-----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, UCiolP/wg9RDhOrOsYCNQ5Y0sS8ERAvQs46iRHs/OSBOOl1mMYBtd3vS1BAzMMDY evV10MyJ1SSy5ReiIQ1tCA== 0000950135-98-004207.txt : 19980714 0000950135-98-004207.hdr.sgml : 19980714 ACCESSION NUMBER: 0000950135-98-004207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980530 FILED AS OF DATE: 19980710 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-Q SEC ACT: SEC FILE NUMBER: 000-10824 FILM NUMBER: 98664123 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-Q 1 GENOME THERAPEUTICS CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter Ended: May 30, 1998 ------------ Commission File No: 0-10824 ------- GENOME THERAPEUTICS CORP. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2297484 - --------------------------------- -------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154 - ------------------------------------------ -------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300 ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK 18,306,839 -------------- ------------------------- $.10 PAR VALUE Outstanding July 10, 1998 -------------- 2 Genome Therapeutics Corp. and Subsidiaries Index to Financial Information (Unaudited) and Other Information Page ---- Part I Financial Information (Unaudited): Consolidated Condensed Balance Sheets as of August 31, 1997 and May 30, 1998 3 Consolidated Condensed Statements of Operations for the 39 week period ended May 31, 1997 and May 30, 1998 4 Consolidated Statements of Cash Flows for the 39 week period ended May 31, 1997 and May 30,1998 5 Notes to Consolidated Condensed Financial Statements for the 39 week period ended May 31, 1997 and May 30, 1998 6-12 Management's Discussion and Analysis of Financial Conditions and Results of Operations 13-19 Part II Other Information: Other Information 20 Signature 21 2 3 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------- August 31, May 30, 1997 1998 (Unaudited) - ---------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 8,602,698 $11,936,574 Marketable securities 34,814,601 23,475,214 Interest receivable 1,280,611 753,848 Accounts receivable 55,142 34,305 Unbilled costs and fees 140,320 831,952 Note receivable from officer 160,000 0 Prepaid expenses and other current assets 408,240 525,976 ----------- ----------- Total current assets 45,461,612 37,557,869 Equipment and leasehold improvements, at cost: Laboratory and scientific equipment 11,855,630 14,405,616 Leasehold improvements 1,964,981 7,621,123 Office Equipment and furniture 792,342 1,378,793 Construction-in-progress 1,111,526 271,506 ----------- ----------- 15,724,479 23,677,038 Less accumulated depreciation and amortization 5,352,999 7,846,828 ----------- ----------- 10,371,480 15,830,210 Restricted cash 301,500 301,500 Long-term marketable securities 4,124,798 3,523,878 Note receivable from officer 0 160,000 Other assets 428,989 439,125 ----------- ----------- Total assets $60,688,379 $57,812,582 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $1,288,391 $1,120,902 Accrued expenses 2,373,788 3,037,944 Deferred revenue 2,335,695 6,280,642 Current maturities of long-term obligations 3,595,120 5,507,578 ----------- ----------- Total current liabilities 9,592,994 15,947,066 Long-term obligations, net of current maturities 7,149,188 9,233,038 Shareholders' equity 43,946,197 32,632,478 ----------- ----------- Total liabilities and shareholders' equity $60,688,379 $57,812,582 =========== ===========
See Notes to Consolidated Condensed Financial Statements. 3 4 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------ Thirteen Weeks Ended Thirty-nine Weeks Ended May 31, May 30, May 31, May 30, 1997 1998 1997 1998 (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Revenues: Collaborative research, licenses, subscription fees and royalties $ 2,987,210 $ 4,658,417 $ 9,816,045 $ 12,515,891 Government research 918,999 351,896 4,229,562 815,499 ----------- ----------- ----------- ------------ Total revenues 3,906,209 5,010,313 14,045,607 13,331,390 ----------- ----------- ----------- ------------ Costs and Expenses: Research and development 5,977,861 8,090,097 14,483,568 22,561,069 Cost of government research 918,999 351,896 4,229,562 815,499 Selling, general and administrative 997,021 1,178,187 2,587,078 3,313,133 ----------- ----------- ----------- ------------ Total costs and expenses 7,893,881 9,620,180 21,300,208 26,689,701 ----------- ----------- ----------- ------------ Loss from operations (3,987,672) (4,609,867) (7,254,601) (13,358,311) Interest income 741,152 552,037 2,270,910 1,881,023 Interest expense (159,066) (307,068) (430,545) (846,055) ----------- ----------- ----------- ------------ Net loss $(3,405,586) $(4,364,898) $(5,414,236) $(12,323,343) =========== =========== =========== ============ Basic/diluted net loss per common share $ (0.19) $ (0.24) $ (0.31) $ (0.68) =========== =========== =========== ============ Basic/diluted weighted average number of common shares outstanding 17,666,731 18,274,085 17,569,640 18,181,749 =========== =========== =========== ============
See Notes to Consolidated Condensed Financial Statements. 4 5 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------- Thirty-nine Weeks ended May 31, May 30, 1997 1998 (Unaudited) - -------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net loss $ (5,414,236) $(12,323,343) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,554,338 2,674,487 Loss on disposal of fixed assets 0 103,821 Deferred compensation 57,683 94,814 Changes in assets and liabilities: Interest receivable 2,925 526,763 Accounts receivable (561,438) 20,837 Unbilled costs and fees 93,710 (691,632) Prepaid expenses and other current assets (31,070) (117,736) Accounts payable (171,485) (167,489) Accrued expenses 455,468 664,156 Deferred contract revenue 1,896,899 3,944,947 ------------ ------------ Total adjustments 3,297,030 7,052,968 ------------ ------------ Net cash used in operating activities (2,117,206) (5,270,375) ------------ ------------ Cash Flows from Investing Activities: Purchases of marketable securities (18,236,804) (28,873,818) Proceeds from sale of marketable securities 19,174,000 40,814,125 Increase in restricted cash (200,000) 0 Purchases of equipment and leasehold improvements (643,716) (5,317,164) Increase in other assets (88,189) (10,136) ------------ ------------ Net cash provided by investing activities 5,291 6,613,007 ------------ ------------ Cash Flows from Financing Activities: Proceeds from exercise of stock options 681,265 914,810 Proceeds from long-term obligations 0 4,011,000 Payments on long-term obligations (2,122,960) (2,934,566) ------------ ------------ Net cash provided by (used in) financing activities (1,441,695) 1,991,244 ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (3,553,610) 3,333,876 Cash and Cash Equivalents, at beginning of period 10,679,287 8,602,698 ------------ ------------ Cash and Cash Equivalents, at end of period $ 7,125,677 $ 11,936,574 ============ ============ Supplemental Disclosure of Cash Flow Information: Taxes paid during period $ 29,142 $ 20,250 ============ ============ Interest paid during period $ 430,545 $ 846,055 ============ ============ Supplemental Disclosure of Non-cash Investing Activities: Property and equipment acquired under capital leases $ 4,629,267 $ 2,919,874 ============ ============
See Notes to Consolidated Condensed Financial Statements. 5 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated condensed financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. The results of operations for the 39 week period ended May 30, 1998 are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying consolidated condensed financial statements should be read in conjunction with the Company's Form 10-K which was filed with the Securities and Exchange Commission on November 28, 1997. 2. REVENUE RECOGNITION Research and contract revenues are derived from collaborative agreements with pharmaceutical companies, as well as government grants and contract arrangements. 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 revenues from collaborative research and development arrangements are recognized when the milestones are achieved. License fees are recognized as earned. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents cash amounts received prior to revenue recognition. Subscription fee revenues from the PathoGenome(TM) database are recognized ratably over the access period of the subscription agreement. 3. NET LOSS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128 "Earnings Per Share" which establishes new standards for calculating and presenting earnings per share. This standard is effective for financial statements for periods ending after December 15, 1997 with early application not permitted. These condensed financial statements have been prepared and presented based on the new standard. Prior period amounts have been restated to conform to the current year presentation. Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share for the periods presented is the same as basic net loss per share as the inclusion of the potential common stock equivalents would be antidilutive. At May 30, 1998 and May 31, 1997, the Company had 6 7 potential common stock of approximately 4,298,000 and 4,593,000, respectively. 