources for the expected substantial time period between technological conception and commercial sales of products based upon the Company's gene discoveries. Many of the Company's competitors have greater research and product development capabilities and financial, scientific, marketing and human resources than the Company. These competitors may succeed in identifying or sequencing genes or developing products earlier than the Company or its collaborators, obtaining authorization from the FDA for such products more rapidly than the Company or its 17 18 collaborators or developing products that are more effective than those proposed to be developed by the Company or its collaborators. Any potential products based on genes identified by the Company will face competition both from companies developing gene-based products and from companies developing other forms of diagnosis or treatment for the particular diseases targeted by the Company. There can be no assurance that products developed by others will not render the products which the Company or its collaborators may seek to develop obsolete or uneconomical or result in diagnoses, treatments or cures superior to any products developed by the Company or its collaborators, or that any product developed by the Company or its strategic collaboration partners will be preferred to any existing or newly developed technologies. GOVERNMENT REGULATION Regulation by governmental entities in the United States and other countries will be a significant factor in the development, manufacturing and marketing of any products which may be developed by the Company or its collaborators. The nature and the extent to which such regulation may apply to the Company or its collaborators will vary depending on the nature of any such products. Virtually all of the Company's or its collaborators' pharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic and vaccine products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA in the United States and similar health authorities in foreign countries. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources. The FDA regulates human therapeutic products in one of three broad categories: drugs, biologics, or medical devices. Products based on the Company's technologies could potentially fall into all three categories. Generally, in order to gain FDA pre-market approval of a new drug or biological product, a company first must conduct pre-clinical studies in the laboratory and in animal model systems to gain preliminary information on an agent's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug application ("IND"), which the FDA must review before human clinical trials of a drug or biologic can commence. In order to commercialize any products, the Company or its collaborators will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety, efficacy and potency that are necessary to obtain FDA approval of any such products. Clinical trials are normally done in three phases and are likely to take a number of years to complete. After completion of clinical trials of a new product, FDA marketing approval must be obtained. If the product is classified as a new drug, the Company or its collaborators will be required to file a New Drug Application ("NDA") and receive approval before commercial marketing of the drug. If the product is classified as a biologic (e.g., a vaccine), the Company or its collaborator will be required to file a product license application and an establishment license application ("ELA") and receive approval of both before commercial marketing of the product can take place. The testing and approval processes require substantial time and effort and there can be no assurance that any approvals will be granted on a timely basis, if at all. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable 18 19 regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. In addition, biologic products may be subject to batch certification and lot release requirements. To the extent that any of the Company's products involve recombinant DNA technology, additional layers of government regulation and review are possible. For marketing outside the United States, the Company will also be subject to FDA export regulations and foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The Company or its collaborators may also develop diagnostic products based upon the human or pathogen genes that the Company identifies. The Company believes that the diagnostic products to be developed by the Company or its collaborators are likely to be regulated by the FDA as devices rather than drugs or biologics. The nature of the FDA requirements applicable to such diagnostic devices depends on their classification by the FDA. A diagnostic device developed by the Company or a collaborator would most likely be classified as a Class III device, requiring pre-market approval. Obtaining pre-market approval involves the costly and time-consuming process, comparable to that for new drugs or biologics, of conducting pre-clinical studies, obtaining an investigational device exemption to conduct clinical tests, filing a pre-market approval application, and obtaining FDA approval. Again, there can be no assurance that any approval will be granted on a timely basis, if at all. The Company's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. The Company is subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state, federal and local laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any liability could exceed the resources of the Company. MANUFACTURING AND MARKETING The Company does not generally expect to directly manufacture or market products in the near term. However, the Company may, in the future, consider taking such actions if it believes they are appropriate under the circumstances. The Company has no recent experience in developing pharmaceutical products or in manufacturing or marketing products. The Company may not have the resources to develop or to manufacture or market by itself any products based on genes identified by it. In the event the Company decides to establish a manufacturing facility, the Company will require substantial additional funds and will be required to hire and train significant additional personnel and comply with the extensive "good manufacturing practice" regulations applicable to such a facility. In addition, if any products produced at the Company's facilities were regulated as biologics, the Company would be required to file and obtain approval of an ELA for its facilities. HUMAN RESOURCES As of August 31, 1996, the Company had 176 full-time employees, of whom 155 were engaged in research and development activities, and 21 in general and administrative functions. Twenty-eight of the Company's employees hold Ph.D. degrees and 44 others hold other advanced degrees. 19 20 None of the Company's employees are covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good. FACILITIES The Company's executive offices and its research and development activities are conducted at facilities located at 100 Beaver Street and 1365 Main Street, Waltham, Massachusetts. The Company has leased approximately 14,000 square feet of space at 1365 Main Street under a lease expiring December 31, 1997 with the option for a five-year renewal. The Company's executive offices and additional labs are located at 100 Beaver Street, Waltham, Massachusetts, where the Company has leased approximately 23,305 square feet of space under a lease expiring July 1999 with the option for a five-year renewal. On July 29, 1996, the Company negotiated an amendment to its current lease of 100 Beaver Street, giving it access to the entire building (approximately 80,000 sq. ft.) in two phases. The new lease expires on November 15, 2006, subject to the right of the Company to extend the lease for two consecutive five-year periods. During fiscal 1996, the Company incurred aggregate rental costs, excluding maintenance, taxes and utilities, for all facilities of approximately $472,000. The aggregate minimum rental cost to be paid in Fiscal 1997 is expected to be approximately $1,400,000. Item 3. LEGAL PROCEEDINGS ----------------- None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- None. PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER -------------------------------------------------------------------- MATTERS ------- The Company's common stock is traded on the NASDAQ National Market System (ticker symbol "GENE"). The table below sets forth the range of high and low quotations for each fiscal quarter of the Company during 1996 and 1995 as furnished by the National Association of Securities Dealers Quotation System.
1996 1995 High Low High Low ---- --- ---- --- First Quarter 8 1/2 6 5/8 2 11/16 1 13/16 Second Quarter 15 7 2 7/8 1 1/2 Third Quarter 15 8 1/2 6 1/4 2 1/2 Fourth Quarter 12 1/8 6 1/8 8 5/8 5 1/8
20 21 As of November 25, 1996, there were approximately 1,382 shareholders of record of the Company's Common Stock. The Company has not paid any dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on its Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements and general business conditions. 21 22 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended August 31, 1992 1993 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------- Revenues: Collaborative research, license fees, product, service and royalties $ 952,991 $ 1,254,577 $ 399,987 $ 3,961,161 $12,675,836 Government research 4,170,635 5,021,975 6,077,346 7,014,280 6,795,393 Interest income 384,710 173,788 141,584 231,662 1,785,164 Total $ 5,508,336 $ 6,450,340 $ 6,618,917 $11,207,103 $21,256,393 Net income (loss) $(2,078,711) $(3,481,857) $(1,078,718) $ 585,204 $ 1,920,710 Net income (loss) per common share $ (0.19) $ (0.33) $ (0.10) $ 0.05 $ 0.11 Weighted average common and common equivalent shares 10,662,551 10,668,628 11,097,224 12,961,734 18,129,794 Cash, cash equivalents, restricted cash and long and short-term marketable securities $ 7,144,140 $ 3,915,306 $ 4,311,854 $ 9,011,247 $53,768,562 Working capital 5,768,331 3,264,454 3,244,260 5,498,782 25,904,641 Total assets 9,354,613 5,288,691 5,910,682 11,528,674 63,279,017 Shareholders' equity $ 7,081,311 $ 3,676,333 $ 4,224,555 $ 7,238,503 $54,312,758
22 23 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS OVERVIEW ------------------------------ The Company is engaged in the field of genomics -- the discovery and characterization of genes. Currently, the Company's primary activity is genomic research and development. For the past several years, the Company's primary source of revenues have been government research grants and contracts and collaborative agreements with pharmaceutical company partners. The Company entered into corporate collaborations with Astra Hassle AB ("Astra") relating to H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd. (collectively, "Schering-Plough") in December 1995 providing for the use by Schering-Plough of the genomic sequence of a specific pathogen that the Company is sequencing to identify new gene targets for the development of novel antibiotics. The Company will not receive significant product revenues on a sustained basis until such time, if any, at which products based on the Company's research efforts are commercialized. The Company's product development strategy is to enter into collaborations with pharmaceutical and biotechnology companies whereby these corporate partners will provide most of or all of the financial and other resources required to complete the development and to commercialize products based on the Company's genomics research in exchange for a variety of license and milestone payments, research support and royalties. In order for a product to be commercialized based on the Company's research, it will be necessary for the collaborators to conduct preclinical tests and clinical trials, obtain regulatory clearances and make manufacturing, distribution and marketing arrangements. Accordingly, the Company does not expect to receive royalties based on product revenues for many years. For fiscal 1994, 1995, and 1996, the Company expended $5,522,000, $7,892,000 and $14,074,000, respectively, on research and development, of which $5,144,000, $6,414,000 and $6,150,000, respectively, was sponsored by the United States government. As of August 31, 1996, the Company had outstanding approximately $8,129,000 of government grants and research contracts under which services were yet to be performed. These grants and contracts call for these services to be performed over approximately the next 5 to 36 months. The Company's government grants and contracts are typically funded annually and are subject to appropriation by the United States Congress each year. Funding may be discontinued or reduced at any time by the Congress. As of August 31, 1996, the funded portion of these grants and contracts was $5,841,000. For fiscal 1994, 1995 and 1996, revenue recognized pursuant to United States government grants and research accounted for approximately 92%, 63% and 32%, respectively, of the Company's total revenues. The decrease in government research revenue, as a percentage of total revenues, over the last two years reflects a substantial increase in revenue derived from the Company's collaborative partnerships. The Company plans to continue to seek government grants and contracts in the genomics field and to enter into additional corporate partnering arrangements with the goal of advancing the Company's genomic technologies and gene discovery programs and of obtaining revenues sufficient to cover a portion of the Company's cash requirements. There can be no assurance that the Company will be able successfully to pursue this strategy. The Company has incurred significant losses, since inception, with an accumulated deficit of approximately $33,254,000 at August 31, 1996. The Company's results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the timing and composition of funding under existing and new government grants and contracts and collaborative 23 24 agreements. The Company is subject to risks common to companies in its industry including unproven technology and business strategy, availability of, and competition for, family resources, reliance upon collaborative partners and others, reliance on United States government funding, 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, health care reform and related matters, product liability exposure, and volatility of the Company's stock price. RESULTS OF OPERATIONS - --------------------- REVENUE - ------- Total revenues increased 90% from $11,207,000 in fiscal 1995 to $21,256,000 in fiscal 1996 and increased 69% from $6,619,000 in fiscal 1994 to $11,207,000 in fiscal 1995. Collaborative research, license fees, product and royalties increased 220% from $3,961,000 in fiscal 1995 to $12,676,000 in fiscal 1996 primarily due to milestone payments, license fee and sponsored research revenue of $4,539,000 and $7,868,000 received under the Company's collaboration agreements with Astra and Schering-Plough, respectively. Collaborative research, license fees, product and royalties increased from $400,000 in fiscal 1994 to $3,961,000 in fiscal 1995 primarily due to a $3,500,000 payment received from Astra in August 1995. Government research revenue decreased slightly by 3% from $7,014,000 in fiscal 1995 to $6,795,000 in fiscal 1996 and increased 15% from $6,077,000 in fiscal 1994 to $7,014,000 in fiscal 1995. The decrease in government research revenue in fiscal 1996 was primarily attributable to a decrease in research effort on existing government grants and contracts. The increase in government research revenue in fiscal 1995 was primarily attributable to the commencement of work performed under the Company's 3-year, $10 million Genome Sequencing Center grant from the NIH and existing government grants and contracts. Revenue derived from government research grants and contracts is generally based upon direct cost such as labor, laboratory supplies as well as an allocation for reimbursement of a portion of overhead. The Company had royalty revenue of $148,000, $91,000 and $127,000 in fiscal 1994, 1995 and 1996, respectively, from the Company's rennin patent. In October 1996, the Company assigned its rights to the rennin patent to Pfizer, Inc. for $671,000 and no further royalty payments will be received. Interest income increased 669% from $232,000 in fiscal 1995 to $1,785,000 in fiscal 1996 and increased 63% from $142,000 in fiscal 1994 to $232,000 in fiscal 1995 reflecting the increase in funds available for investment as a result of proceeds received from the sale of Common Stock through a public offering in February 1996, sale of Common Stock in a private placement in March 1995, as well as payments received under the Astra and Schering-Plough collaborations. COST AND EXPENSES - ----------------- Total cost and expenses, excluding noncash charges for stock option grants, increased 61% from $10,596,000 in fiscal 1995 to $17,015,000 in fiscal 1996 and increased 38% from $7,671,000 in fiscal 1994 to $10,596,000 in fiscal 1995. Research and development expense, which includes company-sponsored research and development, research funded pursuant to arrangements with the Company's corporate collaborators and cost of product revenue, increased 436% from $1,478,000 in 24 25 fiscal 1995 to $7,924,000 in fiscal 1996 and increased 291% from $378,000 in fiscal 1994 to $1,478,000 in fiscal 1995. The increase in research and development expense in both fiscal 1995 and fiscal 1996 was primarily related to the Company's expansion of its pathogen and gene discovery programs. The increase consisted primarily of increases in payroll and related expenses, laboratory supplies and overhead expenses. The Company expects to continue to increase research and development expenditures, particularly with respect to its human gene discovery programs. The cost of government research decreased 4% from $6,414,000 in fiscal 1995 to $6,150,000 in fiscal 1996 and increased 25% from $5,144,000 in fiscal 1994 to $6,414,000 in fiscal 1995. The fluctuation in cost of government research in both fiscal 1996 and fiscal 1995 was due primarily to the fluctuation in government research revenue. Cost of government research, as a percentage of government research revenue, was 91%, 91% and 85% in fiscal 1996, 1995 and 1994, respectively. Selling, general and administrative expenses increased 9% from $2,704,000 in fiscal 1995 to $2,941,000 in fiscal 1996 and increased 26% from $2,150,000 in fiscal 1994 to $2,704,000 in fiscal 1995. The increase in selling, general and administrative expenses in fiscal 1996 was primarily due to increases in payroll and related expenses, consulting and interest expense. The increase in selling, general and administrative expenses in fiscal 1995 was primarily due to approximately $495,000 of severance and relocation expenses as well as increases in payroll and related expenses and facilities expenses. In fiscal 1996, the Company's Board of Directors granted certain employees, officers, and directors options to purchase an aggregate of 440,000 shares of Common Stock which were subject to shareholder approval. The options were granted at exercise prices ranging from $7.25 to $9.56 per share, in each case, the fair market value of the Common Stock on the date the Company's Board of Directors granted the option. The Company recorded deferred compensation of $2,565,000 which represents an amount equal to the difference between the fair market value of the Common Stock on February 16, 1996, the date of shareholder approval, and the per share exercise price of the options. The Company recorded $2,320,000 of the $2,565,000, as compensation expense in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Since September 1, 1992, the Company's primary sources of cash have been revenue from government grants and contract, revenue from collaborative research agreements, borrowing under capital leases and proceeds from sale of equity securities. In fiscal 1994, the Company received net proceeds of approximately $1,601,000 from the sale of Common Stock and the exercise of certain stock options. In fiscal 1995, the Company received net proceeds of approximately $2,403,000 from the private sale of Common Stock and warrants and the exercise of stock options. In August 1995, the Company entered into a collaborative agreement with Astra under which it received $3,500,000. In fiscal 1996, the Company received $4,421,000 in collaborative payments from Astra consisting of a $1,500,000 milestone payment and $2,921,000 in sponsored research. In December 1995, the Company entered into a collaborative agreement with Schering-Plough under which it received a $3,000,000 up-front license fee, $2,750,000 in milestone payments and $1,500,000 in sponsored research payments through August 31, 1996. In February 1996, the Company closed a public offering of 3,000,000 shares of its Common Stock at $13.00 per share, resulting in proceeds of approximately $36,007,000, net of issuance costs. 