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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-23317
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GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1411336
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(Address of principal executive offices)
Registrant's telephone number, including area code: (301) 987-1700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ____
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the Registrant as of March 1,
2001 was approximately $456,992,000, based on the closing price on that date of
Common Stock on the Nasdaq National Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 26,309,122 as of March 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A in connection
with the 2001 Annual Meeting of Stockholders to be held on June 7, 2001 is
incorporated by reference into Part III of this Annual Report on Form 10-K to
the extent stated herein.
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* Excludes 4,151,923 shares of Common Stock held by directors and executive
officers and stockholders whose beneficial ownership exceeds 10% of the
shares outstanding on March 1, 2001. Exclusion of shares held by any
person should not be construed to indicate that such person possesses
the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is
controlled by or under common control with the Registrant.
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PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. We generally use words such as "anticipate,"
"estimate," "plan," "project," "continuing," "ongoing," "expect," "management
believes," "we believe," "we intend" and similar expressions to indicate when we
are making forward-looking statements. You should not place undue reliance on
these forward-looking statements. The forward-looking statements speak only as
of the date on which they are made, and we undertake no obligation to update any
forward-looking statement. Forward-looking statements include statements about
the performance and utility of our products, the timing and availability of
products under development, the ability of our customers to develop products
identified using our products, the adequacy of capital resources and other
expectations, plans, objectives, assumptions or future events. These statements
involve estimates, assumptions and uncertainties that could cause actual results
to differ materially from those expressed for the reasons described in this
Report on Form 10-K. These risks and uncertainties include, but are not limited
to, the extent of utilization of genomic information by the pharmaceutical and
biotechnology industries in both research and development, our ability to retain
existing and obtain additional database customers, risks relating to the
development of genomic database products and their use by existing and potential
customers, the impact of technological advances and competition, our ability to
enforce our intellectual property rights, and the impact of the intellectual
property rights of others, as well as other risks and uncertainties set forth
below and in the sections entitled "Risk Factors" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
Unless the context requires otherwise, references in this Report on Form
10-K to "Gene Logic," the "Company," "we," "us," and "our" refer to Gene Logic
Inc. and its wholly owned subsidiary.
GeneExpress(R) is a registered trademark of Gene Logic. READS(TM),
BioExpress(TM), ToxExpress(TM), PharmExpress(TM), CloneExpress(TM),
e-northern(TM), gene signature(TM) and Flow-thru Chip(TM) are trademarks of Gene
Logic. GeneChip(R) is a registered trademark of Affymetrix, Inc. Trade names and
trademarks of other companies appearing in this Report on Form 10-K are the
property of their respective holders.
OVERVIEW
Gene Logic is a leading supplier of integrated genomic information and
bioinformatics related to gene activity in human disease and toxicity to enable
global pharmaceutical, biotechnology, life sciences and diagnostic companies to
reduce the time, risk and cost involved in developing drugs against human
disease. Through the systematic and industrialized application of genomics, we
have built and are commercializing what we believe to be the world's most
comprehensive survey of gene expression from human and animal tissues. Gene
expression, which is the degree to which genes in a cell are switched on or off,
is information critical to understanding the functions of genes. We market a
growing portfolio of gene expression-based products. These products include our
flagship product, the GeneExpress Suite of databases, and custom, proprietary
gene expression databases focused on single disease indications. The GeneExpress
Suite is a growing reference library of gene expression information to be used
to discover drug targets, prioritize therapeutic compounds, predict toxicity,
determine drug efficacy via pharmacogenetics, and facilitate clinical trial
development and patient management. Currently, a number of global pharmaceutical
and biotechnology companies utilize our various gene expression products
throughout their drug discovery and development programs.
Since 1997, we have developed gene expression databases designed to fulfill
the needs of our customers' internal programs and targeted to specific
therapeutic areas of interest, including heart failure, kidney disease,
osteoporosis, psychiatric disorders and other major illnesses. Building on this
know-how, in March 1999 we began developing the GeneExpress Suite of databases
of reference gene expression information. The GeneExpress Suite contains genomic
information from a broad range of normal and diseased human tissues, tissues
from experimental animals, human and animal cell lines as well as tissues from
patients and animals treated with many different drugs. We completed development
of the first commercial version of the GeneExpress Suite in November 1999 and
sold our first GeneExpress Suite subscription in December 1999. We currently
market the GeneExpress Suite of databases through nonexclusive subscriptions to
the pharmaceutical, biotechnology, life sciences and diagnostic industries.
