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, 2002 | Commission File Number 0-22962 |
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
| Delaware (State of organization) |
22-3178468 (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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
The number of shares of the registrant’s common stock outstanding on September 30, 2002 was 128,755,597.
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, 2002 and 2001 |
3 | ||||||||
| Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 | 4 | ||||||||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 |
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 | 15 | |||||||
Item 4 |
Controls and Procedures | 15 | |||||||
PART II. |
OTHER INFORMATION | ||||||||
Item 6. |
Exhibits and Reports on Form 8-K | 16 | |||||||
| Signatures | 17 | ||||||||
| Certifications | 18 | ||||||||
| Exhibit Index | Exhibit Volume | ||||||||
2
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended | Nine months ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
| (dollars in thousands, except share and per share amounts) | ||||||||||||||||||
Revenue — research and development
collaborative contracts: |
||||||||||||||||||
Third parties |
$ | 1,000 | $ | 1,000 | $ | 1,000 | $ | 10,250 | ||||||||||
Related parties |
642 | 642 | 1,926 | 1,926 | ||||||||||||||
Total revenue |
1,642 | 1,642 | 2,926 | 12,176 | ||||||||||||||
Costs and expenses: |
||||||||||||||||||
Research and development |
47,993 | 37,407 | 142,283 | 105,963 | ||||||||||||||
General and administrative |
10,449 | 9,212 | 34,016 | 27,198 | ||||||||||||||
Total costs and expenses |
58,442 | 46,619 | 176,299 | 133,161 | ||||||||||||||
Income (loss) from operations |
(56,800 | ) | (44,977 | ) | (173,373 | ) | (120,985 | ) | ||||||||||
Interest income |
19,817 | 26,267 | 63,478 | 81,893 | ||||||||||||||
Interest expense |
(5,932 | ) | (6,150 | ) | (17,818 | ) | (18,924 | ) | ||||||||||
Charge for impaired investment |
(32,158 | ) | — | (32,158 | ) | — | ||||||||||||
Debt conversion expenses |
— | (19 | ) | — | (3,894 | ) | ||||||||||||
Income (loss) before taxes |
(75,073 | ) | (24,879 | ) | (159,871 | ) | (61,910 | ) | ||||||||||
Provision for income taxes |
— | — | — | — | ||||||||||||||
Net income (loss) |
$ | (75,073 | ) | $ | (24,879 | ) | $ | (159,871 | ) | $ | (61,910 | ) | ||||||
Net income (loss) per share, basic and diluted |
$ | (0.58 | ) | $ | (0.19 | ) | $ | (1.24 | ) | $ | (0.49 | ) | ||||||
Weighted average shares outstanding,
basic and diluted |
128,700,714 | 127,670,980 | 128,523,971 | 126,626,604 | ||||||||||||||
See accompanying notes to consolidated financial statements.
3
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
| (dollars in thousands) | |||||||||||
| ASSETS | |||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 20,787 | $ | 88,319 | |||||||
Short-term investments |
1,331,110 | 1,456,091 | |||||||||
Prepaid expenses and other current assets |
4,249 | 3,988 | |||||||||
Total current assets |
1,356,146 | 1,548,398 | |||||||||
Long-term investments |
15,213 | 43,824 | |||||||||
Property, plant and equipment (net of accumulated depreciation and amortization) |
125,624 | 101,282 | |||||||||
Restricted investments |
195,717 | 144,901 | |||||||||
Other assets |
21,339 | 26,599 | |||||||||
TOTAL ASSETS |
$ | 1,714,039 | $ | 1,865,004 | |||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||||||
Current liabilities: |
|||||||||||
Current portion of long-term debt |
$ | 444 | $ | 444 | |||||||
Current portion of capital lease obligation |
241 | 241 | |||||||||
Accounts payable and accrued expenses |
24,084 | 32,915 | |||||||||
Accrued payroll and related taxes |
8,323 | 5,600 | |||||||||
Deferred revenues |
2,568 | 2,568 | |||||||||
Total current liabilities |
35,660 | 41,768 | |||||||||
Long-term debt, net of current portion |
503,468 | 503,468 | |||||||||
Capital lease obligation, net of current portion |
346 | 502 | |||||||||
Deferred revenues |
10,913 | 12,839 | |||||||||
Other liabilities |
2,251 | 1,964 | |||||||||
Total liabilities |
552,638 | 560,541 | |||||||||
Stockholders’ Equity: |
|||||||||||
Preferred stock |
— | — | |||||||||
Common stock |
1,288 | 1,283 | |||||||||
Additional paid-in capital |
1,756,971 | 1,753,235 | |||||||||
Unearned portion of compensatory stock options |
(245 | ) | (294 | ) | |||||||
Accumulated other comprehensive income (loss) |
45,089 | 32,070 | |||||||||
Retained deficit |
(641,702 | ) | (481,831 | ) | |||||||
Total stockholders’ equity |
1,161,401 | 1,304,463 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 1,714,039 | $ | 1,865,004 | |||||||
See accompanying notes to consolidated financial statements.