25 26 In March 1996, the Company sold an additional 450,000 shares of its Common Stock in the underwriter's over-allotment, resulting in proceeds of $5,515,000, net of issuance costs. Additionally, the Company received proceeds of $1,311,000 from the issuance of 534,831 shares of Common Stock resulting from the exercise of stock options and warrants during fiscal 1996. As of August 31, 1996, the Company had cash, cash equivalents, restricted cash and long and short-term marketable securities of approximately $53,769,000. The Company has various arrangements under which it can finance up to $9,000,000 of certain office and laboratory equipment and leasehold improvements. Under these arrangements, the Company is required to maintain certain financial ratios, including minimum levels of tangible net worth, total indebtedness to tangible net worth, maximum loss, and minimum restricted cash balances. At August 31, 1996, the Company had approximately $2,267,000 available under these arrangements and had an outstanding balance of approximately $5,335,000 which is repayable over the three year period ending August 1999. The Company's operating activities provided cash of approximately $2,976,000 and $2,693,000 in fiscal 1996 and 1995, respectively, and used cash of approximately $639,000 in fiscal 1994. Net cash provided in fiscal 1996 and 1995 was comprised primarily of deferred contract revenue, accounts payable, accrued expenses and operating income. Cash was utilized in fiscal 1994 primarily to fund the Company's operating loss. The Company's investing activities used cash of approximately $40,258,000 and $1,550,000 in fiscal 1996 and 1994, respectively. The Company's investing activities provided cash of approximately $5,600 in fiscal 1995. The Company used cash primarily for purchases of marketable securities and to a lesser extent the purchase of equipment and leasehold improvements. In addition, the Company acquired $1,340,000 and $4,724,000 of property and equipment in fiscal 1995 and 1996, respectively, under capital lease arrangements. Financing activities provided cash of approximately $42,075,000, $2,074,000 and $1,410,000 in fiscal 1996, 1995, and 1994, respectively, primarily from the sale of equity securities and the exercise of stock options and warrants, net of payments of capital lease obligations. Capital expenditures totaled $4,888,000 during fiscal 1996. The Company currently estimates that it will acquire $5,800,000 of capital equipment, consisting primarily of computer systems, laboratory equipment and office equipment in fiscal 1997. The Company plans to utilize capital lease arrangements to finance the acquisition of this equipment. At August 31, 1996, the Company had net operating loss and tax credit carryforwards of approximately $33,968,000 and $1,128,000 respectfully. These losses and tax credits are available to reduce federal taxable income and federal income taxes, respectively, in future years, if any. These losses and tax credits 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 excess of 50%. The Company does not believe it has experienced a cumulative ownership change in excess of 50%. However, there can be no assurance that ownership changes will not occur in future periods which will limit the Company's ability to utilize the losses and tax credits. The Company believes that its existing capital resources are adequate to meet its cash requirements for the foreseeable future. There is no assurance, however, that changes in the Company's 26 27 plans or events affecting the Company's operations will not result in accelerated or unexpected expenditures. The Company may seek additional funding through public or private financing and expects additional funding through collaborative or other arrangements with corporate partners. There can be no assurance, however, that additional financing will be available from any of these sources or will be available on terms acceptable to the Company. Statements in this Form 10K that are not strictly historical are "forward looking" statements as defined in the Private Securities Litigation Reform Act of 1995. The actual results may differ from those projected in the forward looking statement due to risks and uncertainties that exist in the Company's operations and business environment. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Financial statements and supplementary data required by Item 8 are set forth at the pages indicated in Item 14 (a) below. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------- None. PART III -------- Pursuant to General Instruction G (3) to Form 10-K, the information required for Part III (Items 10, 11, 12 and 13) is incorporated herein by reference from the Company's proxy statement for the Special Meeting of Shareholders in Lieu of an Annual Meeting to be held on February 7, 1997. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See "Index to Consolidated Financial Statements and Financial Statement Schedules" appearing on page F-1. 27 28 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 CONSOLIDATED BALANCE SHEETS AS OF AUGUST 31, 1995 AND 1996 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 F-1 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Genome Therapeutics Corp.: We have audited the accompanying consolidated balance sheets of Genome Therapeutics Corp. and subsidiaries (a Massachusetts corporation) as of August 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Genome Therapeutics Corp. and subsidiaries as of August 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. Boston, Massachusetts October 18, 1996 F-2 30 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS AUGUST 31, 1995 1996 CURRENT ASSETS: Cash and cash equivalents $ 5,886,184 $ 10,679,287 Marketable securities 2,340,592 17,429,488 Accounts receivable 280,904 1,338,418 Interest receivable 79,889 1,296,657 Unbilled costs and fees 259,005 345,773 Prepaid expenses and other current assets 50,140 552,903 ------------ ------------ Total current assets 8,896,714 31,642,526 ------------ ------------ EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST: Laboratory and scientific equipment 2,049,432 6,403,221 Equipment and furniture 319,501 581,533 Leasehold Improvements 1,597,069 1,939,545 Construction-in-progress 206,103 77,027 ------------ ------------ 4,172,105 9,001,326 Less--Accumulated depreciation 2,451,632 3,266,068 ------------ ------------ 1,720,473 5,735,258 RESTRICTED CASH 784,471 195,500 LONG-TERM MARKETABLE SECURITIES -- 25,464,287 OTHER ASSETS 127,016 241,446 ------------ ------------ $ 11,528,674 $ 63,279,017 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 409,282 $ 864,279 Accrued expenses 1,736,569 1,731,220 Deferred contract revenue 774,048 1,035,504 Current maturities of capital lease obligations 478,033 2,106,882 ------------ ------------ Total current liabilities 3,397,932 5,737,885 ------------ ------------ CAPITAL LEASE OBLIGATIONS, NET OF CURRENT MATURITIES 892,239 3,228,374 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDERS' EQUITY: Common stock, $.10 par value- Authorized--34,375,000 shares Issued and outstanding--13,476,135 and 17,460,966 shares at August 31, 1995 and 1996, respectively 1,347,613 1,746,097 Series B restricted stock, $.10 par value- Authorized--625,000 shares Issued and outstanding--none -- -- Additional paid-in capital 41,066,932 86,067,176 Accumulated deficit (35,174,225) (33,253,515) Deferred compensation (1,817) (247,000) ------------ ------------ Total shareholders' equity 7,238,503 54,312,758 ------------ ------------ $ 11,528,674 $ 63,279,017 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 31 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
----------- YEARS ENDED AUGUST 31,---------- 1994 1995 1996 REVENUES: Collaborative research, license fees, product and royalties $ 399,987 $ 3,961,161 $12,675,836 Government research 6,077,346 7,014,280 6,795,393 Interest income 141,584 231,662 1,785,164 ----------- ----------- ----------- Total revenues 6,618,917 11,207,103 21,256,393 ----------- ----------- ----------- COSTS AND EXPENSES: Cost of government research 5,144,071 6,414,148 6,150,234 Research and development 377,654 1,478,247 7,924,113 Selling, general and administrative 2,149,566 2,703,546 2,941,119 Noncash charge for stock option grants 26,344 25,958 2,320,217 ----------- ----------- ----------- Total costs and expenses 7,697,635 10,621,899 19,335,683 ----------- ----------- ----------- Net income (loss) $(1,078,718) $ 585,204 $ 1,920,710 =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Primary $ (0.10) $ 0.05 $ 0.11 =========== =========== =========== Fully diluted $ -- $ 0.04 $ -- =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 11,097,224 12,961,734 18,129,794 =========== =========== =========== Fully diluted -- 13,036,741 -- =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 32 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY BALANCE, AUGUST 31, 1993 10,693,166 $1,069,316 $37,341,847 $(34,680,711) $ (54,119) $ 3,676,333 Exercise of stock options 84,276 8,428 138,779 -- -- 147,207 Amortization of deferred compensation -- -- -- -- 26,344 26,344 Sale of common stock and warrants 1,001,504 100,150 1,353,239 -- -- 1,453,389 Net loss -- -- -- (1,078,718) -- (1,078,718) ---------- ---------- ----------- ------------ ----------- ----------- BALANCE, AUGUST 31, 1994 11,778,946 1,177,894 38,833,865 (35,759,429) (27,775) 4,224,555 Exercise of stock options 244,166 24,417 394,982 -- -- 419,399 Amortization of deferred compensation -- -- -- -- 25,958 25,958 Sale of common stock and warrants 1,453,023 145,302 1,838,085 -- -- 1,983,387 Net income -- -- -- 585,204 -- 585,204 ---------- ---------- ----------- ------------ ----------- ----------- BALANCE, AUGUST 31, 1995 13,476,135 1,347,613 41,066,932 (35,174,225) (1,817) 7,238,503 Exercise of stock options, including tax effects 496,756 49,676 1,151,079 -- -- 1,200,755 Exercise of warrants 38,075 3,808 106,643 -- -- 110,451 Deferred compensation from grant of stock options -- -- 2,565,400 -- (2,565,400) -- Amortization of deferred compensation -- -- -- -- 2,320,217 2,320,217 Sale of common stock 3,450,000 345,000 41,177,122 -- -- 41,522,122 Net income -- -- -- 1,920,710 -- 1,920,710 ---------- ---------- ----------- ------------ ----------- ----------- BALANCE, AUGUST 31, 1996 17,460,966 $1,746,097 $86,067,176 $(33,253,515) $ (247,000) $54,312,758 ========== ========== =========== ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 33 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
------ YEARS ENDED AUGUST 31, ------ 1994 1995 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,078,718) $ 585,204 $ 1,920,710 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 205,889 350,230 887,907 Deferred compensation 26,344 25,958 2,320,217 Changes in assets and liabilities- Accounts receivable 227,822 77,544 (1,057,514) Interest receivable (4,589) (47,186) (1,216,768) Unbilled costs and fees (86,281) (29,960) (86,768) Prepaid expenses and other current assets 70,727 (27,754) (502,763) Accounts payable 176,178 124,568 454,997 Accrued expenses (128,912) 897,974 (5,349) Deferred contract revenue (47,289) 736,057 261,456 ----------- ----------- ------------ Total adjustments 439,889 2,107,431 1,055,415 ----------- ----------- ------------ Net cash provided by (used in) operating activities (638,829) 2,692,635 2,976,125 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (4,985,970) (5,332,248) (49,553,183) Proceeds from the sale of marketable securities 4,000,000 6,000,000 9,000,000 Purchases of equipment and leasehold improvements (191,907) (97,016) (164,211) (Increase) decrease in restricted cash (94,674) (689,797) 588,971 (Increase) decrease in other assets (277,398) 124,687 (129,233) ----------- ----------- ------------ Net cash provided by (used in) investing activities (1,549,949) 5,626 (40,257,656) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options, including tax benefits 147,207 419,399 1,200,755 Proceeds from the exercise of warrants -- -- 110,451 Proceeds from sale of common stock and warrants 1,453,389 1,983,387 41,522,122 Payments on capital lease obligations (190,588) (329,025) (758,694) ----------- ----------- ------------ Net cash provided by financing activities 1,410,008 2,073,761 42,074,634 ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (778,770) 4,772,022 4,793,103 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,892,932 1,114,162 5,886,184 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,114,162 $ 5,886,184 $ 10,679,287 =========== =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the year $ 19,482 $ 85,759 $ 214,264 =========== =========== ============ Taxes paid during the year $ 13,049 $ 6,824 $ 43,240 =========== =========== ============ SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING ACTIVITIES: Deferred compensation from grant of stock options $ -- $ -- $ 2,565,400 =========== =========== ============ Property and equipment acquired under capital leases $ 264,379 $ 1,340,611 $ 4,723,678 =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 34 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Genome Therapeutics Corp. and subsidiaries (the Company) is engaged in the field of genomics--the discovery and characterization of genes. The Company's primary activity is genomic research and development. The accompanying consolidated financial statements reflect the application of certain accounting policies described in this note and elsewhere in the accompanying notes to the consolidated financial statements. (a) Revenue Recognition Research and contract revenues are derived from government grants and contract arrangements as well as under collaborative agreements with pharmaceutical companies. Research revenues are recognized as earned under government grants, which consist of cost-plus-fixed-fee contracts and fixed-price contracts. Revenues are recognized under collaborative agreements as earned. Milestone payments from collaborative research and development arrangements are recognized when they are achieved. License fees are recognized as earned. Unbilled costs and fees represent revenue recognized prior to billing. Deferred contract revenue represents amounts received prior to revenue recognition. Royalty revenue is recorded as earned. (b) Equipment and Leasehold Improvements Equipment and leasehold improvements are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for leasehold improvements is the lesser of the term of the lease or the estimated useful life of the assets. Equipment and all other depreciable assets' useful lives vary from three to ten years. The majority of the Company's equipment and leaseholds are financed through capital leases. (c) Net Income (Loss) per Common and Common Equivalent Share Net income per common and common equivalent share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period using the treasury method. Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. F-7 35 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Concentration of Credit Risk Statement of Financial Accounting Standards (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 instruments with significant off-balance-sheet risk or concentration of credit risk. The Company maintains its cash and cash equivalents and marketable securities balances with several institutions. The Company had revenues from the following significant customers:
NUMBER OF SIGNIFICANT PERCENTAGE OF CUSTOMERS TOTAL REVENUES A B C Year Ended August 31, 1994 1 92% -% -% 1995 2 63 31 - 1996 3 32 21 37
(e) 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. (f) Financial Instruments The estimated fair value of the Company's financial instruments, which include cash equivalents, marketable securities, accounts receivable and long-term debt, approximates carrying value. F-8 36 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) New Accounting Standard In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board (APB) Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair-value-based method beginning in the year ending August 31, 1997, with comparable disclosures for the year ended August 31, 1996. The Company has not determined the impact of these pro forma adjustments. (h) Reclassifications The Company has reclassified certain prior year information to conform with the current year's presentation. (2) CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At August 31, 1996, 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 less than three months. 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, at August 31, 1995 and 1996. 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. F-9 37 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) CASH EQUIVALENTS AND MARKETABLE SECURITIES (Continued) The aggregate fair value and costs of investments at August 31, 1995 and 1996 were as follows:
1995 1996 AMORTIZED MARKET AMORTIZED MARKET MATURITY COST VALUE COST VALUE Less than one year- Corporate and other debt securities $ 2,340,592 $ 2,340,592 $17,429,488 $17,413,011 =========== --========= =========== =========== Greater than one year- U.S. Government and agency securities $ -- $ -- $ 2,998,931 $ 2,988,420 Corporate and other debt securities (average maturity of 1.7 years) -- -- 22,465,356 22,296,279 ----------- ----------- ----------- ----------- $ -- $ -- $25,464,287 $25,284,699 =========== =========== =========== ===========
The Company has $784,471 and $195,500 in restricted cash at August 31, 1995 and 1996, respectively, in connection with certain capital lease obligations (see Note 6). (3) INCOME TAXES The Company applies SFAS No. 109, Accounting for Income Taxes, which requires the Company to recognize deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS No. 109 requires deferred tax assets and liabilities to be adjusted when the tax rates or other provisions of the income tax laws change. At August 31, 1996, the Company had net operating loss and tax credit carryforwards of approximately $33,968,000 and $1,128,000, respectively, available to reduce federal taxable income and federal income taxes, respectively, if any. Net operating loss carryforwards and credits are subject to review and possible adjustments by the Internal Revenue Service and may be limited in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%. In the years ended August 31, 1995 and 1996, respectively, the Company utilized approximately $1,100,000 and $4,398,000 of net operating loss carryforwards to offset taxable income. F-10 38 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) INCOME TAXES (Continued) The net operating loss carryforwards and tax credits expire approximately as follows:
NET OPERATING RESEARCH INVESTMENT LOSS TAX CREDIT TAX CREDIT EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS 1997 $ -- $ 80,000 $103,000 1998 5,069,000 208,000 90,000 1999 5,039,000 273,000 143,000 2000 3,829,000 84,000 75,000 2001 4,812,000 24,000 3,000 2002-2011 15,219,000 8,000 37,000 ----------- -------- -------- $33,968,000 $677,000 $451,000 =========== ======== ========
The components of the deferred tax assets recognized in the Company's balance sheet at the respective dates are as follows:
AUGUST 31, 1995 1996 Net operating loss carryforwards $12,428,000 $11,997,000 Research and development credits 669,000 677,000 Investment tax credits 451,000 451,000 Other, net 1,143,000 1,173,000 ----------- ----------- 14,691,000 14,298,000 Valuation allowance (14,691,000) (14,298,000) ----------- ----------- $ -- $ -- =========== ===========
The valuation allowance has been provided due to the uncertainty surrounding the realization of the deferred tax assets. F-11 39 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) ACCRUED EXPENSES Accrued expenses consist of the following:
AUGUST 31, 1995 1996 Payroll and related expenses $ 630,290 $ 893,303 Severance 326,723 93,000 Employee relocation 230,468 137,622 License and other fees 283,971 335,434 All other 265,117 271,861 ---------- ---------- $1,736,569 $1,731,220 ========== ==========
(5) COMMITMENTS (a) Lease Commitments At August 31, 1996, the Company has operating leases for office and laboratory facilities, the last of which expires on November 15, 2006. Subsequent to year-end, the Company expanded its operating facilities. Minimum lease payments and facilities charges under the leases, including the expanded facilities at August 31, 1996, are as follows:
Year Ending August 31, 1997 $ 1,483,524 1998 1,705,731 1999 1,591,992 2000 1,591,992 2001 1,591,992 Thereafter 8,576,182 ----------- $16,541,413 ===========
Rental expense was approximately $208,000, $411,000 and $472,000 in the years ended August 31, 1994, 1995 and 1996, respectively. Rental expense for the year ended August 31, 1994 was offset by approximately $100,000 of sublease rental income. (b) Employment Agreements The Company has employment agreements with certain executive officers which provide for bonuses, as defined, and severance benefits upon termination of employment, as defined. F-12 40 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) CAPITAL LEASE OBLIGATIONS The Company has various capital lease line arrangements under which it can finance up to $9,000,000 of certain office and laboratory equipment. These leases are payable in 36 monthly installments. The interest rate ranges from 7.97% to 11.42%. The Company is required to maintain certain restricted cash balances, as defined (see Note 2). In addition, the Company is required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth, debt to tangible net worth and maximum loss. The Company has approximately $2,267,000 available under these various capital lease agreements at August 31, 1996. Subsequent to August 31, 1996, the Company entered into approximately $1,403,000 of additional capital lease obligations under its capital lease line arrangements. Additionally, in connection with its facilities lease, the Company issued a $100,000 note payable in September 1994 to its lessor to finance leasehold improvements. The note bears interest at 9% and is payable in 60 monthly payments of $2,076. Capital lease obligations at August 31, 1996 are as follows:
Year Ending August 31, 1997 $2,492,253 1998 2,112,900 1999 1,371,173 ---------- Total minimum lease payments 5,976,326 Less--Amount representing interest 641,070 ---------- Present value of total minimum lease payments 5,335,256 Less--Current portion 2,106,882 ---------- $3,228,374 ==========
F-13 41 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) SHAREHOLDERS' EQUITY (a) Public Offering In February 1996, the Company closed a public offering of 3,000,000 shares of its common stock at $13.00 per share, resulting in proceeds of approximately $36,007,000, net of issuance costs. In March 1996, the Company sold an additional 450,000 shares of its common stock in the underwriter's overallotment, resulting in proceeds of approximately $5,515,000, net of issuance costs. (b) Private Placement On March 20, 1995, the Company completed a private placement of 850,000 shares of common stock at $2.43 per share resulting in proceeds of approximately $2,000,000, net of issuance costs. In connection with the private placement, the Company issued warrants to purchase 1,020,000 shares of common stock at an exercise price of $2.43 per share. These warrants were exercised on July 18, 1995 through a cashless exercise and resulted in the net issuance of 603,023 shares of common stock. The net issuance represents the excess fair market value of the shares purchasable pursuant to the warrants on the date of exercise over the total exercise price of such warrants. (c) Stock Options The Company has granted stock options to key employees and consultants under its 1988, 1991, and 1993 Stock Option Plans. In February 1996, the Company's stockholders approved the 1995 Stock Option Plan (the 1995 Plan) covering 750,000 options. The purchase price and vesting schedule applicable to each option grant are determined by the stock option and compensation committee of the Board of Directors. Under separate agreements not covered by any plan, the Company has granted certain key employees and certain directors of the Company, options to purchase common stock. On November 16, 1995, the Board of Directors of the Company granted, and the shareholders approved on February 16, 1996, nonqualified stock options outside the 1995 Plan for the purchase of an aggregate of 80,000 shares of common stock to four members of the Board of Directors. The options were granted with an exercise price of $7.25 per share, the fair market value on the date of grant by the Board of Directors, and vest at the end of five years or earlier as follows: (i) 50% will become fully vested if the average closing price of the stock for a period of 10 out of 20 consecutive trading days is $9.425 or higher; and (ii) an additional 50% will become fully vested if the average closing price for the stock for a period of 10 out of 20 consecutive trading days is $11.60 or higher. F-14 42 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) SHAREHOLDERS' EQUITY (Continued) (c) Stock Options (Continued) On December 21, 1995, the Board of Directors of the Company granted, and the shareholders approved on February 16, 1996, nonqualified stock options outside the 1995 Plan for the purchase of 300,000 shares of common stock to the Company's Chief Executive Officer. The options were granted with an exercise price of $8.87 per share, the fair market value on the date of grant by the Board of Directors, and vest at the end of five years or earlier as follows: (i) 75,000 vest if the average closing price of the common stock for a period of 10 out of 20 consecutive trading days is $10.25 or higher; (ii) 100,000 vest if the average closing price of common stock for a period of 10 out of 20 consecutive trading days is $12.25 or higher; and (iii) 125,000 vest if the average closing price of the common stock for a period of 10 out of 20 consecutive trading days is $14.25 or higher. On January 2, 1996, the Board of Directors of the Company granted, and the shareholders approved on February 16, 1996, stock options for the purchase of 60,000 shares of common stock to an employee. The options were granted with an exercise price of $9.56 per share, the fair market value on the date of grant, and vest over a four-year period. On July 11, 1996, the Board of Directors of the Company granted nonqualified stock options outside the 1995 Plan for the purchase of an aggregate of 600,000 shares of common stock to the Company's Chief Scientific Officer. The options were granted with an exercise price of $7.44 per share, the fair market value on the date of grant, and vest as follows: (a) an option covering 300,000 shares shall vest in four equal annual installments with the first installment vesting on July 11, 1997; (b) an option covering 300,000 shares shall vest on July 11, 2001 or earlier as follows: (i) 33-1/3% will become fully vested if the average closing price of the common stock for a period of 10 out of 20 consecutive trading days is $14.25 or higher; (ii) 33-1/3% will become fully vested if the average closing price of the common stock for a period of 10 out of 20 consecutive trading days is $18.25 or higher; and (iii) 33-1/3% will become fully vested if the average closing price of the common stock for a period of 10 out of 20 trading days is $20.25 or higher. The Company records deferred compensation when stock options are granted at an exercise price per share that is less than the fair market value on the date of the grant. Deferred compensation is recorded in an amount equal to the excess of the fair market value per share over the exercise price multiplied by the number of options granted. In 1996, the Company recorded $2,565,400 of deferred compensation for certain options described above based upon a grant date represented by shareholder approval. Deferred compensation will be recognized as an expense over the estimated vesting period of the underlying options. Compensation expense included in the statements of operations was approximately $26,000, $26,000 and $2,320,000 for the years ended August 31, 1994, 1995 and 1996, respectively. F-15 43 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) SHAREHOLDERS' EQUITY (Continued) (c) Stock Options (Continued) There were 564,242 common shares available for future grants at August 31, 1996 under the 1995 Plan. The following is a summary of all stock option activity:
-------YEARS ENDED AUGUST 31,------- 1994 1995 1996 Options shares- Granted 970,100 355,275 1,361,775 Exercised (84,276) (244,166) (496,756) Canceled (108,288) (70,624) (56,992) ---------- ---------- ----------- Outstanding 3,499,702 3,540,187 4,348,214 ========== ========== =========== Price range of outstanding options, end of period $.20-$8.00 $.20-$8.00 $.20-$14.50 ========== ========== =========== Price range of exercised options during the period $.88-$2.94 $.81-$4.00 $ .20-$8.00 ========== ========== ===========
(d) Warrants In connection with the sales of common stock in March and May, 1994, the Company issued three-year warrants for the purchase of 30,075 shares of common stock at $3.09 per share and 8,000 shares of common stock at $2.19 per share, respectively. These warrants were exercised during the year ended August 31, 1996. In connection with the Company's public offering described in Note 7(a), the Company issued two-year warrants to its underwriters for the purchase of 224,250 shares of common stock at $15.60 per share. (8) INCENTIVE SAVINGS PLAN 401(k) The Company maintains an incentive savings plan (the Plan) for the benefit of all employees, as defined. Matching contributions are made to the Plan by the Company at a rate of 50% for the first 2% of salary and 25% for the next 4% of salary, limited to the first $50,000 of annual salary. The Company contributed $43,233, $43,533 and $58,354 to the Plan for the years ended August 31, 1994, 1995 and 1996, respectively. F-16 44 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) COLLABORATION AGREEMENTS (a) Astra AB In August 1995, the Company entered into a collaboration agreement with Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infection 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 also provides for a four-year research collaboration to further develop and annotate the Company's H. pylori genomic sequence database, identify therapeutic and vaccine targets and develop appropriate biological assays. This research is being directed by a Joint Management Committee and a Joint Research Committee, each consisting of representatives from both parties. Under this agreement, Astra agreed to pay the Company a minimum of approximately $11 million and, subject to the achievement of certain product development milestones, up to approximately $22 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. Of such fees, $500,000 is creditable against any future royalties payable to the Company by Astra under the agreement. Astra is obligated to provide funding for the research program for a minimum of two and one-half years; Astra may terminate the research collaboration at any time after the second year on six months' notice. The Company will also be entitled to receive royalties on Astra's sale of products (i) protected by the claims of patents licensed exclusively to Astra by the Company pursuant to the agreement, or (ii) the discovery of which were 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 Astra is not actively pursuing commercialization of the technology. The Company has recognized $3,500,000 and $4,539,496 under the agreement in the years ended August 31, 1995 and 1996, respectively. The revenue in the year ended August 31, 1995 consisted of a nonrefundable license fee and capital allowance. The revenue in the year ended August 31, 1996 consisted of a $1.5 million milestone payment and $3,039,496 of collaborative research revenues. The Company recorded $768,750 and $650,504 of deferred collaborative research revenues under this agreement at August 31, 1995 and 1996, respectively. F-17 45 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) COLLABORATION AGREEMENTS (Continued) (b) Schering-Plough In December 1995, the Company entered into a collaboration 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 a specified pathogen. The Company is sequencing to identify new gene targets for development of antibiotics effective against drug-resistant infectious organisms. As part of this agreement, the Company granted Schering-Plough exclusive access to certain of the Company's genomic sequence databases. 