4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At May 30, 1998, 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. The Company has not recorded any realized holding gains or losses on its marketable securities. Marketable securities consist of commercial paper and U.S. Government debt securities. The Company has $301,500 in restricted cash at August 31, 1997 and May 30, 1998 in connection with certain long-term obligations (See Note 6). 5. 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. 6. LONG-TERM OBLIGATIONS On February 28, 1997, the Company entered into an equipment line of credit under which it can finance up to $6,000,000 of laboratory, computer and office equipment. Borrowings are payable in 48 monthly installments at a variable interest rate of prime (8.5% as of May 30, 1998) plus one-quarter of one percent. At any time during the term of this agreement, the Company may elect to convert to a fixed rate loan at the prevailing interest rate. The Company is required to maintain certain restricted cash balances, as defined (see Note 4). In addition, the Company is required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth and debt service coverage. On March 9, 1998, the Company increased the equipment line of credit described above by $4,300,000 to $10,300,000. The additional borrowings under the equipment line of credit will be utilized to finance laboratory, computer and office equipment over the next ten months. Borrowings under the new credit line are payable in 15 quarterly installments commencing March 31, 1999. All other terms and conditions remained the same. The Company had $4,300,000 available under the modified line of credit at May 30, 1998. 7 8 On July 31, 1997, the Company entered into a financing arrangement under which it can finance up to $6,000,000 of laboratory and office renovations at its Beaver Street facility. The principal amount of the loan will be repaid over 48 consecutive months commencing July 1, 1998 at the prevailing 12 month Eurodollar rate (12-month Eurodollar rate was 5.93% as of May 30, 1998) plus one and a half percent. The Company is required to maintain certain financial ratios pertaining to minimum cash balances, debt to net worth and tangible net worth. At May 30, 1998, the Company had no additional borrowing capacity under this arrangement, however, approximately $539,000 of the amounts received have not been utilized to finance the Company's purchases, and is included in cash and cash equivalents. The Company is required to maintain certain restricted cash balances, upon the occurrence of certain events, as defined. The Company has entered into other capital lease arrangements under which it financed approximately $9,725,000 of certain laboratory, computer and office equipment. These leases are payable in 36 monthly installments. The interest rates range from 7.52% to 11.42%. The Company is required to maintain certain restricted cash balances, as defined (see Note 4). 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 debt service coverage. The Company has no additional borrowing capacity under these capital lease agreements at May 30, 1998. 7. COLLABORATIVE AGREEMENTS 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 Company's Staph. aureus genomic database. 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 agreed to pay the Company a minimum of $13.3 million for an up-front payment, 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 $30.2 million in research funding and milestone payments. On March 4, 1998, Schering-Plough elected to extend the research program to the full term of the agreement which expires on March 31, 2000. 8 9 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, Staph. aureus, which 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. For the 13 week periods ended May 30, 1998 and May 31, 1997, the Company recorded revenue of $733,000 and $1,024,000, respectively, under this agreement, which consisted of sponsored research funding. For the 39 week period ended May 30, 1998, the Company recorded revenue of $2,645,000 under this agreement, which consisted of sponsored research funding and milestone payments . For the 39 week period ended May 31, 1997, the Company recorded revenue of $2,774,000 under this agreement, which consisted of sponsored research funding. In December 1996, the Company entered into its second research collaboration and license agreement with Schering-Plough. This agreement calls for the use of genomics to discover new therapeutics for treating asthma. As part of the agreement, the Company will employ its high-throughput positional cloning, bioinformatics, and genomics sequencing capabilities to identify genes and associated proteins that can be utilized by Schering-Plough to develop new pharmaceuticals. Under this agreement, the Company has granted Schering-Plough exclusive access to (i) certain gene sequence databases made available under this research program, (ii) information made available to the Company under certain third party research agreements, (iii) an exclusive worldwide right and license to make, use and sell pharmaceutical and vaccine products based on the rights to develop and commercialize diagnostic products that may result from this collaboration. Under the agreement, Schering-Plough has agreed to pay an initial license fee and an expense allowance to the Company. Schering-Plough is also required to fund a research program for a minimum number of years with an option to extend. In addition, upon completion of certain scientific developments, Schering-Plough will make milestone payments to the Company, as well as pay royalties to the Company based on sales of therapeutics product developed from this collaboration. If all milestones are met and the research program continues for its full term, total payments to the Company will be approximately $67 million, excluding royalties. Of the total potential payments, approximately $22.5 million represents license fees and research payments, and $44.5 9 10 million represents milestone payments based on achievement of research and product development milestones. For the 13 week period ended May 30, 1998, the Company recorded revenue of $2,212,000 under this agreement, which consisted of sponsored research funding, subcontract activity and a milestone payment. For the 13 week period ended May 31, 1997, the Company recorded revenue of $663,000 under this agreement, which consisted of sponsored research funding and subcontract activity. For the 39 week period ended May 30, 1998, the Company recorded revenue of $5,164,000 under this agreement, which consisted of sponsored research funding, subcontract activity and a milestone payment. For the 39 week period ended May 31, 1997, the Company recorded revenue of $3,481,000 under this agreement, which consisted of sponsored research funding, license fee, expense allowance and subcontract activity. In September 1997, the Company entered into its third research collaboration and license agreement with Schering-Plough to use genomics to discover and develop new pharmaceutical products for treating fungal infections. Under the agreement, the Company will employ its bioinformatics, high-throughput sequencing and functional genomics capabilities to identify and validate genes and associated proteins as drug discovery targets that can be utilized by Schering-Plough to develop novel antifungal treatments. Schering-Plough will receive exclusive access to the genomic information developed in the collaboration related to two fungal pathogens, Candida albicans and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide right to make, use and sell products based on the technology developed in the course of the research program. In return, Schering-Plough has agreed to fund a research program for a minimum number of years with an option to extend. If all milestones are met and the research program continues for its full term, total payments to the Company will approximate $30.7 million, excluding royalties. Of the total potential payment, approximately $7.7 million represents license fees and research payments and $23 million represents milestone payments based on achievement of research and product development milestones. Additionally, the Company entered into a database subscription agreement with Schering-Plough (See Database Subscriptions). For the 13 and 39 week periods ended May 30, 1998, the Company recorded revenue of $613,000 and $1,619,000, respectively, under this agreement, which consisted of sponsored research funding. 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 10 11 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 credited 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 with an option to extend. On June 15, 1998, subsequent to quarter-end, Astra elected to extend the research program for a second time which will carry the alliance through at least August 1999. The Company will also be entitled to receive royalties on Astra's sale of any products (i) protected by 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. 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. For the 13 week period ended May 30, 1998, the Company recorded revenue of $336,000 under this agreement, which consisted of sponsored research funding. For the 13 week period ended May 31, 1997, the Company recorded revenue of $775,000 under this agreement, which consisted of sponsored research funding and a milestone payment. For the 39 week period ended May 30, 1998, the Company recorded revenue of $1,405,000 under this agreement, which consisted of sponsored research funding and a milestone payment. For the 39 week period ended May 31, 1997, the Company recorded revenue of $2,416,000 under this agreement, which consisted of sponsored research funding and a milestone payment. 8. DATABASE SUBSCRIPTIONS In May 1997, the Company introduced its proprietary genome sequence database, PathoGenome(TM) and sold its first subscription to Bayer AG, ("Bayer") providing Bayer with nonexclusive access to the Company's PathoGenome(TM) database and associated information relating to microbial organisms. In September 1997, the Company sold subscriptions to its PathoGenome(TM) database to Bristol-Myers Squibb and Schering-Plough. In May 1998, the Company sold its fourth subscription to its PathoGenome(TM) database to Scriptgen Pharmaceuticals, Inc. ("Scriptgen"). The subscription agreements call for the Company to provide each subscriber with periodic data updates, analysis tools and software support. Under the agreements, Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen have agreed to pay annual subscription fees, milestone payments, 11 12 when applicable, and royalties on any molecules developed as a result of access to the information provided by the PathoGenome(TM) database. The Company retains all rights associated with protein therapeutic, diagnostic and vaccine use of bacterial genes or gene products. For the 13 and 39 week periods ended May 30, 1998, the Company recognized subscription fee revenue of $750,000 and $1,668,000, respectively, under these agreements. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Genome Therapeutics Corp. ("the Company") is a leader in the field of genomics-based drug discovery--the identification and functional 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. The Company'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 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. The Company has entered into several corporate collaborations in connection with its pathogen and human gene discovery programs. The Company does not anticipate revenues from product sales on a sustained basis until such time that products based on the Company's research efforts are commercialized, if any. The Company's product development strategy is to form collaborations with pharmaceutical and biotechnology companies generating revenues from licensing fees, sponsored research and milestone payments. Additionally, the Company will sell nonexclusive access to its proprietary genome sequence database, PathoGenome(TM). These collaborations are expected to result in the discovery and commercialization of novel therapeutics, vaccines and diagnostics, generating royalty payments to the Company from product sales downstream. 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 upon product revenues for many years. The Company's primary sources of revenue are collaborative agreements with pharmaceutical company partners, subscription agreements to the Company's proprietary genome sequence database, PathoGenomeTM and government research grants and contracts. As of May 30, 1998, the Company had signed four collaborative agreements. 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 Company's Staph. aureus genomic database to identify new gene targets for the development of novel antibiotics. In December 1996, the Company entered into its second research collaboration with Schering-Plough to identify genes and associated proteins that can be utilized by Schering-Plough to develop new pharmaceuticals for treating asthma. In September 1997, the Company entered into its 13 14 third research collaboration with Schering-Plough to use genomics to discover and develop new pharmaceutical products for treating fungal infections. In May 1997, the Company introduced its proprietary genome sequence database, PathoGenome(TM) and sold its first subscription to Bayer AG ("Bayer"). In September 1997, the Company sold subscriptions to Bristol-Myers Squibb and Schering-Plough. In May 1998, the Company sold a subscription to Scriptgen Pharmaceuticals, Inc ("Scriptgen"). Under the agreements, the subscribers will receive nonexclusive access to the Company's PathoGenome(TM) database and associated information relating to microbial organisms. The Company has incurred significant losses, since inception, with an accumulated deficit of approximately $56,879,000 at May 30, 1998. 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 collaborative agreements and government research grants and contracts. 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, 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 THIRTEEN WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998 REVENUE Total revenues increased 28% from $3,906,000 for the 13 week period ended May 31, 1997 to $5,010,000 for the 13 week period ended May 30, 1998. Collaborative research, licenses, subscription fees and royalties increased 56% from $2,987,000 for the 13 week period ended May 31, 1997 to $4,658,000 for the 13 week period ended May 30, 1998. The increase in collaborative research, licenses, subscription fees and royalties was primarily attributable to an increase in sponsored research revenue received this year under the Company's collaboration research agreements with Schering-Plough for treating both asthma and fungal infections. The increase was also due to subscription fee revenue earned this year under the Company's license agreements with Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen providing each company with nonexclusive access to the Company's proprietary genome sequence database, PathoGenome(TM) and associated information relating to microbial organisms. Government research revenue decreased 62% from $919,000 for the 13 week period ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 1998. The decrease in government research revenue was primarily attributable to a shift in personnel from government research programs to company-sponsored research and development 14 15 programs, in particular, the microbial genetic database program, PathoGenome(TM). 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 expenses. COST AND EXPENSES Total cost and expenses increased 22% from $7,894,000 for the 13 week period ended May 31, 1997 to $9,620,000 for the 13 week period ended May 30, 1998. Research and development expenses, which include company-sponsored research and development and research funded pursuant to arrangements with the Company's corporate collaborators, increased 35% from $5,978,000 for the 13 week period ended May 31, 1997 to $8,090,000 for the 13 week period ended May 30, 1998. The increase in research and development expenses was primarily attributable to increases in both personnel and laboratory expenses associated with the Company's expansion of its pathogen, microbial genetic database, human gene discovery and functional genomics research programs. The increase consisted primarily of increases in payroll and related expenses, laboratory supplies and overhead expenses. The cost of government research decreased 62% from $919,000 for the 13 week period ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 1998. The decrease in cost of government research was primarily attributable to the decrease in government research revenues. Selling, general and administrative expenses increased 18% from $997,000 for the 13 week period ended May 31, 1997 to $1,178,000 for the 13 week period ended May 30, 1998. The increase in selling, general and administrative expenses was primarily due to increases in payroll and related expenses as a result of hiring additional administrative personnel. INTEREST INCOME AND EXPENSE Interest income decreased 26% from $741,000 for the 13 week period ended May 31, 1997 to $552,000 for the 13 week period ended May 30, 1998 reflecting a decrease in funds available for investment. Interest expense increased 93% from $159,000 for the 13 week period ended May 31, 1997 to $307,000 for the 13 week period ended May 30, 1998. The increase in interest expense was attributable to increases in the Company's average outstanding balance under its long-term obligations. 