We collect tissues and cells through our global biorepository network and
generate gene expression data in-house using two complementary
technologies--GeneChip microarrays manufactured by Affymetrix, Inc. and our own
patented READS (Restriction Enzyme Analysis of Differentially Expressed
Sequences) technology. The combination of GeneChip microarrays and READS enables
us to obtain comprehensive coverage of the genes expressed in virtually all
important tissue types. At year-end 2000, the GeneExpress Suite of databases
contained gene expression profiles on over 4,000 tissue samples. By the end of
2003, we expect to have complete gene expression profiles on 30,000 tissue
samples, over half of which will be tissue from a wide range of human organs,
each with comprehensive clinical information, representing a broad and in-depth
survey of human gene expression across every major disease.
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We have also developed a novel software platform for delivering our database
products. The GeneExpress 2000 software interface provides support for
integrating customers' data with Gene Logic's gene expression data. Our software
interface provides powerful analytical and visualization tools for mining gene
expression data, and allows users to conduct a broad variety of analytical
experiments designed to answer their specific questions about mechanisms of
disease and drug action.
The GeneExpress Suite of databases is used for a variety of applications,
including the discovery and validation of novel drug targets, prioritization of
therapeutic compounds, in silico prediction of safety and efficacy of new
molecular entities and facilitation of clinical trials and patient management.
We have the ability to organize gene expression data into subsets, called
DataSuites, specific to customers' research program requirements and optimally
priced to satisfy a wide range of budgetary requirements. As a result, we can
tailor the same information to different customer requirements, thereby
maximizing the revenue potential of the underlying data. We believe our
GeneExpress Suite of databases will become a fundamental reference source of
gene expression information for many scientists engaged in industrial and
academic biological research.
We currently have the following 15 global pharmaceutical and biotechnology
companies utilizing gene expression information from the GeneExpress Suite.
- - American Home Products - Genentech, Inc. - Pfizer, Inc.
- - Avalon Pharmaceuticals - IDEC Pharmaceuticals - Procter & Gamble Pharmaceuticals
- - Biogen, Inc. - LG Chemical Ltd. - Psychiatric Genomics, Inc.
- - Boehringer Ingelheim KG - NeuralStem Biopharmaceuticals - Sumitomo Pharmaceuticals
- - Genaissance Pharmaceuticals - N.V. Organon - UCB Pharma
We currently have the following five pharmaceutical companies with whom we
have a custom discovery research collaboration focused on specific disease
indications:
- - Procter & Gamble Pharmaceuticals - LG Chemical Ltd. - UCB Pharma
- - Japan Tobacco, Inc. - N.V. Organon
Our customers provide us with various combinations of subscription,
technology and database access fees, research fees, up-front payments, research
and product development milestone payments, and possible future royalty payments
that could enable us to receive a portion of our customers' revenues from sales
of any products that result from use of our technology or proprietary database
information.
THE IMPORTANCE OF GENE EXPRESSION INFORMATION
Diseases result when the physiological pathways that regulate the
functioning of cells are disturbed. The main components of these pathways are
proteins, the synthesis of which is directed by genes within the cells. Genes
transcribe their instructions for protein synthesis into messenger RNA, or mRNA;
the amount of mRNA present in any given cell, which is termed gene expression,
is thus a measure of the gene's activity. While each cell of the human body
contains all of the approximately 30,000 to 40,000 protein-coding genes, only
about 10-20% of the genes are active in any particular cell type. By analyzing
which genes are expressed in a cell or tissue and to what level, it can be
determined which physiological pathways are active in the cell and to what
degree. By understanding when and where abnormal gene expression occurs and the
changes in expression that a drug can cause, the physiological pathways
implicated in disease and drug action can be pinpointed. This knowledge can be
used to help discover drug targets, prioritize drug leads, predict toxic effects
of compounds, anticipate pharmacological responses to drug leads, and tailor
clinical trials to the specific needs of subgroups within a population. By
understanding the gene expression patterns of relevant tissues from patients
with a disease, physicians may also be able to determine which treatments are
likely to be effective for that condition and which may be ineffective or
harmful.
We believe that the GeneExpress Suite of databases is the world's largest
reference set of gene expression information linked to relevant clinical
information and that it enables our customers to exploit the power of gene
expression information to reduce the time, risk and cost involved in their
product development efforts.
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OUR STRATEGY
Our goal is to be the world's leading supplier of genetic information and
complementary bioinformatics regarding gene activity in human disease and
toxicity. The key elements of our strategy are to:
- MARKET OUR GENE EXPRESSION INFORMATION AND SOFTWARE PLATFORM TO THE
GLOBAL PHARMACEUTICAL, BIOTECHNOLOGY, LIFE SCIENCES AND DIAGNOSTIC
INDUSTRIES. We market our gene expression database products to a variety
of customers who require different levels of information and support
depending upon their gene expression data needs. Currently, we are
marketing various subscription options to the GeneExpress Suite of
databases, including subscriptions to the full database or to specific
data Modules, called the BioExpress Module and the ToxExpress Module. We
also market less expensive subscriptions to disease-specific subsets of
the GeneExpress Suite, called DataSuites, to smaller biotechnology
companies. We will also continue to develop custom gene expression
databases as requested by major customers, for which we expect to earn
database access fees, and may earn milestone and royalty payments as
products are developed and commercialized using our data. We have built
and are continually expanding our data management and storage
capabilities to provide our customers with a comprehensive data
management and analysis software platform that enables them to
efficiently manage their own data as well as access ours.
- EXPAND OUR GENE EXPRESSION DATABASES TO BUILD THE WORLD'S MOST
COMPREHENSIVE GENE EXPRESSION RESOURCE. We are continually expanding the
breadth and depth of our gene expression information with the intent of
maintaining the GeneExpress Suite of databases as the largest and most
comprehensive gene expression resource in the world. At the end of 2000,
the database contained gene expression profiles on over 4,000 tissue
samples. By the end of 2003, we expect to have complete profiles on
30,000 tissue samples representing an estimated 1 billion gene
expression data points. As part of this strategy, we are continually
expanding our global biorepository network to ensure our supply of
tissue samples.
- INCREASE THE VALUE OF OUR DATA CONTENT BY ADDING ENHANCED FUNCTIONALITY
TO OUR SOFTWARE PLATFORM. We introduced the first version of our
GeneExpress Suite of databases in November 1999 and introduced the new
version of the data management and analysis software platform, the
GeneExpress 2000 1.0, in the second quarter of 2000. Subsequent upgrades
to the software platform occurred throughout the remainder of 2000,
including GeneExpress 2000 1.1 in July, GeneExpress 2000 1.2 in October,
and GeneExpress 2000 1.2.1 in January 2001. GeneExpress 2000
enhancements include an extended GeneExpress Index that captures rich
annotations associated with expressed genes, enhanced analysis methods
and powerful front-end tools. We expect to continue to enhance the
GeneExpress 2000 software platform throughout 2001. Planned enhancements
include new gene expression analysis methods, additional third-party
analysis tools, extensions of the gene annotations and clinical data
associated with samples, and improvement of the overall system usability
and performance.
- CAPTURE THE UNDERLYING VALUE OF OUR DATA CONTENT BY AGGRESSIVELY
PATENTING DISEASE-ASSOCIATED GENES. We initiated a program with
Invitrogen Corporation to clone, sequence and patent disease-associated
genes culled directly from the GeneExpress Suite of databases and to
provide access to these full-length clones through a separate add-on
product to the GeneExpress Suite called the CloneExpress Library. The
CloneExpress Library will be made available exclusively to companies
utilizing data from the GeneExpress Suite. We plan to introduce
CloneExpress during the fourth quarter of 2001.
- INTEGRATE OTHER TYPES OF BIOLOGICAL DATA IN OUR DATABASES. The
GeneExpress 2000 software interface will enable customers to manage DNA
sequence, cDNA microarray and quantitative RT-PCR information which is
complementary to the core gene expression information we provide. Future
versions will include, for example, single nucleotide polymorphism, or
SNP, and protein expression profile information. Because of the way our
databases have been designed, we believe that we will be able to readily
generate and/or incorporate such data either into our existing products
or into separate, specialized databases and become a source of an
increasingly broad range of information.
OUR PRODUCTS
We generate the gene expression data contained in the GeneExpress Suite
in-house from tissues and cells we collect through our biorepository network
using two complementary technologies--the GeneChip microarrays produced by
Affymetrix and our own proprietary licensed READS gene expression technology.
The GeneChips currently provide quantitative expression levels for approximately
60,000 human gene fragments (transcripts) for which either full or partial
sequences are known. Currently, GeneChip microarrays are also available for
approximately 36,000 mouse and 24,000 rat genes and we use these to profile
experimental animals and disease models and in toxicology studies. Our READS
technology does not depend on any prior knowledge of gene sequence, is
applicable to all animal and plant types, and is extremely sensitive. We use
READS to determine the expression levels of novel genes that are not represented
on the GeneChip microarrays and genes that are expressed at low abundance. The
combination of GeneChip microarrays and READS enables us to obtain comprehensive
coverage of the genes expressed in virtually all important tissue types.
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The GeneExpress Suite of Databases
The content of the GeneExpress Suite of databases is organized into three
modules:
- THE BIOEXPRESS MODULE allows subscribers to use gene expression
information to study normal physiology, elucidate the mechanisms of
disease, identify disease-associated pathways and select and prioritize
potential drug targets. This database represents a survey of gene
expression in a broad range of normal and diseased human tissues,
tissues from experimental animals and also human and animal cell lines.
Within the BioExpress Module, we are also building more in-depth
profiles of samples specifically related to key therapeutic areas in
which the pharmaceutical industry spends the majority of its research
dollars. These disease-specific data subsets, called DataSuites, are
focused on the following areas: central nervous system (or CNS), cancer,
cardiovascular disease, and inflammatory diseases. We have already
launched two DataSuites, the Oncology DataSuite and the Atlas DataSuite.
- THE TOXEXPRESS MODULE contains gene expression profiles of tissues and
cells treated with drugs and other compounds associated with known
classes of toxicity that affect specific organs. These toxicity profiles
can be used as references against which the profiles induced by new drug
leads can be compared to assess their toxic potentials. Detection of
potential toxicity early in the drug discovery and development process
allows drug developers to reject compounds having unacceptable toxicity
profiles before incurring the substantial expenses of traditional animal
toxicology studies and clinical trial failures. We also have seen cases
which indicate that gene expression profiling may predict human toxicity
where traditional animal toxicity screening failed to reveal such
effects. The database currently contains gene expression data from a
variety of tissues from experimental animals treated in vivo at various
dosages for multiple time periods and primary rat and human hepatocytes
treated in vitro.
- THE PHARMEXPRESS MODULE is analogous to the ToxExpress Module in that it
contains gene expression profiles produced by a wide range of marketed
drugs and drugs in clinical development across many human and animal
tissue samples and at different therapeutic dosage levels. Subscribers
can use this information to analyze mechanisms of drug action at the
molecular level, to re-engineer compounds to have more specific effects
and, potentially, to identify new indications for existing products. We
expect that the content of the PharmExpress Module will increase with
growing customer demand.
For each human sample in the GeneExpress Suite, there is a variety of
associated information, including demographic and biographical data, clinical
history and diagnosis, laboratory values, medication history, drug treatment
outcomes and social and family histories. Experimental animal samples are
annotated with the details of the applicable experimental protocols, such as
types, doses and durations of treatments. This information can be used to define
the samples that are relevant for answering specific biological questions.
The GeneExpress Suite of databases also incorporates the GeneExpress Index,
which serves as the link between the genes identified by a query and
comprehensive information available about those genes from publicly available
sources and our own proprietary annotations. This includes sequences and
sequence clusters, gene homologies, gene classification and gene family data,
gene function and pathway maps, chromosome location, single nucleotide
polymorphism, or SNP, information, protein sequences, protein structures and
relevant medical and scientific literature. These data sources are refreshed
weekly. By selecting among these elements, a user can bring up on the computer
screen an up-to-date customized report for genes of interest.