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. Under the agreement, Schering-Plough made an up-front payment to the Company of $3 million. In addition, upon completion of certain development milestones, Schering-Plough has agreed to pay the Company a minimum of $10.3 million in additional research funding and milestone payments. Subject to the achievement of additional product development milestones and Schering-Plough's election to extend the research collaboration, Schering-Plough has agreed to pay the Company up to an additional $40.5 million (inclusive of the $10.3 million referred to above) in research funding and 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 has also granted Schering-Plough a right of first negotiation if during the term of the research plan the Company desires to enter into a collaboration with a third party with respect to the development or sale of any compounds that are targeted against, as their primary indication, the pathogen that is the principal subject of the Company's agreement with Schering-Plough. 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. Subject to certain limitations, the Company retained the rights to make, use and sell diagnostic products developed based on the Company's genomic database licensed to Schering-Plough or the technology developed in the course of the research program. F-18 46 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) COLLABORATION AGREEMENTS (Continued) (b) Schering-Plough (Continued) The Company has recognized $7,867,579 in revenue in the year ended August 31, 1996 under this collaborative arrangement, which consisted of a $3.0 million license fee, $1.1 million in collaborative research revenues and a $3.75 million in milestone payments. The Company recorded $382,421 as deferred collaborative research revenues at August 31, 1996. (10) HARVARD LICENSE AGREEMENT On November 12, 1993, the Company entered into an agreement with Harvard College for an exclusive worldwide license for commercial applications of their patented multiplex sequencing technology. Under this agreement, the Company has paid a nonrefundable license fee of $100,000, of which $50,000 can be credited against future royalties. In addition, the Company must pay minimum royalties ranging from $5,000 in 1995 to $35,000 in 1998. The Company may terminate this agreement upon 90 days' notice. The Company recorded a $10,000, $115,000 and $135,000 expense under this agreement in the years ended August 31, 1994, 1995 and 1996, respectively, primarily relating to the Astra and Schering-Plough collaborative agreements. F-19 47 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 27, 1996. GENOME THERAPEUTICS CORP. /s/ Robert J. Hennessey --------------------------------- Robert J. Hennessey Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of November 27, 1996. Signature Title - --------- ----- /s/ Robert J. Hennessey Chairman, President, - ----------------------------- Chief Executive Officer Robert J. Hennessey /s/ Orrie M. Friedman Director - ----------------------------- Orrie M. Friedman /s/ Philip Leder Director - ----------------------------- Philip Leder /s/ Lawrence Levy Director - ----------------------------- Lawrence Levy /s/ Donald J. McCarren Director - ----------------------------- Donald J. McCarren /s/ Steven M. Rauscher Director - ----------------------------- Steven M. Rauscher /s/ Fenel M. Eloi Vice President, Treasurer - ----------------------------- Chief Financial Officer Fenel M. Eloi (Principal Financial and Accounting Officer) 48 EXHIBIT INDEX 3.2 Amendment dated January 24, 1983 to Restated Articles of Organization (3) 3.3 Amendment dated January 17, 1984 to Restated Articles of Organization (4) 3.4 Amendment dated October 20, 1987 to the By-laws (8) 3.5 Amendment dated December 9, 1987 to Restated Articles of Organization (9) 3.6 Amendment dated October 16, 1989 to the By-laws (11) 3.7 Amendment dated January 24, 1994 to Restated Articles of Organization (15) 3.8 Amendment dated August 31, 1994 to Restated Articles of Organization (15) 4 Series B Restricted Stock Purchase Plan (3) 10.1 Research Agreement with The Dow Chemical Company dated May 21, 1980 (1) 10.2 Research Agreement with The Dow Chemical Company dated August 19, 1981 (1) 10.3 1981 Amended Stock Option Plan and Form of Stock Option Certificate (1) 10.4 Incentive Stock Option Plan and Form of Stock Option Certificate (1) 10.5 1984 Stock Option Plan and Form of Stock Option Certificate (5) 10.6 Collaborative Research Incentive Savings Plan (6) 10.7 Amendment dated November 4, 1986 to the Collaborative Research Incentive Savings Plan dated March 1, 1985 (7) 10.8 Stock Option Agreement with Mr. Lawrence Levy (8) 10.9 Form of Amendment to the 1981 Incentive Stock Option Plan (8) 10.10 Stock Option Agreement with Mr. Mark Friedman (10) 10.11 1988 Stock Option Plan and Form of Stock Option Certificate (10) 10.12 Stock Option Agreement with Dr. Rothchild (11)
49 10.13 Agreement with Health Sciences Research Institute (Hoken Kagaku Kenkyojyo) (12) 10.14 1991 Stock Option Plan and Form of Stock Option Certificate (13) 10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts (14) 10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts (14) 10.17 License Agreement with President and Fellows of Harvard College (14) 10.18 Agreement with Becton Dickinson and Company (14) 10.19 Employment Agreement with Robert J. Hennessey (14) 10.20 Agreement with Immuno-Cor Inc. dated September 13, 1993 (14) 10.21 Agreement with DIANON Systems, Inc. (14) 10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA (15) 10.23 Consulting Agreement with Dr. Philip Leder (15) 10.24 1993 Stock Option Plan and Form of Stock Option Certificate (15) 10.25 Stock and Warrant Purchase Agreement among the Company and certain purchasers named therein dated March 20, 1995 (16) 10.26 Registration Rights Agreement among the Company and certain purchasers named therein dated March 20, 1995 (16) 10.27 Form of Warrant Certificate issued pursuant to the Stock and Warrant Purchase Agreement (16) 10.28 Agreement between the Company and Astra Hassle AB dated August 31, 1995. (17)* 10.29 Collaboration and License Agreement between the Company, Schering Corporation and Schering-Plough Ltd., dated as of December 6, 1995.(20)* 10.30 Form of director Stock Option Agreement and schedule of director options granted (18) 10.31 United States government grant from the National Institutes of Health, National Institute of Arthritis and Musculoskeletal and Skin Diseases for Cloning the Gene Responsible for FSH Muscular Dystrophy dated September 30, 1994, as amended. (17) 10.32 United States government grant from the National Center for Human Genome Research for Genome Sequencing Center dated August 16, 1994, as amended. (17) 10.33 United States government grant from the National Center for Human Genome Research for High Resolution Physical Map of Chromosome 10 dated April 13, 1995, as amended. (17) 10.34 United States government contract from the National Institute of Neurological Disorders and Stroke, NIH for Large Scale Automated DNA Sequencing of Human Genes Involved in Neurological Disorders dated November 30, 1993, as amended. (17) 10.35 Cooperative agreement from the United States Department of Energy for Microbial Genome Sequencing dated December 21, 1994, as amended. (17) 10.36 Credit Agreement between the Company and Silicon Valley Bank dated June 1, 1995, as amended. (17) 10.37 Lease amendment dated November 15, 1996 to certain property in Watham, MA (21) 11.1 Calculation of Shares Used in Determining Net Income (Loss) Per Share (21) 23. Consent of Arthur Andersen LLP Independent Public Accounts (21) * Confidential treatment requested with respect to a portion of this Exhibit.
28 50 FOOTNOTES (1) Filed as exhibits to the Company's Registration Statement on Form S-1 (No. 2-75230) and incorporated herein by reference. (2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended February 27, 1982 and incorporated herein by reference. (3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended February 26, 1983 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended February 25, 1984 and incorporated herein by reference. (5) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1984 and incorporated herein by reference. (6) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1985 and incorporated herein by reference. (7) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1986 and incorporated herein by reference. (8) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1987 and incorporated herein by reference. (9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended November 28, 1987 and incorporated herein by reference. (10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1988 and incorporated herein by reference. (11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989 and incorporated herein by reference. (12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1990 and incorporated herein by reference. (13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1992 and incorporated herein by reference. (14) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference. EX-10.37 2 LEASE AGREEMENT DATED 11-15-96 1 EXHIBIT 10.37 SECOND AMENDMENT TO LEASE ------------------------- REFERENCE is made to that certain Lease dated June 1, 1992 by and between South Shore Bank, as landlord, and Collaborative Research Incorporated, as tenant, as amended by that certain Lease Amendment dated August 1, 1994 by and between ACTMED Limited Partnership, successor-in-interest to South Shore Bank, as landlord ("Landlord"), and Collaborative Research Incorporated, as tenant (collectively, the "Lease"), for those certain premises consisting of approximately 23,305 square feet located on the second floor of that certain building situated at 100 Beaver Street, Waltham, Massachusetts 02154, all as more particularly described in the Lease. WHEREAS, Genome Therapeutics Corporation is successor-in-interest to Collaborative Research Incorporated as tenant under the Lease ("Tenant"), and WHEREAS, Landlord and Tenant wish to amend the Lease as set forth herein. NOW, THEREFORE, in consideration of the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree that the Lease shall be amended as follows: 1. Subjects Referred to (Article 1.1) ---------------------------------- a) PREMISES. The term "Premises" is hereby amended to be "Approximately 23,305 square feet of rentable space on the second floor of the Building ("Current Premises"), and from and after the date that Landlord delivers possession of the following in accordance with the terms of this Lease, approximately 25,847 square feet located on the first floor, 4,034 square feet located on the second floor and 7,000 square feet located on the third floor of the Building ("Lexicon Premises"), now occupied by Lexicon, Inc. ("Lexicon"), and from and after the date that Landlord delivers possession in accordance with the terms of this Lease, approximately 21,270 square feet of rentable space on the third floor of the Building ("ACT Premises") currently occupied by ACT Medical, Inc. ("ACT"), together with the right to use any paved parking areas and loading docks located on the lot on which the Building is located subject to the Rules and Regulations attached hereto as EXHIBIT C. The Current Premises, Lexicon Premises, and ACT Premises are collectively referred to as "the Premises." b) MANAGING AGENT. The term "Managing Agent" is hereby amended to be "Sandact, Inc.". 1 2 c) LANDLORD'S & MANAGING AGENT'S ADDRESS. The term "Landlord's & Managing Agent's Address" is hereby amended to be "P.O. Box 442, Hull, MA 02045." d) TERM EXPIRATION DATE. The term "Term Expiration Date" is hereby amended to be "the date which is ten (10) years after the date the Lexicon Premises are delivered to Tenant in accordance herewith." e) PREMISES DESIGN FLOOR AREA. The term "Premises Design Floor Area" is hereby deleted in its entirety. f) ANNUAL FIXED RENT RATE. The term "Annual Fixed Rent" is hereby amended as follows: "For the Current Premises:
Period $/square foot $/annum ------ ------------- ------- From the date hereof through $15.20 $354,236.00 July 31, 1996 August 1, 1996 to July 31, 1997 $15.45 $360,062.25 August 1, 1997 to July 31, 1998 $15.95 $371,714.75 August 1, 1998 to July 31, 1999 $16.70 $389,193.50 August 1, 1999 through the $16.70 $389,193.50 Term Expiration Date For the Lexicon Premises: Period $/square foot $/annum ------ ------------- ------- Commencing thirty (30) days $9.00 $331,884.00 after Landlord delivers the for the Lexicon Premises in accordance entirety herewith - the date which is of the five (5) years after the date Lexicon Landlord delivers the Lexicon Premises Premises in accordance herewith ("Year Five Date") $27,000.00 with respect to 3000 s.f. to be delivered on or about August 26, 1996 as set forth below
2 3 The day following the Year $10.00 $368,760.00 Five Date - Term Expiration Date For the ACT Premises: Period $/square foot $/annum ------ ------------- ------- Commencing ninety (90) days $9.00 $191,430.00 after Landlord delivers the ACT Premises in accordance with the terms herewith - Year Five Date The day following the Year $10.00 $212,700.00" Five Date - Term Expiration Date a) SECURITY DEPOSIT. The term "Security Deposit" is hereby amended to be as follows: "$59,039.33. After delivery of the Lexicon Premises to Tenant, Tenant shall deposit an additional $55,314.00. After delivery of the ACT Premises, Tenant shall deposit an additional $31,905.00." b) TENANT'S PROPORTIONATE FRACTION. The term "Tenant's Proportionate Fraction" is hereby amended to be a fraction, the numerator which shall be the leasable square footage of the Premises leased hereunder from time to time and the denominator shall be the leasable square footage of the Building. 2. Initial Construction (Section 3.1) is hereby modified by: a) deleting the first sentence thereof and substituting the following therefor: "Tenant agrees to accept the Premises in "as-is" condition, provided that notwithstanding the foregoing, Landlord shall deliver the Lexicon Premises and ACT Premises (i) in broom clean condition, (ii) in accordance with the State Building Code 780 CMR, (iii) in compliance with the barrier free regulations set forth in 521 CMR, and (iv) with such other repairs and the cost thereof as agreed to between the parties (subsection (ii) - (iv) being collectively referred to as "Landlord's Building Improvements")"; and b) adding the following sentence at the end of the first paragraph: "Landlord agrees not to charge any supervising fee for any work performed by Tenant." 3 4 3. PREPARATION OF PREMISES FOR OCCUPANCY (SECTION 3.2) is hereby amended by deleting the second paragraph thereof and adding the following before the first paragraph thereof: "Landlord agrees to deliver 3000 square feet of the Lexicon Premises located on the third floor on or before August 26, 1996. Landlord agrees to deliver the balance of the Lexicon Premises and ACT Premises on or before October 1, 1996, and March 1, 1997, respectively (collectively, the "Relocation Dates"). Notwithstanding the foregoing, Landlord may delay delivery of possession of the ACT Premises until August 1, 1998 upon prior written notice to Tenant which notice is delivered on or before March 1, 1997. Tenant acknowledges that Lexicon and ACT are currently leasing portions of the Building as set forth herein. If Landlord, after using reasonable efforts to remove Lexicon, is unable to deliver possession of the entirety of the Lexicon Premises to Tenant by December 31, 1996, and provided that Landlord's inability to so deliver possession is not due to fire, casualty, or any act or omission of Tenant, its agents, contractors, employees, licensees or invitees, then (i) Tenant shall receive one (1) day of free rent for the Lexicon Premises for each day after November 15, 1996 until December 31, 1996, and two (2) days of free rent for each day during January, February, and March of 1997 in which Landlord fails to so deliver the Premises, provided Tenant shall not be entitled to any additional free rent for each day after March 31, 1997 in which Landlord fails to so deliver the Premises, and (ii) if Landlord has not so delivered the entirety of the Lexicon Premises to Tenant by March 31, 1997, then Tenant may terminate this Second Amendment to Lease, it being understood that the Lease shall continue in full force and effect with respect to the Current Premises. Notwithstanding the foregoing, if Landlord has delivered 3000 square feet of the Lexicon Premises as set forth above in accordance with the terms of this Lease, then this Second Amendment to Lease shall continue in full force and effect with respect to the Current Premises and said 3000 s.f. of the Lexicon Premises. If Landlord has delivered the Lexicon Premises in accordance with the terms hereof, and if Landlord, after using reasonable efforts to remove ACT, is unable to deliver possession of the ACT Premises to Tenant by November 1, 1998, and provided Landlord's inability to so deliver possession is not due to fire, casualty, force majeure, or any act or omission of Tenant, its agents, contractors, employees, licensees or invitees, then (i) Landlord shall so notify Tenant of such inability, and (ii) any reference to the "ACT Premises" shall be deemed stricken from this Second Amendment to Lease, it being understood that the Lease shall continue in full force and effect with respect to the Current Premises and the Lexicon Premises. 4 5 Notwithstanding anything to the contrary set forth herein, "reasonable efforts" as set forth in this Section 3.2 shall include the institution of court proceedings for eviction, but "reasonable efforts" shall not require Landlord to pay any sum of money to Lexicon or ACT. 4. CERTAIN REQUIREMENTS APPLICABLE TO INSURANCE POLICIES (SECTION 4.2.2.4) is hereby modified by deleting the last sentence thereof. 5. UTILITIES (SECTION 4.2.3) is hereby modified by deleting "to the extent . . . Tenant and the Premises," from the first sentence thereof, and by deleting "provided that if said utilities . . . use of utilities." from the second sentence thereof. 6. ASSIGNMENT AND SUBLETTING (SECTION 5.2.1) is hereby amended by deleting the last sentence of the first paragraph and substituting the following therefor: "In the event that any assignee, subtenant, or occupant pays to Tenant any amounts (whether by lump sum or monthly payments) in excess of $10.00 per square foot on a triple net basis for space leased as office space, or $23.00 per square foot on a triple net basis for space leased as laboratory space, Tenant shall promptly pay fifty percent (50%) of all such excess to Landlord as and when received by Tenant after first deducting from such excess, the reasonable expenses incurred by Tenant in obtaining such assignment or sublease, provided such expenses are amortized over the term hereof." 7. NOTICES FROM ONE PARTY TO THE OTHER (SECTION 9.1) is hereby amended by deleting the last sentence thereof and substituting the following sentence therefor: "A copy of any notice to Landlord shall be sent to: Mary C. Mazzio, Esquire, Brown, Rudnick, Freed & Gesmer, P.C., One Financial Center, Boston, Massachusetts 02111 in the same manner as Landlord's Notice, and a copy of any notice to the Tenant shall be sent to Francis X. Hanlon, Esquire, Ropes & Gray, One International Place, Boston, Massachusetts 02110 in the same manner as Tenant's Notice." 8. The following is hereby added to the Lease as a new Section 9.15: 9.15 SIGNAGE. Tenant shall have the right to erect its corporate logo in locations on Beaver Street and on the Building that are mutually agreed upon by the parties hereto. 9. EXHIBITS. EXHIBITS A, A-1, A-2, and E are hereby deleted in their entirety, and the EXHIBIT A attached hereto is added to the Lease as a new EXHIBIT A thereof. 10. EXHIBIT D (TENANT'S EXTENSION OPTION) is hereby modified by: 5 6 a) deleting the phrase "one (1) period of five (5) years" in the first sentence thereof and substituting the phrase "two (2) periods of five (5) years" therefor, b) by deleting the word "option" in the second sentence thereof and substituting the word "options" therefor, c) by deleting the word "period" in the first sentence of the second paragraph thereof and substituting the word "periods" therefor, and d) further, by adding the following phrase after the words "office and laboratory space" in the second sentence of the second paragraph thereof: ", excluding the structural laboratory improvements constructed by Tenant after the date hereof in the Lexicon Premises and the ACT Premises," 11. EXHIBIT G (TENANT IMPROVEMENT ALLOWANCE) is hereby modified by deleting the first paragraph thereof and by deleting the phrase "with respect to the Allowance" in the first sentence of the second paragraph and substituting the phrase "with respect to a $100,000 Allowance granted pursuant to the First Lease Amendment" therefor. 