4
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine months ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (dollars in thousands) | |||||||||||
Cash flows from operating activities: |
|||||||||||
Net income (loss) |
$ | (159,871 | ) | $ | (61,910 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|||||||||||
Accrued interest on short-term investments |
12,050 | 3,801 | |||||||||
Depreciation and amortization |
12,997 | 9,507 | |||||||||
Charge for impaired investment |
32,158 | — | |||||||||
Inducement costs paid in the form of common stock |
— | 3,875 | |||||||||
Loss (gain) on disposal of fixed assets |
314 | 367 | |||||||||
Compensation expense related to stock options |
249 | 192 | |||||||||
Changes in operating assets and liabilities: |
|||||||||||
Prepaid expenses and other current assets |
(261 | ) | 354 | ||||||||
Other assets |
3,580 | 2,184 | |||||||||
Accounts payable and accrued expenses |
91 | 6,572 | |||||||||
Accrued payroll and related taxes |
2,723 | 2,902 | |||||||||
Deferred revenues |
(1,926 | ) | (11,176 | ) | |||||||
Other liabilities |
282 | (262 | ) | ||||||||
Net cash provided by (used in) operating activities |
(97,614 | ) | (43,594 | ) | |||||||
Cash flows from investing activities: |
|||||||||||
Capital expenditures — property, plant and equipment |
(44,889 | ) | (54,267 | ) | |||||||
Purchase of short-term investments and marketable securities |
(495,897 | ) | (1,141,391 | ) | |||||||
Proceeds from sales and maturities of investments and marketable securities |
616,135 | 848,870 | |||||||||
Net cash provided by (used in) investing activities |
75,349 | (346,788 | ) | ||||||||
Cash flows from financing activities: |
|||||||||||
Repayment of long-term debt |
— | (924 | ) | ||||||||
Restricted investments |
(48,652 | ) | (57,125 | ) | |||||||
Payments on capital lease |
(156 | ) | — | ||||||||
Proceeds from issuance of common stock (net of expenses) |
3,541 | 17,415 | |||||||||
Net cash provided by (used in) financing activities |
(45,267 | ) | (40,634 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
(67,532 | ) | (431,016 | ) | |||||||
Cash and cash equivalents — beginning of period |
88,319 | 493,867 | |||||||||
Cash and cash equivalents — end of period |
$ | 20,787 | $ | 62,851 | |||||||
Supplemental disclosures of cash flow information: |
|||||||||||
Cash paid during the period for: |
|||||||||||
Interest |
$ | 21,475 | $ | 22,784 | |||||||
Income taxes |
— | 75 | |||||||||
See accompanying notes to consolidated financial statements.
5
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS):
In June 2001, the Company converted $25,000 of 5% Convertible Subordinated Notes Due 2007 into common stock and incurred $3,875 in inducement costs paid in the form of common stock as an inducement to convert. In addition, the Company reclassified $673 of unamortized debt financing costs associated with these notes to stockholders’ equity as part of the conversion.
During the first nine months of 2001, the Company converted an aggregate of $3,595 of 5 1/2% Convertible Subordinated Notes Due 2006 into common stock and incurred $19 in inducement costs paid in the form of cash as an inducement to convert. In addition, the Company reclassified $78 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, 2002
(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, 2002 and 2001, the Company’s financial position at September 30, 2002, and the cash flows for the nine month periods ended September 30, 2002 and 2001. These adjustments are of a normal recurring nature.
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 2001 Annual Report on Form 10-K and the Company’s March 31, 2002 and June 30, 2002 Quarterly Reports on Form 10-Q.
The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of future financial results.
Note 2. 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 (“CAT”) and Ciphergen Biosystems to be included in other comprehensive income.
During the three and nine month periods ended September 30, 2002 and 2001, total comprehensive income (loss) amounted to:
| Three months ended | Nine months ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net income (loss) |
$ | (75,073 | ) | $ | (24,879 | ) | $ | (159,871 | ) | $ | (61,910 | ) | ||||||
Net unrealized gains (losses): |
||||||||||||||||||
Short-term investments |
15,237 | 25,293 | 7,308 | 38,583 | ||||||||||||||
Long-term investments |
(10,619 | ) | (13,789 | ) | (28,612 | ) | (60,513 | ) | ||||||||||
Restricted investments |
2,221 | — | 2,165 | — | ||||||||||||||
Subtotal |
6,839 | 11,504 | (19,139 | ) | (21,930 | ) | ||||||||||||
Impairment loss relating to
investment in CAT |
32,158 | — | 32,158 | — | ||||||||||||||
Total comprehensive income (loss) |
$ | (36,076 | ) | $ | (13,375 | ) | $ | (146,852 | ) | $ | (83,840 | ) | ||||||
During the three and nine month periods ended September 30, 2002, the Company reduced the carrying value of its investment in Cambridge Antibody Technology in the amount of $32,158 and reversed the previously-recorded unrealized loss relating to this investment due to the significant reduction in market value of CAT’s shares that the Company believes may not be temporary. As a result, the Company had an adjusted cost of $13,080 as determined by the current market value of CAT’s publicly-traded common stock and no unrealized loss as of this same date.
7
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2002
(In thousands, except share and per share data)
Note 2. Comprehensive Income (Loss) (continued)
Realized gains and losses on securities sold before maturity, which are included in the Company’s net income (loss) for the three and nine month periods ended September 30, 2002 and 2001, and their respective net proceeds were as follows: