10-Q 1 w54475e10-q.txt QUARTERLY REPORT FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended September 30, 2001 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC. (Exact name of registrant) Delaware 22-3178468 (State of organization) (I.R.S. Employer Identification Number)
9410 Key West Avenue, Rockville, Maryland 20850-3331 (Address of principal executive offices and zip code) (301) 309-8504 (Registrant's telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- The number of shares of the registrant's common stock outstanding on September 30, 2001 was 127,802,272. TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000......................................... 3 Consolidated Balance Sheets at September 30, 2001 and December 31, 2000......... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000......................................... 5 Notes to Consolidated Financial Statements...................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................ 14 Signatures...................................................................... 15
2 PART I. FINANCIAL INFORMATION HUMAN GENOME SCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------- ------------ ------------- ------------- (dollars in thousands, except share and per share amounts) Revenue - research and development collaborative contracts: Third parties ............................................... $ 1,000 $ 5,625 $ 10,250 $ 14,875 Related parties ............................................. 642 642 1,926 1,926 ------------- ------------- ------------- ------------- Total revenue ...................................... 1,642 6,267 12,176 16,801 ------------- ------------- ------------- ------------- Costs and expenses: Research and development .................................... 37,407 23,471 105,963 64,709 Purchased In-Process R&D .................................... -0- 134,050 -0- 134,050 General and administrative .................................. 9,212 6,274 27,198 18,794 ------------- ------------- ------------- ------------- Total costs and expenses ........................... 46,619 163,795 133,161 217,553 ------------- ------------- ------------- ------------- Income (loss) from operations .................................. (44,977) (157,528) (120,985) (200,752) Interest income ................................................ 26,267 14,954 81,893 37,969 Interest expense ............................................... (6,150) (6,335) (18,924) (15,724) Debt conversion expenses ....................................... (19) -0- (3,894) (50,818) ------------- ------------- ------------- ------------- Income (loss) before taxes and cumulative effect of change in accounting principle ....................................... (24,879) (148,909) (61,910) (229,325) Provision for income taxes ..................................... -0- -0- -0- 225 ------------- ------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle .................................................. (24,879) (148,909) (61,910) (229,550) Cumulative effect of change in accounting principle ............ -0- -0- -0- (8,250) ------------- ------------- ------------- ------------- Net income (loss) .............................................. $ (24,879) $ (148,909) $ (61,910) $ (237,800) ============= ============= ============= ============= Net income (loss) per share, basic and diluted: Net income (loss) per share, before cumulative effect of change in accounting principle .................................... $ (0.19) $ (1.35) $ (0.49) $ (2.13) Cumulative effect of change in accounting principle ............ -0- -0- -0- (0.08) ------------- ------------- ------------- ------------- Net income (loss) per share, basic and diluted ................. $ (0.19) $ (1.35) $ (0.49) $ (2.21) ============= ============= ============= ============= Weighted average shares outstanding, basic and diluted .......................................... 127,670,980 110,646,143 126,626,604 107,665,837 ============= ============= ============= =============
See accompanying notes to consolidated financial statements. 3 HUMAN GENOME SCIENCES, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 ------------ ------------ ASSETS (dollars in thousands) ------ Current assets: Cash and cash equivalents .................................. $ 62,851 $ 493,867 Short-term investments ..................................... 1,596,596 1,268,441 Prepaid expenses and other current assets .................. 8,084 9,290 ----------- ----------- Total current assets ................................. 1,667,531 1,771,598 Long-term investments ............................................ 32,824 93,337 Property, plant and equipment (net of accumulated depreciation) .. 83,744 38,567 Restricted investments ........................................... 69,457 12,332 Other assets ..................................................... 28,005 32,691 ----------- ----------- TOTAL ASSETS ......................................... $ 1,881,561 $ 1,948,525 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt .......................... $ 444 $ 729 Accounts payable and accrued expenses ...................... 23,464 18,317 Accrued payroll and related taxes .......................... 6,722 3,820 Deferred revenues .......................................... 2,568 11,818 ----------- ----------- Total current liabilities ............................ 33,198 34,684 Long-term debt, net of current portion ........................... 