12. EXHIBIT H attached hereto is hereby added to the Lease as EXHIBIT H. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Lease. EXCEPT as modified by this Second Amendment, all other terms of the Lease remain unchanged and in full force and effect. 6 7 WITNESS our hands and seal this ____ day of _____________, 1996. LANDLORD: TENANT: ACTMED LIMITED PARTNERSHIP GENOME THERAPEUTICS, INC. By: SANDACT INC., its sole general partner By: ________________________ By: _______________________________ 7 8 EXHIBIT A --------- 1. BUYER'S REPRESENTATION AND AGREEMENTS. Buyer represents, warrants and covenants with Seller as follows: (i) Buyer is a corporation that has been duly organized and is validly existing in good standing under the laws of its state of incorporation; (ii) Buyer has full power and right to enter into and perform its obligations under this Agreement and the other agreements contemplated herein to be executed and performed by it; (iii) Buyer is not in the hands of a receiver nor is application for a receiver pending, Buyer has not made an assignment for the benefit of creditors, nor has Buyer filed, or had filed against it, any petition in bankruptcy; and (iv) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (1) have been duly authorized, executed and delivered by Buyer and the persons executing this Agreement and other documents on behalf of Buyer are duly authorized to execute the same, and (2) do not and will not (A) require any governmental or other consent, (B) violate or conflict with any judgment, decree or order of any court applicable to or affecting Buyer, (C) violate or conflict with any law or governmental regulation applicable to Buyer, (D) violate or conflict with the organizational documents of Buyer, and (E) result in the breach of, or constitute a default under, any agreement, contract, indenture or other instrument or obligation to which Buyer is a party or is otherwise bound. Upon the assumption that this Agreement constitutes the legal, valid and binding obligation of Seller, this Agreement constitutes the legal, valid and binding obligation of Buyer. 2. CASUALTY/TAKING. If, prior to the Closing Date, all or a significant portion of the Property is destroyed by fire or casualty or taken by eminent domain (or is the subject of a pending taking which has not yet been consummated), Seller shall notify Buyer of such fact promptly after obtaining knowledge thereof and either Buyer or Seller shall have the right to terminate this Agreement by giving notice to the other not later than ten (10) days after the giving of Seller's notice. For the purposes hereof, a "significant portion" of the Property shall mean such a portion of the Property as shall have a value in excess of $735,687.00. If either party elects to terminate this Agreement as aforesaid, this Agreement shall terminate and be of no further force and effect and neither party shall have any liability to the other hereunder. If neither Seller nor Buyer elects to terminate this Agreement as aforesaid, or if an "insignificant portion" (i.e., anything other than a significant portion) of the Property is destroyed by fire or casualty or taken by eminent domain (or becomes the subject of a pending taking), then the sale of the Property shall be consummated as herein provided at the Purchase Price (without abatement), and Seller shall assign to Buyer, without recourse, at the 8 9 Closing all of Seller's right, title and interest in and to all net insurance proceeds received by Seller in connection with a fire or casualty, and any net award, if any, received in connection with a taking. 3. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had executed the same document. All such counterparts shall be construed together and shall constitute one instrument. 9 10 EXHIBIT H Tenant's Option to Purchase --------------------------- Provided that no Event of Default has occurred hereunder, Tenant shall have a right to purchase the Building to be exercised prior to August 31, 1997, time being of the essence, upon the following terms and conditions: 1. The purchase price ("Purchase Price") for the Building shall be (a) $7,356,870.00, based on a price of $90.00 per rentable square foot; plus (b) if Tenant exercises its purchase option hereunder after ACT and/or Lexicon vacate the Building, the Landlord's cost of carrying the ACT Space or the Lexicon Space during Tenant's 30- and 90-day fit-up periods, respectively (including lost rent at the rate of $9.00 per square foot per annum), plus a pro rata share of Additional Rent, as defined in Article 4 of the Lease; plus (c) the cost of Landlord's Building Improvements. 2. Tenant shall notify Landlord of its intent to purchase the Building by written notice ("Tenant's Notice") to Landlord prior to August 31, 1997, a copy of which shall be accompanied with a deposit of 10% of the Purchase Price to be sent simultaneously to Whittier Partners, the Tenant's Notice to be in the form attached to this EXHIBIT H as EXHIBIT H-1. Upon receipt of an executed original of Tenant's Notice, Landlord shall promptly execute and deliver to Tenant an executed copy thereof. 3. Notwithstanding the foregoing, Tenant's right to give Tenant's Notice and exercise this purchase option shall terminate on June 1, 1997, July 1, 1997, or August 1, 1997, unless prior to each such date, Tenant has paid to Landlord a non-refundable sum of $10,000.00 in each case in order to retain Tenant's purchase option for the next succeeding month. Time is of the essence of each such date. 4. If (a) Tenant (i) does not timely exercise its purchase right as set forth above or (ii) fails to pay the non-refundable sums of $10,000.00 to Landlord prior to June 1, July 1, or August 1, as the case may be, as set forth above or (iii) fails to otherwise fulfill the conditions hereunder or set forth in Tenant's Notice, Tenant's right to purchase the Building shall terminate and shall be null and void, and Landlord shall have no further obligation to sell the Building to Tenant, and may sell the Building to another party upon such terms and conditions as Landlord may deem appropriate, free and clear of any rights in favor of Tenant contained herein. 10 11 5. Tenant shall indemnify and hold harmless Landlord, and defend Landlord with counsel approved by Landlord, from and against any and all losses, damages, liability, claims and judgment in connection with Tenant's failure, after having executed its right to purchase the Building, to fulfill its obligations hereunder or under the Tenant's Notice This provision shall survive the termination or expiration of this Lease. Notwithstanding the foregoing, if Tenant has paid Landlord the deposit required pursuant to Section 5 of Tenant's Notice, then this indemnity shall be deemed null and void, it being understood that Seller's damages shall be limited to the amount of the deposit as set forth in Section 19 of the Tenant's Notice. 6. Tenant, after the termination or expiration of Tenant's rights to purchase the Building, and within five (5) days after receipt of Landlord's request, shall execute and deliver to Landlord an agreement prepared by Landlord, in recordable form, confirming the termination of Tenant's rights to purchase the Building. Tenant's failure to so execute and deliver such agreement shall entitle Landlord to execute and record in the appropriate Registry of Deeds (including the Land Registration Office therein, if applicable) an affidavit confirming the termination of Tenant's purchase rights hereunder, which affidavit shall be binding upon the parties hereto and may be relied upon by third parties. Notwithstanding Landlord's rights as set forth in the foregoing sentence, and without limiting the generality of Tenant's indemnification as set forth above, Tenant shall be liable for any and all damages and expenses including, without limitation, delay damages, loss of opportunity damages and attorney's fees incurred as a result of Tenant's wrongful failure to execute the agreement confirming termination of Tenant's purchase rights hereunder, or Tenant's execution of an affidavit or other document stating that Tenant's purchase rights have not terminated if the affidavit or other document shall prove to be false, except as otherwise provided in Section 5 above if Tenant has paid Landlord the deposit pursuant to Section 5 of Tenant's Notice. 7. Tenant may not assign, mortgage, pledge, encumber or otherwise transfer ("Transfer") its interest or rights set forth hereunder, and any such purported Transfer or attempt to Transfer shall be void and without effect, and shall terminate this right to purchase (except with respect to the obligation set forth in Paragraph (4) hereof). 8. Notice of Tenant's right to purchase the Building shall be included in a Notice of Lease to be executed by the parties and recorded by Tenant in the Registry of Deeds (including the Land Registration Office therein, if applicable). 9. Time is of the essence with respect to all aspects of this right to purchase. 11 EX-11.1 3 CALCULATION OF NET INCOME(LOSS) PER SHARE 1 EXHIBIT 11.1 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING PRIMARY NET INCOME (LOSS) PER SHARE
YEAR ENDED AUGUST 31, 1994 1995 1996 ------------------------------------- Weighted average common stock outstanding during the year 11,097,224 12,287,918 15,530,639 Weighted average common stock equivalents outstanding during the year -- 673,816 2,599,155 ------------------------------------- 11,097,224 12,961,734 18,129,794 =====================================
CALCULATION OF SHARES USED IN DETERMINING FULLY DILUTED NET INCOME (LOSS) PER SHARE
YEAR ENDED AUGUST 31, 1994 1995 1996 ------------------------------------- Weighted average common stock outstanding during the year 11,097,224 12,287,918 15,530,639 Weighted average common stock equivalents outstanding during the year -- 748,823 2,599,155 ------------------------------------- 11,097,224 13,036,741 18,129,794 =====================================
EX-23 4 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated October 18, 1996 included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements No. 2-77846, No. 2-81123, No. 2-95446, No. 33-12633, No. 33-27885, No. 33-45432, No. 0-10824, No. 03-361191, and No. 333-15935 /s/ Arthur Andersen LLP -------------------------------- Arthur Andersen LLP Boston, Massachusetts November 27, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 10,679 42,894 1,338 0 0 31,643 9,001 3,266 63,279 5,738 0 1,746 0 0 52,567 63,279 0 21,256 0 16,759 2,320 0 214 1,964 43 1,921 0 0 0 1,921 .11 0
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