15 16 THIRTY-NINE WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998 REVENUE Total revenues decreased 5% from $14,046,000 for the 39 week period ended May 31, 1997 to $13,331,000 for the 39 week period ended May 30, 1998. Collaborative research, licenses, subscription fees and royalties increased 28% from $9,816,000 for the 39 week period ended May 31, 1997 to $12,516,000 for the 39 week period ended May 30, 1998. The increase in collaborative research, licenses, subscription fees and royalties was primarily attributable to higher milestone payments and sponsored research revenues received this year under the Company's collaboration research agreements with Schering-Plough for treating both asthma and fungal infections. The increase was also due to subscription fee revenue earned this year under the Company's license agreements with Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen providing each company with nonexclusive access to the Company's proprietary genome sequence database, PathoGenomeTM and associated information relating to microbial organisms. Government research revenue decreased 81% from $4,230,000 for the 39 week period ended May 31, 1997 to $816,000 for the 39 week period ended May 30, 1998. The decrease in government research revenue was primarily attributable to a shift in personnel from government research programs to company-sponsored research and development programs, in particular, the microbial genetic database program, PathoGenome(TM). COST AND EXPENSES Total cost and expenses increased 25% from $21,300,000 for the 39 week period ended May 31, 1997 to $26,690,000 for the 39 week period ended May 30, 1998. Research and development expenses, which include company-sponsored research and development and research funded pursuant to arrangements with the Company's corporate collaborators, increased 56% from $14,484,000 for the 39 week period ended May 31, 1997 to $22,561,000 for the 39 week period ended May 30, 1998. The increase in research and development expenses was primarily attributable to increases in both personnel and laboratory expenses associated with the Company's expansion of its pathogen, microbial genetic database, human gene discovery and functional genomics research programs. The increase consisted primarily of increases in payroll and related expenses, laboratory supplies and overhead expenses. The cost of government research decreased 81% from $4,230,000 for the 39 week period ended May 31, 1997 to $815,000 for the 39 week period ended May 30, 1998. The decrease in cost of government research was primarily attributable to the decrease in government research revenues. 16 17 Selling, general and administrative expenses increased 28% from $2,587,000 for the 39 week period ended May 31, 1997 to $3,313,000 for the 39 week period ended May 30, 1998. The increase in selling, general and administrative expenses was primarily due to increases in payroll and related expenses as a result of hiring additional administrative personnel. INTEREST INCOME AND EXPENSE Interest income decreased 17% from $2,271,000 for the 39 week period ended May 31, 1997 to $1,881,000 for the 39 week period ended May 30, 1998 reflecting a decrease in funds available for investment. Interest expense increased 96% from $431,000 for the 39 week period ended May 31, 1997 to $846,000 for the 39 week period ended May 30, 1998. The increase in interest expense for was attributable to increases in the Company's average outstanding balance under its long-term obligations. LIQUIDITY AND CAPITAL RESOURCES Since September 1, 1992, the Company's primary sources of cash have been revenue from collaborative research agreements, revenue from subscription agreements, revenue from government research grants and contracts, borrowings under equipment lending facilities and capital leases and proceeds from sale of equity securities. 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 fiscal 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. The Company also 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. As of May 30, 1998, the Company had cash, cash equivalents, restricted cash and long and short-term marketable securities of approximately $39,237,000. The Company has various arrangements under which it can finance 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, debt service coverage and minimum restricted cash balances. On March 9, 1998, the Company amended one of the finance arrangements to increase the facility by $4,300,000 in order to finance certain laboratory, computer and office equipment. Borrowings are payable in 15 quarterly installments commencing March 31, 1999. All other terms and conditions remained the same. The Company had $4,300,000 available under these arrangements for future borrowings at May 30, 1998. The Company also received a $6,000,000 advance to finance office and laboratory renovations at its Beaver Street facility of which approximately $539,000 had not been expended at May 30, 1998. 17 18 For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's operating activities used cash of approximately $2,117,000 and $5,270,000, respectively, primarily to fund operating losses. For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's investing activities provided cash of approximately $5,000 and $6,613,000, respectively, from the sale of marketable securities, partially offset by purchases of marketable securities, and property and equipment. Financing activities used cash of approximately $1,443,000 for the 39 week period ended May 31, 1997 primarily for payments of capital lease obligations, partially offset by proceeds from the exercise of stock options. Financing activities provided cash of approximately $1,991,000 for the 39 week period ended May 30, 1998 primarily from proceeds from long-term obligations and exercise of stock options, net of payments of long-term obligations. Capital expenditures totaled $2,781,000 for the 39 week period ended May 30, 1998 consisting of laboratory, computer and office equipment. The Company estimates that it will acquire an additional $1,200,000 in capital equipment in fiscal 1998 consisting of primarily computer and laboratory equipment which it intends to finance under existing financing arrangements. Additionally, the Company is in the process of consolidating its operations at its Beaver Street facility at an estimated cost of $6,852,000 which consists of office and laboratory renovations. As of May 30, 1998, the Company had incurred approximately $6,303,000 of capital improvements consisting of $847,000 during fiscal 1997 and $5,456,000 during the 39 week period ended May 30,1998. The Company plans to spend an additional $549,000 on this renovation project and expects the renovations to be completed by September 30, 1998. The Company plans to utilize existing capital lease financing arrangements to finance substantially all of these capital improvements. At August 31, 1997, the Company had net operating loss and tax credit carryforwards of approximately $49,065,000 and $1,128,000, respectively. 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 in 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 plans or events affecting the Company's operations will not result in accelerated or unexpected expenditures. 18 19 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 10Q 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, described more fully in the Company's Annual Report on Forms 10-K for the year ended August 31, 1997, filed with the Securities and Exchange Commission. 19 20 PART II Item 1. LEGAL PROCEEDINGS None Item 2. CHANGES IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS: 10.43 Credit modification agreement between the Company and Fleet National Bank, dated March 9, 1998. (26) (26) Filed within. b) REPORTS ON FORM 8-K None. 20 21 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized who also serves in the capacity of principal financial officer. Genome Therapeutics Corp. /s/ Fenel M. Eloi --------------------------------- Fenel M. Eloi (Principal Financial Officer) Date: July 10, 1998 21 EX-10.43 2 CREDIT MODIFICATION AGREEMENT 1 Exhibit 10.43 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement ("this Agreement") is made as of March 9, 1998 between Genome Therapeutics Corp., a Massachusetts corporation (the "Borrower"), and Fleet National Bank (the "Bank"). For good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank act and agree as follows: 1. Reference is made to: (i) that certain letter agreement dated February 28, 1997 (the "Letter Agreement") between the Borrower and the Bank; (ii) that certain $6,000,000 face principal amount term promissory note dated February 28, 1997 (the "1997 Term Note") made by the Borrower and payable to the order of the Bank; (iii) that certain Security Agreement (Equipment) dated February 28, 1997 (the "Equipment Security Agreement") given by the Borrower to the Bank; and (iv) that certain $4,300,000 face principal amount term promissory note of even date herewith (the "1998 Term Note") made by the Borrower and payable to the order of the Bank. The Letter Agreement, the Equipment Security Agreement, the 1997 Term Note and the 1998 Term Note are hereinafter collectively referred to as the "Financing Documents". 2. The Letter Agreement is hereby amended, effective as of the date hereof: a. By deleting from clause (i) of Section 1.1 of the Letter Agreement the words "(the `Term Note')" and by substituting in their stead the following: "(the `1997 Term Note')" b. By deleting the word "and" appearing at the end of clause (i) of Section 1.1 of the Loan Agreement and by substituting a comma in its stead. c. By deleting the period at the end of Section 1.1 of the Letter Agreement and by substituting in its stead the following: ", and (iii) that certain $4,300,000 face principal amount term note (the `1998 Term Note') dated March 9, 1998 made by the Borrower and payable to the order of the Bank." d. By deleting in its entirety the caption of Section 1.2 of the Letter Agreement and by substituting in its stead the following: "1997 TERM LOANS; 1997 TERM NOTE." e. By deleting from the first sentence of Section 1.2 of the Letter Agreement the words "(the `Term Loans')" and by substituting in their stead the following: "(the `1997 Term Loans')" 2 f. By modifying Sections 1.2, 1.3, 1.4 and 1.5 of the Letter Agreement so that: (i) all references therein to the "Term Note" will be deemed to refer to the 1997 Term Note, and (ii) all references therein to "Term Loans" or to any "Term Loan" will be deemed to refer to any one or more of the 1997 Term Loans (the definition of "1997 Term Loans" having been inserted by paragraph e above). Further, all references in Sections 1.4 and 1.5 of the Letter Agreement to any "COF Loan" will be deemed to refer to a 1997 Term Loan which is a COF Loan, all references in said Sections to any "LIBOR Loan" will be deemed to refer to a 1997 Term Loan which is a LIBOR Loan, and all references in said Sections to a "Floating Rate Loan" will be deemed to refer to a 1997 Term Loan which is a Floating Rate Loan. g. By deleting in its entirety the caption to Section 1.3 of the Letter Agreement and by substituting in its stead the following: "PRINCIPAL REPAYMENT OF 1997 TERM LOANS." h. By inserting at the end of the fourth sentence of Section 1.3 of the Letter Agreement immediately after the words "the date of payment", the following: "and the payment, if any, due under Section 1.7" i. By deleting in its entirety the caption to Section 1.4 of the Letter Agreement and by substituting in its stead the following: "INTEREST RATE FOR 1997 TERM LOANS." j. By deleting from the first sentence of Section 1.4 of the Letter Agreement the words "(the `Floating Rate')". k. By deleting from the third sentence of the first paragraph of Section 1.4 of the Letter Agreement the words "(a `Fixed Rate Borrowing Notice')" and by substituting in their stead the following: "(hereinafter, in this Section 1.4, a `Fixed Rate Borrowing Notice')" l. By deleting from the second sentence of the second paragraph of Section 1.4 of the Letter Agreement the words "(the `Fixed Rate Period')" and by substituting in their stead the following: "(hereinafter, in this Section 1.4, a `Fixed Rate Period')" m. By inserting into the twelfth sentence of the second paragraph of Section 1.4 of the Letter Agreement, immediately after the words "Floating Rate", the following: "applicable to the 1997 Term Loans" -2- 3 n. By deleting in its entirety the fifth sentence of Section 1.5 of the Letter Agreement and by substituting in its stead the following: "Interest on any 1997 Term Loans which are Floating Rate Loans will be payable at the applicable Floating Rate (being that rate described in the first sentence of Section 1.4)." o. By inserting into the Letter Agreement, immediately after Section 1.5 thereof, the following: "1.5A. 1998 TERM LOANS; 1998 TERM NOTE. In addition to the foregoing, the Bank may make one or more loans (the `1998 Term Loans') to the Borrower in an aggregate amount up to $4,300,000. A 1998 Term Loan shall be made, no more than once per month (except that more than one 1998 Term Loan may be made in any month provided that each additional 1998 Term Loan in any one month is an amount of at least $500,000), in order to finance costs of Qualifying Equipment acquired by the Borrower within the 120 days preceding the request for such 1998 Term Loan, each such 1998 Term Loan to be in such amount as may be requested by the Borrower; provided that (i) no 1998 Term Loan will be made after March 25, 1999; (ii) the aggregate original principal amounts of all 1998 Term Loans will not exceed $4,300,000; and (iii) no 1998 Term Loan will be in an amount more than 100% of the Invoice Value of the Qualifying Equipment with respect to which such 1998 Term Loan is made. As used herein the `Invoice Value' of equipment supporting any 1998 Term Loan means invoiced actual costs of the tangible property constituting the items of Qualifying Equipment with respect to which such 1998 Term Loan is made (excluding taxes, shipping, prepackaged software, installation charges, training fees and other `soft costs'; except that software needed to operate purchased equipment (not including `shrink-wrapped' software) may be included within Qualifying Equipment up to an aggregate dollar amount of $250,000). Prior to the making of each 1998 Term Loan, and as a precondition thereto, the Borrower will provide the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment; (ii) such evidence as the Bank may reasonably require showing that the Qualifying Equipment has been delivered to and installed at the Borrower's Waltham, MA premises, has become fully operational, has been paid for by the Borrower and is owned by the Borrower free of all liens and interests of any other Person (other than the security interest of the Bank pursuant to the Security Agreement); (iii) Uniform Commercial Code financing statements reflecting the relevant -3- 4 Qualifying Equipment with respect to which such 1998 Term Loan is being made and an appropriate supplement to the Security Agreement adding the relevant Qualifying Equipment to the description of Collateral; and (iv) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee. The 1998 Term Loans will be evidenced by the 1998 Term Note. Interest on the 1998 Term Loans shall be payable at the times and at the rate provided for in the 1998 Term Note. Overdue principal of any 1998 Term Loan and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate otherwise payable under the 1998 Term Note (but in no event in excess of the maximum rate from time to time permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the 1998 Term Note or on the books of the Bank, at or following the time of making each 1998 Term Loan and of receiving any payment of principal, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of the 1998 Term Loans. The amount so noted shall constitute presumptive evidence as to the amount owed by the Borrower with respect to principal of the 1998 Term Loans. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower or any right of the Bank hereunder or under the 1998 Term Note. 1.5B. PRINCIPAL REPAYMENTS OF 1998 TERM LOANS. The Borrower shall repay principal of the 1998 Term Loans in 16 equal consecutive quarterly installments, commencing on March 31, 1999 and continuing on the last Business Day of each calendar quarter thereafter. Each such quarterly installment of principal shall be in an amount equal to 1/16th of the aggregate principal amounts of all 1998 Term Loans outstanding at the close of business on March 25, 1999. In any event, the then outstanding principal balance of each 1998 Term Loan and all interest then accrued but unpaid thereon shall be due and payable in full on December 31, 2002. The Borrower may repay, at any time or from time to time, without premium or penalty, the whole or any portion of any 1998 Term Loan; provided that each such principal prepayment shall be accompanied by a payment of all interest under the 1998 Term Note accrued but unpaid to the date of payment and the payment, if any, due under Section 1.7. Any partial prepayment of principal of the 1998 Term Loans will be applied to installments of principal of the -4- 5 1998 Term Loans thereafter coming due, being applied in inverse order of normal maturity. Amounts repaid or prepaid with respect to the 1998 Term Loans are not available for reborrowing. 1.5C. INTEREST RATE. Except as otherwise provided below in this ss.1.5C, interest on the 1998 Term Loans will be payable at a fluctuating rate per annum which shall at all times be equal to the Prime Rate as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law), with a change in such rate of interest to become effective on each day when a change in the Prime Rate becomes effective. Subject to the conditions set forth herein, the Borrower may elect that all or any portion of any 1998 Term Loan to be made under ss.1.5A will be made as a LIBOR Loan, that all or any portion of any 1998 Term Loan which is a Floating Rate Loan (but not any COF Loan) will be converted to a LIBOR Loan and/or that any 1998 Term Loan which is a LIBOR Loan will be continued at the expiration of the Interest Period applicable thereto as a new LIBOR Loan. Such election shall be made by the Borrower giving to the Bank a written or telephonic notice received by the Bank within the time period and containing the information described in the next following sentence (hereinafter, in this ss.1.5C, a "Fixed Rate Borrowing Notice"). The Fixed Rate Borrowing Notice must be received by the Bank no later than 10:00 a.m. (Boston time) on that day which is two Business Days prior to the date of the proposed borrowing, conversion or continuation, as the case may be, and must specify the amount of the LIBOR Loan requested (which shall be $500,000 or an integral multiple thereof), must identify the particular 1998 Term Loan or Loans so to be made, converted or continued, as the case may be, and must specify the proposed commencement date of the relevant Interest Period. Notwithstanding anything provided elsewhere in this letter agreement, the Borrower may not elect to have any installment of a 1998 Term Loan included in a LIBOR Loan if the Interest Period applicable thereto would continue after the due date of such installment. Any Fixed Rate Borrowing Notice shall, upon receipt by the Bank, become irrevocable and binding on the Borrower, and the Borrower shall, upon demand and receipt of a Bank Certificate with respect thereto, forthwith indemnify the Bank against any loss or expense incurred by the Bank as a result of any failure by the Borrower to obtain or maintain any requested 1998 Term Loan which is a LIBOR Loan, including, without limitation, any loss or expense incurred by reason of the liquidation or redeployment of deposits or other funds acquired by the Bank to fund or maintain such LIBOR Loan. At the expiration of each Interest Period applicable to a 1998 Term Loan which is a LIBOR -5- 6 Loan, the principal amount of such 1998 Term Loan which is a LIBOR Loan may be continued as a new LIBOR Loan to the extent and on the terms and conditions contained in this letter agreement by delivery to the Bank of a new Fixed Rate Borrowing Notice conforming to the requirements set forth above in this ss.1.5C (and any 1998 Term Loan which is a LIBOR Loan not repaid and not so continued as a new LIBOR Loan will be deemed (subject to the provisions of the next following paragraph) to have been converted into a Floating Rate Loan). Notwithstanding any other provision of this letter agreement, the Bank need not make any 1998 Term Loan as a LIBOR Loan or allow any conversion of a 1998 Term Loan which is a Floating Rate Loan to a LIBOR Loan at any time when there exists any Default or Event of Default. On each of March 31, 1998, June 30, 1998, September 30, 1998, December 31, 1998 and March 25, 1999, the Borrower may convert to a COF Loan all (but not less than all) of the 1998 Term Loans then outstanding and not already subject to a COF Interest Rate; however, notwithstanding the foregoing, no more than four (4) 1998 Terms Loans which are COF Loans may be outstanding at one time. If the Borrower desires such conversion to a COF Loan, it will notify the Bank of same not less than two Business Days prior to the proposed conversion and will request that the Bank offer with respect to such 1998 Term Loans a rate of interest which shall be fixed (subject to adjustment as provided in this letter agreement) for the period commencing on the date of such conversion and ending on the final maturity date applicable to such 1998 Term Loans (hereinafter, in this ss.1.5C, a "Fixed Rate Period"). Following such request for a fixed rate, the Bank will endeavor to offer a proposed COF Interest Rate at a rate determined as provided below and under conditions determined by the Bank in its sole discretion. The Borrower may elect to accept such offer in the manner and within the time period specified in such offer. Any such election shall be irrevocable on the part of the Borrower. Upon such election, the interest rate payable with respect to the outstanding 1998 Term Loans shall be fixed (subject to adjustment as provided in this letter agreement) for the Fixed Rate Period and at the rate communicated by the Bank as its proposed COF Interest Rate. Any proposed COF Interest Rate offered under this Section will be a rate per annum equal to the sum of (i) 1.75% per annum PLUS (ii) the COF Rate for the applicable Fixed Rate Period (expressed as a per annum rate); provided, however, that the COF Interest Rate shall in no event exceed the maximum rate permitted by applicable law. The COF Rate shall be determined by the Bank in its discretion for the purposes of any proposed COF Interest Rate offered under this -6- 7 Section. The Bank may base the COF Rate for the purpose of computing the proposed COF Interest Rate on any (or any combination of) recognized sources of available funding for transactions of this type, including, but not limited to, the interbank market, the domestic and European certificate of deposit market and sales of commercial paper. The COF Rate for purposes of this computation shall in any event include adjustments for the costs of maintaining reserves, insurance (including, without limitation, assessments by the FDIC), taxes, hedging and other costs which may be incurred by the Bank with respect to the applicable source or sources of funding, all as determined by the Bank in its discretion. The source or sources of funding utilized for the computation of the proposed rate shall be selected by the Bank at its sole discretion for offering to the Borrower, and the Borrower shall not have any claim against the Bank with respect to computation of any proposed COF Interest Rate. If the Borrower is dissatisfied with any proposed COF Interest Rate, the Borrower's sole remedy with respect thereto shall be not to accept such proposed COF Interest Rate within the applicable time period, and thus to cause interest on the 1998 Term Loans to be payable at the Floating Rate applicable to the 1998 Term Loans (subject to the Borrower's ability set forth elsewhere herein to obtain LIBOR Loans). Notwithstanding the foregoing provisions hereof, the Bank need not offer a proposed COF Interest Rate for any period of time with respect to which the Bank, in its sole discretion, determines that there are no recognized sources of funding available to it for such time period or principal amount or that the cost of funds with respect thereto would be unreasonably high or if there then exists any Default or Event of Default. Further, the Borrower may not convert into a COF Loan any 1998 Term Loan which is a LIBOR Loan prior to the end of the Interest Period applicable to such LIBOR Loan. Any request for a 1998 Term Loan which is a Fixed Rate Loan and any election to convert all or any portion of the 1998 Term Loans to a Fixed Rate Loan may be made on behalf of the Borrower only by a duly authorized officer; provided, however, that the Bank may conclusively rely upon any written or facsimile communication received from any individual whom the Bank believes in good faith to be such a duly authorized officer. 1.5D. INTEREST PAYMENTS. The Borrower will pay interest on the principal amount of the 1998 Term Loans outstanding from time to time, from the date hereof until payment of the 1998 Term Loans and the 1998 Term Note in full and the termination of this letter agreement. Interest on each 1998 Term Loan which is a Floating -7- 8 Rate Loan or a COF Loan will be payable monthly in arrears on the first day of each month. Interest on each 1998 Term Loan which is a LIBOR Loan will be paid in arrears on the applicable Interest Payment Date. In any event, interest shall also be paid on the date of payment of the 1998 Term Loans in full. Interest on each 1998 Term Loan which is a Floating Rate Loan shall be payable at the Floating Rate applicable to the 1998 Term Loans. The rate of interest payable on any 1998 Term Loan which is a LIBOR Loan will be the Eurodollar Interest Rate applicable thereto. Interest on any 1998 Term Loan which is a COF Loan will be payable at the COF Interest Rate applicable thereto. In any event, overdue principal of any 1998 Term Loan and, to the extent permitted by law, overdue interest on any 1998 Term Loan shall bear interest at a rate per annum which at all times shall be equal to the sum of (i) four (4%) percent per annum PLUS (ii) the rate otherwise applicable to such overdue principal (or to the principal amount as to which such interest is overdue) under the 1998 Term Note, payable on demand. All interest payable hereunder and/or under the 1998 Term Note will be calculated on the basis of a 360-day year for the actual number of days elapsed. p. By deleting from Section 1.7 of the Letter Agreement the words "the Term Note" and by substituting in their stead the following: "any Term Note" q. By deleting from Section 1.8 of the Letter Agreement the words "the Term Note" (in each place where same appears) and by substituting in their stead (in each such place) the following: "any Term Note" r. By deleting from the second and third paragraphs of Section 1.10 the words "the Term Note" (in each place where same appears) and by substituting in their stead (in each such place) the following: "any Term Note" s. By deleting from the third sentence of the third paragraph of Section 1.10 of the Letter Agreement, the words "75 State Street, Boston, MA 02109" and by substituting in their stead the following: "One Federal Street, Boston, MA 02110" -8- 9 t. By deleting from clause (i) of Section 4.1 of the Letter Agreement the words "the Term Note" and by substituting in their stead the following: "any Term Note" u. By deleting from clause (a) of Section 5.1 of the Letter Agreement the words "the Term Note" and by substituting in their stead the following: "any Term Note" v. By deleting from clause (a) of Section 5.2 of the Letter Agreement the words "of the Term Note" and by substituting in their stead the following: "of each Term Note" w. By inserting into clause (b) of Section 5.2 of the Letter Agreement, immediately after the words "arrangements for", the following: "any" x. By deleting from clause (c) of Section 5.2 of the Letter Agreement the words "under the Term Note" and by substituting in their stead the following: "under the 1997 Term Note, under the 1998 Term Note" y. By deleting from Section 6.1 of the Letter Agreement, in each of the four places where same appear, the words "the Term Note" and by substituting in their stead the following: "any Term Note" z. By deleting from Section 6.3 of the Letter Agreement the words "and the Term Note" and by substituting in their stead the following: ", the 1997 Term Note and the 1998 Term Note" aa. By deleting from Section 6.4 of the Letter Agreement the words "75 State Street, Boston, MA 02109" and by substituting in their stead the following: "One Federal Street, Boston, MA 02110" bb. By deleting from the third sentence of Section 6.5 of the Letter Agreement the words "the Term Loans and/or the Term Note" and by substituting in their stead the following: "the 1997 Term Loans, the 1998 Term Loans, the 1997 Term Note and/or the 1998 Term Note" -9- 10 cc. By deleting from the first sentence of Section 6.6 of the Letter Agreement the words "and/or the Term Note" and by substituting in their stead the following: "the 1997 Term Note and/or the 1998 Term Note" dd. By inserting into Section 7.1 of the Letter Agreement, immediately before the definition of "Bank Certificate", the following: "`Applicable Eurodollar Margin' - For all 1997 Term Loans, the Applicable Eurodollar Margin is 2.0. For all 1998 Term Loans, the Applicable Eurodollar Margin is 1.75." ee. By deleting from the first sentence of the definition of "Bank Certificate" appearing in Section 7.1 of the Letter Agreement the words ss.1.4, ss.1.7, ss.1.8 or ss.6.1" and by substituting in their stead the following: "ss.1.4, ss.1.5C, ss.1.7, ss.1.8 or ss.6.1" ff. By inserting into each of the definitions of "COF Interest Rate" and "COF Rate" appearing in Section 7.1 of the Letter Agreement, immediately after the reference "ss.1.4", the following: "`or the second sentence of ss.1.5C, as applicable" gg. By deleting the words "Term Loans" from the definition of "COF Interest Rate" appearing in Section 7.1 of the Letter Agreement and by substituting in their stead the following: "`1997 Term Loans and 1998 Term Loans" hh. By deleting from the definition of "Eurodollar Interest Rate" appearing in Section 7.1 of the Letter Agreement the number "2.0" and by substituting in its stead the following: "the Applicable Eurodollar Margin" ii. By deleting in its entirety the definition of "Floating Rate" appearing in Section 7.1 of the Letter Agreement and by substituting in its stead the following: "`Floating Rate' - With respect to the 1997 Term Loans, the fluctuating rate per annum described in the first sentence of ss.1.4; and with respect to the 1998 Term Loans, the fluctuating rate per annum described in the first sentence of ss.1.5C." -10- 11 jj. By deleting from the definition of "Loan Documents" appearing in Section 7.1 of the Letter Agreement the words "the Term Note" and by substituting in their stead the following: "the 1997 Term Note, the 1998 Term Note" kk. By inserting into Section 7.1 of the Letter Agreement, immediately after the definition of "Net Quick Assets", the following: "`1997 Term Loan' - As defined in ss.1.2. `1998 Term Loan' - As defined in ss.1.5A. `1997 Term Note' - As defined in ss.1.1. `1998 Term Note' - As defined in ss.1.1." ll. By deleting in its entirety the definition of "Prime Rate" appearing in Section 7.1 of the Letter Agreement and by substituting in its stead the following: "`Prime Rate' - The variable rate of interest per annum designated by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate and does not necessarily represent the lowest or best rate being charged to any customer." mm. By inserting into the parenthetical contained in the first sentence of the definition of "Qualifying Equipment" appearing in Section 7.1 of the Letter Agreement, immediately after the words "prepackaged software", the following: ", it being agreed, however, that the Borrower may include within Qualifying Equipment, as to the 1998 Term Loans only, costs of software (not including `shrink-wrapped' software) needed to operate purchased equipment up to an aggregate dollar amount of $250,000" nn. By deleting from the definition of "Qualifying Equipment" appearing in Section 7.1 of the Letter Agreement the words "after October 1, 1996" and by substituting in their stead the following: "after October 1, 1996, with respect to 1997 Term Loans, and after October 1, 1997, with respect to 1998 Term Loans," oo. By inserting into Section 7.1 of the Letter Agreement, immediately after the definition of "Tangible Net Worth", the following: -11- 12 "`Term Loans' - Collectively, the 1997 Term Loans and the 1998 Term Loans. `Term Notes' - Collectively, the 1997 Term Note and the 1998 Term Note." 3. The Security Agreement is hereby amended, effective as of the date hereof: a. By deleting in its entirety the second WHEREAS clause of the Security Agreement and by substituting in its stead the following: "WHEREAS, the Term Loans are evidenced by the Debtor's $6,000,000 face principal amount promissory note dated February 28, 1997 (the `1997 Term Note') payable to the order of the Secured Party and by the Debtor's $4,300,000 face principal amount promissory note of even date herewith (the `1998 Term Note'); and" b. By deleting the words "the Term Note" in the definition of "Loan Documents" in Section 1 of the Security Agreement and by substituting in their stead the following: "the 1997 Term Note, the 1998 Term Note" c. By deleting the words "the Term Note" in the third paragraph of Section 8(c) of the Security Agreement and by substituting in their stead the following: "the Term Notes" d. By adding to Exhibit A to the Security Agreement (without deleting anything heretofore appearing on such exhibit) the equipment described in Exhibit A attached to this Agreement. As a result of the foregoing, each of the items listed on Exhibit A to the Agreement will be deemed to be included in the "Collateral" (as defined in the Security Agreement). The Borrower will execute and deliver all such UCC-1 financing statements as the Bank may reasonably request in order to perfect its security interest in all of the Collateral. 4. The Bank and the Borrower acknowledge that the "Term Loans" described in the 1997 Term Note are the 1997 Term Loans and that the first sentence of the seventeenth grammatical paragraph of the text of the 1997 Note is deemed amended to read as follows: "This note is the 1997 Term Note referred to in the Letter Agreement." 5. Wherever in any Financing Document, or in any certificate or opinion to be delivered in connection therewith, reference is made to a "letter agreement" or to the "Letter Agreement", from and after the date hereof same will be deemed to refer to the Letter Agreement, as hereby amended. Whenever in any Financing Document, or in any certificate or opinion to be delivered in connection therewith, reference is made to a "Security Agreement", -12- 13 from and after the date hereof same will be deemed to refer to the Security Agreement, as hereby amended. 6. Simultaneously with the execution and delivery of this Agreement, the Borrower is executing and delivering to the Bank the 1998 Term Note. The 1998 Term Note is a $4,300,000 face amount promissory note of the Borrower, substantially in the form of Exhibit 1 hereto. 7. In consideration of the amendments set forth above and the establishment of the loan facilities described above, the Borrower is paying to the Bank at the date of this Agreement a $10,000 facility fee. This facility fee is non-refundable and is not to be reduced by nor applied against any interest, fees, charges or other amounts now or thereafter paid or payable by the Borrower under or in connection with the Letter Agreement and/or any promissory note now or hereafter issued under the Letter Agreement. 8. In order to induce the Bank to enter into this Agreement, the Borrower further represents and warrants as follows: a. The execution, delivery and performance of this Agreement and the 1998 Term Note have been duly authorized by the Borrower by all necessary corporate and other action, will not require the consent of any third party and will not conflict with, violate the provisions of, or cause a default or constitute an event which, with the passage of time or the giving of notice or both, could cause a default on the part of the Borrower under its charter documents or by-laws or under any contract, agreement, law, rule, order, ordinance, franchise, instrument or other document, or result in the imposition of any lien or encumbrance (except in favor of the Bank) on any property or assets of the Borrower. b. The Borrower has duly executed and delivered each of this Agreement and the 1998 Term Note. c. Each of this Agreement and the 1998 Term Note is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms. d. The statements, representations and warranties made in the Letter Agreement and/or in the Security Agreement continue to be correct as of the date hereof; except as amended, updated and/or supplemented by the attached Supplemental Disclosure Schedule. e. The covenants and agreements of the Borrower contained in the Letter Agreement and/or in the Security Agreement have been complied with on and as of the date hereof. f. No event which constitutes or which, with notice or lapse of time, or both, could constitute, an Event of Default (as defined in the Letter Agreement) has occurred and is continuing. -13- 14 g. No material adverse change has occurred in the financial condition of the Borrower from that disclosed in the annual consolidated financial statements of the Borrower as at December 31, 1996, heretofore furnished to the Bank. 9. Except as expressly affected hereby, the Letter Agreement and each of the other Financing Documents remains in full force and effect as heretofore. 10. Nothing contained herein will be deemed to constitute a waiver or a release of any provision of any of the Financing Documents. Nothing contained herein will in any event be deemed to constitute an agreement to give a waiver or release or to agree to any amendment or modification of any provision of any of the Financing Documents on any other or future occasion. -14- 15 Executed, as an instrument under seal, as of the day and year first above written. GENOME THERAPEUTICS CORP. By: /s/ Fenel M. Eloi ---------------------------------- Name: Fenel M. Eloi Title: Senior VP, Treasurer, CFO Accepted and agreed: FLEET NATIONAL BANK By: /s/ Kimberly A. Martone ------------------------------- Name: Kimberly A. Martone Title: Vice President -15- 16 SUPPLEMENTAL DISCLOSURE SCHEDULE [To be provided by Borrower] 17 PROMISSORY NOTE $4,300,000.00 Boston, Massachusetts March 9, 1998 FOR VALUE RECEIVED, the undersigned Genome Therapeutics Corp., a Massachusetts corporation (the "Borrower") hereby promises to pay to the order of FLEET NATIONAL BANK (the "Bank") the principal amount of Four Million Three Hundred Thousand and 00/100 ($4,300,000.00) Dollars or such portion thereof as may be advanced by the Bank pursuant to ss.1.5A of that certain letter agreement dated as of February 28, 1997 between the Bank and the Borrower, as amended (as so amended, the "Letter Agreement") and remains outstanding from time to time hereunder ("Principal"), with interest, at the rate provided in the Letter Agreement, on the daily balance of all unpaid Principal, from the date hereof until payment in full of all Principal and interest hereunder. Interest on all unpaid Principal shall be due and payable monthly in arrears, on the first day of each month, commencing on the first such date after the advance of any Principal and continuing on the first day of each month thereafter and on the date of payment of this note in full, at a fluctuating rate per annum (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed) which shall at all times be equal to the Prime Rate, as in effect from time to time (but in no event in excess of the maximum rate permitted by then applicable law), with a change in the aforesaid rate of interest to become effective on the same day on which any change in the Prime Rate is effective; provided, however, that (A) if a Eurodollar Interest Rate (as defined in the Letter Agreement) shall have become applicable to all or any portion of the outstanding Principal for any Interest Period (as defined in the Letter Agreement), then interest on such Principal or portion thereof shall accrue at said applicable Eurodollar Interest Rate for such Interest Period and shall be payable on the Interest Payment Date (as defined in the Letter Agreement) applicable to such Interest Period, and (B) if a COF Interest Rate (as defined in the Letter Agreement) shall have become applicable to all or any portion of the outstanding Principal, then interest on such Principal or portion thereof shall accrue at said COF Interest Rate and shall be paid on the first day of each month. Overdue Principal and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) four (4%) percent per annum PLUS (ii) the per annum rate otherwise payable under this note with respect to the Principal which is overdue (or as to which such interest is overdue) (but in no event in excess of the maximum rate permitted by then applicable law), compounded monthly and payable on demand. As used herein, "Prime Rate" means the variable rate of interest per annum designated by the Bank from time to time as its prime rate, it being understood that such rate is merely a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. If the entire amount of any required Principal and/or interest is not paid within ten (10) days after the same is due, the Borrower shall pay to the Bank a late fee equal to five percent (5%) of the required payment, provided that such late fee shall be reduced to three percent (3%) of any required 18 Principal and interest that is not paid within fifteen (15) days of the date it is due if this note is secured by a mortgage on an owner-occupied residence of 1-4 units. Principal of this note shall be repaid by the Borrower to the Bank in 15 equal consecutive quarterly installments (each in an amount equal to 1/16th of the aggregate principal amount of 1998 Term Loans (as defined in the Letter Agreement) outstanding at the close of business on March 25, 1999), such installments to commence March 31, 1999 to continue thereafter on the last Business Day of each calendar quarter through and including September 30, 2002, plus a 16th and final payment due and payable on December 31, 2002, in an amount equal to all then remaining Principal of the 1998 Term Loans and all interest accrued but unpaid thereon. The Borrower may at any time and from time to time prepay all or any portion of any 1998 Term Loan (as defined in the Letter Agreement), but, as to Fixed Rate Loans (as defined in the Letter Agreement), only at the times and in the manner, and (under certain circumstances) with the additional payments, provided for in the Letter Agreement. Any prepayment of Principal, in whole or in part, will be without premium or penalty (but, in the case of Fixed Rate Loans, may require payment of additional amounts, as provided for in the Letter Agreement). Each Principal prepayment shall be accompanied by payment of all interest on the prepaid amount accrued but unpaid to the date of payment. Any partial prepayment of Principal will be applied against Principal installments in inverse order of normal maturity. Payments of both Principal and interest shall be made, in lawful currency of the United States in immediately available funds, at the office of the Bank located at One Federal Street, Boston, Massachusetts 02110, or at such other address as the Bank may from time to time designate. The undersigned Borrower irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to this note or on the books of the Bank, at or following the time of making any 1998 Term Loan and of receiving any payment of Principal, an appropriate notation reflecting such transaction (including date, amount and maturity) and the then aggregate unpaid balance of Principal. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower hereunder or under the Letter Agreement. The unpaid Principal amount of this note, as recorded by the Bank from time to time on such schedule or on such books, shall constitute presumptive evidence of the aggregate unpaid principal amount of the 1998 Term Loans. The Borrower hereby (a) waives notice of and consents to any and all advances, settlements, compromises, favors and indulgences (including, without limitation, any extension or postponement of the time for payment), any and all receipts, substitutions, additions, exchanges and releases of collateral, and any and all additions, substitutions and releases of any person primarily or secondarily liable, (b) waives presentment, demand, notice, protest and all other demands and notices generally in connection with the delivery, acceptance, performance, default or enforcement of or under this note, and (c) agrees to pay, to the extent permitted by law, all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred or paid -2- 19 by the Bank in enforcing this note and any collateral or security therefor, all whether or not litigation is commenced. This note is the 1998 Term Note referred to in the Letter Agreement. This note is subject to prepayment as set forth in the Letter Agreement. This note is secured by, and is entitled to the benefit of, the Security Agreement (as defined in the Letter Agreement). The maturity of this note may be accelerated upon the occurrence of an Event of Default, as provided in the Letter Agreement. THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS NOTE AND TO MAKE THE 1998 TERM LOANS AS CONTEMPLATED IN THE LETTER AGREEMENT. -3- 20 Executed, as an instrument under seal, as of the day and year first above written. CORPORATE SEAL GENOME THERAPEUTICS CORP. ATTEST: /s/ David Chapin By: /s/ Fenel M. Eloi - ---------------------------- -------------------------------- Clerk: Ropes & Gray Name: Fenel M. Eloi Title: Senior VP, Treasurer, CFO -4- EX-27 3 FINANCIAL DATA SCHEDULE
5 0000356830 GENOME THERAPEUTICS CORPORATION 1,000 U.S. DOLLARS 9-MOS AUG-31-1998 SEP-01-1997 MAY-30-1998 1 11,937 23,475 866 0 0 37,558 23,677 7,847 57,813 15,947 0 0 0 1,828 30,804 57,813 0 13,331 0 26,690 0 0 846 0 0 0 0 0 0 (12,323) (.68) (.68)
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