503,912 533,146 Deferred revenues ................................................ 13,481 15,407 Other liabilities ................................................ 2,071 2,333 ----------- ----------- Total liabilities .................................... 552,662 585,570 ----------- ----------- Stockholders' Equity: Preferred stock ............................................ -0- -0- Common stock ............................................... 1,278 1,252 Additional paid-in capital ................................. 1,747,950 1,698,384 Unearned portion of compensatory stock options ............. -0- (192) Accumulated other comprehensive income (loss) .............. 6,261 28,190 Retained earnings (deficit) ................................ (426,590) (364,679) ----------- ----------- Total stockholders' equity ........................... 1,328,899 1,362,955 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 1,881,561 $ 1,948,525 =========== ===========
See accompanying notes to consolidated financial statements. 4 HUMAN GENOME SCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 2000 ----------- ------------ (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................ $ (61,910) $ (237,800) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Accrued interest on short-term investments .............................. 3,801 (5,974) Depreciation and amortization ........................................... 9,507 7,617 Purchased In-Process Research and Development ........................... -0- 134,050 Inducement costs paid in the form of common stock ....................... 3,875 19,433 Cumulative effect of change in accounting principle ..................... -0- 8,250 Loss (gain) on disposal of fixed assets ................................. 367 9 Compensation expense related to stock options ........................... 192 150 Changes in operating assets and liabilities: Prepaid expenses and other current assets .......................... 354 (7,039) Other assets ....................................................... 2,184 (16,902) Accounts payable and accrued expenses .............................. 6,572 4,093 Accrued payroll and related taxes .................................. 2,902 4,119 Deferred revenues .................................................. (11,176) (1,926) Other liabilities .................................................. (262) 13 ----------- ----------- Net cash provided by (used in) operating activities ..................... (43,594) (91,907) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - property, plant and equipment ......................... (54,267) (12,364) Purchase of short-term investments and marketable securities ................. (1,141,391) (563,965) Purchase of long-term investment ............................................. -0- (54,766) Acquisition, net of acquired cash ............................................ -0- 875 Proceeds from sales and maturities of investments and marketable securities .. 848,870 143,509 ----------- ----------- Net cash provided by (used in) investing activities ..................... (346,788) (486,711) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt .................................................. (924) -0- Restricted investments ....................................................... (57,125) (507) Proceeds from issuance of long term debt (net of expenses) ................... -0- 508,584 Proceeds from issuance of common stock (net of expenses) ..................... 17,415 19,113 ----------- ----------- Net cash provided by (used in) financing activities ..................... (40,634) 527,190 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. (431,016) (51,428) Cash and cash equivalents - beginning of period ................................... 493,867 180,839 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD ......................................... $ 62,851 $ 129,411 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................ $ 11,700 $ 41,717 Income taxes 75 200
See accompanying notes to consolidated financial statements. 5 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS): In July 2001, the Company converted $400 of 5 1/2% Convertible Subordinated Notes Due 2006 to common stock. The Company incurred $19 in inducement costs paid in the form of cash as an inducement to convert these notes and paid $1 in accrued interest in the form of cash. In June 2001, the Company converted $25,000 of 5% Convertible Subordinated Notes Due 2007 to common stock. The Company incurred $3,875 in inducement costs paid in the form of common stock as an inducement to convert these notes and paid $458 in accrued interest in the form of common stock. In connection with this conversion, the Company reclassified $673 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In May 2001, the Company converted $500 of 5 1/2% Convertible Subordinated Notes Due 2006 to common stock. In connection with this conversion, the Company reclassified $4 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In February 2001, the Company converted $2,694 of 5 1/2% Convertible Subordinated Notes Due 2006 to common stock. In connection with this conversion, the Company reclassified $65 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In March 2000, the Company converted $200,000 of 5% Convertible Subordinated Notes Due 2006 to common stock. In connection with this conversion, the Company made a $30,000 cash "make-whole" payment. In addition, the Company reclassified $6,000 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In January 2000, the Company converted $118,285 of 5 1/2% Convertible Subordinated Notes Due 2006 to common stock and incurred $19,433 in inducement costs paid in the form of common stock as an inducement to convert. In addition, the Company reclassified $3,470 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. See accompanying notes to consolidated financial statements. 6 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (In thousands, except share and per share data) NOTE 1. INTERIM FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements of Human Genome Sciences, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. In the opinion of the Company's management, the consolidated financial statements reflect all adjustments necessary to present fairly the results of operations for the three and nine month periods ended September 30, 2001 and 2000, the Company's financial position at September 30, 2001, and the cash flows for the nine month periods ended September 30, 2001 and 2000. These adjustments are of a normal recurring nature. The results of operations, cash flows and comprehensive income for the three and nine month periods ended September 30, 2000 have been restated to reflect the implementation of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in 2000, retroactive to January 1, 2000. Certain notes and other information have been condensed or omitted from the interim consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 2000 Annual Report on Form 10-K and the Company's March 31, 2001 and June 30, 2001 Quarterly Reports on Form 10-Q. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of future financial results. NOTE 2. ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION On September 8, 2000, the Company acquired all of the outstanding shares of capital stock of Principia Pharmaceutical Corporation ("Principia") from its shareholders. The cost of the acquisition was $135,071, including fees and expenses. The purchase price was paid with 1,582,204 shares of the Company's Common Stock. The consolidated financial statements include the results of operations of Principia since the date of acquisition. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated as follows: Net assets and liabilities acquired at their estimated fair value as of the date of acquisition $ 521 Assembled Workforce 500 Purchased In-Process Research and Development 134,050 ------------ Total $ 135,071 ============
During the first quarter of 2001, the Company announced its decision to relocate Principia's operations from Norristown, Pennsylvania to the Company's Rockville, Maryland location. As a result, the Company recorded a one-time charge in the first quarter of 2001 of approximately $1,900, representing unit relocation costs and the write off of the remaining book value of Principia's Assembled Workforce. The balance of the unit relocation reserve was approximately $1,500 as of September 30, 2001. In addition, the Company expects to incur approximately $505 in personnel relocation costs and stay bonuses over the fourth quarter of 2001 and the first quarter of 2002. 7 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (In thousands, except share and per share data) NOTE 3. COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", requires unrealized gains or losses on the Company's available-for-sale securities and on the Company's investments in Transgene S.A., Cambridge Antibody Technology and Ciphergen Biosystems to be included in other comprehensive income. During the three and nine month periods ended September 30, 2001 and 2000, total comprehensive income (loss) amounted to:
Three months ended Nine months ended September 30, September 30, ------------------------- --------------------------- 2001 2000 2001 2000 ----------- ---------- ----------- ------------- Net income (loss) $ (24,879) $(148,909) $ (61,910) $(237,800) Net unrealized gains (losses): Short-term investments 25,293 3,198 38,583 3,381 Long-term investments (13,789) 19,730 (60,513) 54,474 --------- --------- --------- --------- Total comprehensive income (loss) $ (13,375) $(125,981) $ (83,840) $(179,945) ========= ========= ========= =========
Realized gains and losses, which are included in the Company's net income (loss) for the three and nine months ended September 30, 2001, and their respective net proceeds were as follows:
Three months ended Nine months ended September 30, 2001 September 30, 2001 ------------------ ------------------ Realized gains $ 2,261 $ 4,720 Realized losses (0) (146) Net proceeds 129,765 550,521
Realized gains and losses on investments and their respective net proceeds were immaterial for the three and nine months ended September 30, 2000. NOTE 4. RECENT SEC INTERPRETATIONS During the fourth quarter of 2000, the Company implemented SAB 101. SAB 101 provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 requires revenues to be recognized ratably over the life of a contract period whereas, previously, the Company generally recognized revenue as non-refundable cash payments were made assuming no significant obligations remained. SAB 101 requires companies to report any changes in revenue recognition as a cumulative effect of a change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes". Historically, the Company has recognized non-refundable license fees, research payments, additional payments and milestone payments in connection with collaboration agreements when the revenue is earned in accordance with the applicable performance requirements and/or contractual terms. This revenue 8 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (In thousands, except share and per share data) NOTE 4. RECENT SEC INTERPRETATIONS, CONTINUED recognition policy was applicable to certain multi-year agreements the Company entered into with Schering-Plough, Sanofi-Synthelabo and Merck KgaA during 1996 (the "1996 Agreements"). The Company recognized revenue under these agreements when it had performed all significant obligations and the customer was obligated to pay. The Company generally considered any remaining performance obligation, such as maintaining access to its genomic databases, as insignificant. However, SAB 101 provides guidance that indicates revenue recognition over the collaboration term is generally the required treatment for all fees, regardless of the significance of remaining performance obligations. As a result of the implementation of SAB 101, the Company recorded a charge to earnings in 2000 in the form of a cumulative effect of a change in accounting principle and additional deferred revenue in the amount of $8,250. The Company has recognized this deferred amount as revenue during both the first and second quarters of 2001 in the amount of $4,125 per quarter. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 RESULTS OF OPERATIONS Revenues. Revenues were $1.6 million for the three months ended September 30, 2001 compared to revenues of $6.3 million for the three months ended September 30, 2000. Revenues for the three months ended September 30, 2001 include a $1.0 million milestone payment earned and received from GlaxoSmithKline and $0.6 million in revenue recognized from Transgene, S.A. As a result of our implementation of SAB 101 last year, our third quarter revenues for 2000 have been restated. Revenues for the three months ended September 30, 2000 represented $1.9 million in revenue recognized from Schering Corporation and Schering Plough Ltd., $1.7 million in revenue recognized from Merck KGaA, $1.1 million in revenue recognized from Synthelabo, $1.0 million in revenue from MedImmune and $0.6 million recognized in revenue from Transgene, S.A. Revenues for the nine months ended September 30, 2001 were $12.2 million including $3.8 million in revenue recognized from Schering Corporation and Schering Plough Ltd., $3.3 million in revenue recognized from Merck KGaA, $2.2 million in revenue recognized from Synthelabo, $1.9 million recognized in revenue from Transgene, S.A., and $1.0 million in revenue from GlaxoSmithKline. As a result of our implementation of SAB 101 last year, revenues for the nine months ended September 30, 2000 have been restated. Revenues for the nine months ended September 30, 2000 were $16.8 million including $5.6 million in revenue recognized from Schering Corporation and Schering Plough Ltd., $4.9 million in revenue recognized from Merck KGaA, $3.4 million in revenue recognized from Synthelabo, $1.9 million recognized in revenue from Transgene, S.A. and $1.0 million in revenue from MedImmune. Related party revenues include revenues from Transgene in which we hold a minority interest. We expect that our revenues may be limited to already charged payments under existing collaboration agreements which are contingent on meeting certain product milestones, license fees, proceeds from the sale of rights and other payments from other collaborators and licensees under existing or future arrangements, to the extent that we enter into any such further arrangements. On June 30, 2001, the exclusivity period, or initial research term, relating to our consortium with GlaxoSmithKline, Schering, Takeda Chemical Industries, Synthelabo and Merck concluded. All payments required during the initial research term have been received and recognized as revenue. While none of the consortium members chose to renew the initial research term, work already initiated by the members can continue if evidence of continued diligence is provided. We will be entitled to certain milestone payments on such work and royalty payments on any drugs that are commercialized. In addition, for drugs developed by GlaxoSmithKline, we will be entitled to certain co-promotion rights. We can provide no assurance that any of these drugs can be successfully commercialized. Expenses. Research and development expenses were $37.4 million for the three months ended September 30, 2001 compared to $23.5 million for the three months ended September 30, 2000. Research and development expenses were $104.0 million for the nine months ended September 30, 2001 compared to $64.7 million for the nine months ended September 30, 2000. The increase for both the three and nine month periods resulted primarily from increased manufacturing operations costs as well as increased expenditures in preclinical research and clinical trial research. In addition, research and development expenses for the nine months ended September 30, 2001 include $1.9 million in unit relocation costs and asset write-downs relating to the relocation of Principia's operations to our Rockville, Maryland location as discussed in Note 2 to the Consolidated Financial Statements. Purchased In-Process R&D expenses of $134.1 million for the three and nine months ended September 30, 2000 relate to the acquisition of Principia Pharmaceutical Corporation on September 8, 2000. This amount represents that portion of the $135.1 million purchase price allocated to in-process research and development. See Note 2 of the Notes to the Consolidated Financial Statements for additional discussion. 10 RESULTS OF OPERATIONS, CONTINUED General and administrative expenses increased to $9.2 million for the three months ended September 30, 2001 from $6.3 million for the three months ended September 30, 2000. General and administrative expenses increased to $27.2 million for the nine months ended September 30, 2001 from $18.8 million for the nine months ended September 30, 2000. The increase for both the three and nine month periods ended September 30, 2001 resulted primarily from increased market research costs in connection with our expanding clinical activities and higher legal expenses associated with filing and prosecuting a larger number of patent applications relating to genes and proteins we discovered, along with increased business and product development expenses in support of our expanding activities. Interest income increased for both the three and nine month periods ended September 30, 2001 compared to the three and nine month periods ended September 30, 2000 due to higher cash balances arising primarily from our public offering of common stock during the fourth quarter of 2000 that raised net proceeds of approximately $912.7 million. Interest expense decreased for the three month period due primarily to a reduction in the average debt balance for 2001 compared to 2000 as a result of the conversion to equity of $318.3 million of convertible subordinated debt during the first quarter of 2000. Interest expense increased for the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000 due primarily to an increase of $525.0 million in convertible subordinated debt during the first quarter of fiscal 2000, partially offset by the convertible subordinated note conversions discussed herein. Debt conversion expenses of $19.0 thousand for the three months ended September 30, 2001 and $3.9 million for the nine months ended September 30, 2001 relate primarily to the second quarter of 2001 conversion of $25.5 million aggregate principal amount of convertible subordinated notes into equity. During the second quarter of 2001, we converted $25.0 million of our outstanding $224.9 million aggregate principal amount of 5% Notes Due 2007 into common stock at a cost of $3.9 million, substantially all of which was paid in the form of common stock and we also converted $0.5 million of our 5 1/2% Notes Due 2006 into common stock. Debt conversion expenses of $50.8 million for the nine months ended September 30, 2000 relate to the first quarter of fiscal 2000 conversion costs of $318.3 million aggregate principal amount of convertible subordinated notes into equity. We converted $118.3 million of our 5 1/2% Notes Due 2006 into common stock at a cost of $20.8 million, substantially all of which was paid in the form of common stock. In addition, we converted all of our $200.0 million aggregate principal amount of 5% Notes Due 2006 into common stock at a cost of $30.0 million, all of which was paid in cash. Cumulative effect of a change in accounting principle of $8.3 million for the nine months ended September 30, 2000 relates to our implementation of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). As a result of the implementation of SAB 101, we recorded a charge of $8.3 million as a cumulative effect of a change in accounting principle, retroactive to January 1, 2000. Net Income. We recorded a net loss of $24.9 million, or $0.19 per share, for the three months ended September 30, 2001 compared to a net loss of $148.9 million, or $1.35 per share, for the three months ended September 30, 2000. The decreased loss for the three month period of 2001 reflects the absence of Purchased In-Process R&D of $134.1 million, or $1.21 per share, the reduction in debt conversion expenses and an increase in net interest income, partially offset by the increase in manufacturing operations, increased investment in the development of preclinical and clinical drug candidates and increased general and administrative activities. Excluding the debt conversion charge incurred during the three months ended September 30, 2001 and the charge for Purchased In-Process R&D incurred during the three months ended September 30, 2000, our net loss would have been $24.9 million, or $0.19 per share compared to $14.9 million, or $0.14 per share, for the three months ended September 30, 2001 and 2000, respectively. We recorded a net loss of $61.9 million, or $0.49 per share, for the nine months ended September 30, 2001 compared to a net loss of $237.8 million, or $2.21 per share, for the nine months ended September 30, 2000. The decreased loss for the nine month period reflects the reduction of debt conversion expenses and the absence of both Purchased In-Process R&D and the cumulative effect of a change in accounting principle incurred in 2000, the increase in net interest income in 2001, partially offset by the increase in manufacturing operations, 11 RESULTS OF OPERATIONS, CONTINUED increased investment in the development of preclinical and clinical drug candidates, and increased general and administrative activities. Excluding the charges for debt conversion expenses for both fiscal year 2001 and 2000 and the Purchased In-Process R&D and the cumulative effect of a change in accounting principle incurred in the nine months ended September 30, 2000, our net loss for the nine months ended September 30, 2001 would have been $58.0 million, or $0.46 per share, compared to $44.7 million, or $0.41 per share for the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES We had working capital of $1.6 billion and $1.7 billion at September 30, 2001 and December 31, 2000, respectively. No significant transactions have occurred in the nine months ended September 30, 2001 that have affected our working capital. Our restricted investments increased during the second quarter of 2001 primarily due to a transfer of $55 million of investments into a restricted account as part of a long-term facility lease we entered into during that quarter. We expect to continue to incur substantial expenses relating to our research and development efforts, which are expected to increase relative to historical levels as we focus on preclinical and clinical trials required for the development of therapeutic protein and antibody product candidates. We expect that our existing funds and interest income will be sufficient to fund our operations for the foreseeable future. Our future capital requirements and the adequacy of our available funds will depend on many factors, including scientific progress in our research and development programs, the magnitude of those programs, the success of the consortium members developing and commercializing drugs from existing programs, our ability to establish additional collaborative and licensing arrangements, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and competing technological and market developments. Our funds may be invested in U.S. Treasuries, government agency obligations, high grade debt securities and various money market instruments. Such investments reflect our policy regarding the investment of liquid assets, which is to seek a reasonable rate of return consistent with an emphasis on safety, liquidity and preservation of capital. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on our current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of our unproven business model, dependence on new technologies, uncertainty and timing of clinical trials, ability to develop and commercialize products, dependence on collaborators for services and revenue, substantial indebtedness, intense competition, uncertainty of patent and intellectual property protection, dependence on key management, uncertainty of regulation of products, dependence on key suppliers, the impact of future alliances or transactions and other risks that may be described in our filings with the Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. We undertake no obligation to update or revise the information contained in this announcement whether as a result of new information, future events or circumstances or otherwise. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We do not have operations subject to risks of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. Our investment portfolio can be comprised of low-risk U.S. Treasuries, government agency obligations, high-grade debt having a rating of at least an A rating and various money market instruments. The short-term nature of these securities, which have an average term of approximately one year, significantly decreases the risk of a material loss caused by a market change. We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect the net fair value of our cash, cash equivalents and short-term and restricted investments by approximately $25.2 million, or approximately 1.5% of the aggregate fair value of $1.73 billion, at September 30, 2001. For these reasons, and because these securities are almost always held to maturity, we believe we do not have significant exposure to market risks associated with changes in interest rates related to our debt securities held as of September 30, 2001. We believe that any market change related to our U.S. securities held as of September 30, 2001 is not material to our consolidated financial statements. However, given the short-term nature of these securities, a general decline in interest rates would adversely affect the interest income from our portfolio as securities mature and are replaced with securities having a lower interest rate. As of September 30, 2001, the carrying values of our equity investments in Transgene, Cambridge Antibody Technology (CAT) and Ciphergen Biosystems were approximately $3.9 million, $28.3 million and $0.7 million, respectively. Our investments in Transgene and Ciphergen Biosystems are subject to equity market risk. Our investment in CAT is denominated in pounds sterling and is subject to both foreign currency risk as well as equity market risk. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. ------------------- (b) Reports on Form 8-K We filed a Current Report on Form 8-K on July 6, 2001, announcing that the exclusivity period for our human gene therapeutic consortium expired on June 30, 2001, a period described as the initial research term. None of the consortium members chose to extend the initial research term. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUMAN GENOME SCIENCES, INC. BY: /s/ William A. Haseltine, Ph.D. ------------------------------- William A. Haseltine, Ph.D. Chairman and Chief Executive Officer BY: /s/ Steven C. Mayer ------------------------------- Steven C. Mayer Senior Vice President and Chief Financial Officer Dated: November 5, 2001