In 2000, we released several versions of the GeneExpress 2000 software. The
GeneExpress 2000 software platform represents a new generation of our
GeneExpress software interface that replaces the first generation system
released in November 1999. The GeneExpress 2000 includes a comprehensive gene
expression data warehouse back-end, an advanced gene expression analysis engine,
and a novel user interface front-end. The GeneExpress 2000's data warehouse
integrates gene expression data generated using the Affymetrix human, mouse and
rat GeneChip microarrays with comprehensive information on samples, clinical
profiles and rich gene annotations. The GeneExpress 2000 is based on a
three-tier architecture. The components include an Oracle 8i database server
hosting the data warehouse, a high performance analysis engine providing support
for computationally intensive gene expression data mining, and Java client user
interfaces providing support for streamlined user navigation, powerful data
manipulation and analysis. Gene Logic's proprietary data management and
middle-ware tools provide further support for rapid tuning of the user interface
for improved performance and usability. The GeneExpress 2000 also provides an
enhanced Workspace Manager supporting a centralized and secure repository for
user-defined analysis projects and includes new proprietary analysis tools. An
enhanced GeneExpress Index records annotations for known human, rat and mouse
genes, and provides support for classifying proprietary novel genes. Finally,
the GeneExpress 2000 allows users to explore and share massive amounts of gene
expression information in a computer network environment including local server
and secure remote access. The first version of the GeneExpress 2000, version
1.0, was released in April 2000, followed by the release of the GeneExpress 2000
1.1 in July 2000, and the GeneExpress 2000 1.2 in October 2000. With every new
version of the GeneExpress 2000, the analytical tools and performance of the
system were steadily improved. Furthermore, the system has been extended to
provide support for analyzing data generated using new GeneChips, such as the
new Hu95 Human GeneChip released by Affymetrix in 2000.
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During 2001, we plan to continue to enhance the functionality and
performance of the GeneExpress 2000 software platform. Planned extensions
include novel analytical tools based on advanced statistical methods, powerful
visual data exploration tools, and extensions of the gene and sample annotations
in support of enhanced data mining. We expect a substantial increase in the size
of the GeneExpress Suite of databases in 2001 and, therefore, are also planning
further optimizations of the system in order to maintain its high performance
level.
Custom Discovery Gene Expression Databases
Gene Logic has been developing customized gene expression databases under
research collaboration agreements tailored to specific customers' internal
programs and needs since 1997. We currently have five pharmaceutical customers
engaged in custom research collaborations which provide for various technology
and database access fees, research funding and up-front payments. Four of these
collaborations also may provide for additional payments upon attainment of
research and product development milestones as well as royalty payments based on
sales of any products that results from use of our technology or proprietary
database information.
MARKET SEGMENTS
When we first released the GeneExpress Suite of databases in November 1999,
our sales and marketing efforts concentrated principally on the largest
pharmaceutical and biotechnology companies. During 2000, we expanded our
marketing group and hired field specialists to service what we saw as rapidly
increasing interest in, and demand for, our gene expression information products
from this first target market. Because of the flexible, modular nature of the
GeneExpress Suite, we began introducing smaller, less expensive databases,
called DataSuites, containing segments or versions of the data from the
GeneExpress Suite, which will expand our product offerings and, we believe, make
our products more accessible to potential customers lacking the resources of the
largest pharmaceutical companies. Accordingly, we broadened our marketing
efforts to include other market segments, specifically, smaller pharmaceutical,
biotechnology and life sciences companies.
In 2001 and beyond, we will continue to focus our sales and marketing
efforts for our gene expression information products on a global basis.
Moreover, we plan to expand our market segments beyond large and small
pharmaceutical and biotechnology companies to include diagnostic companies,
contract research organizations, and academic and governmental research groups.
CORE PROCESSES USED TO CREATE OUR GENE EXPRESSION DATABASES
To build our gene expression information products we have developed
quality-controlled and quality-assured processes by which we acquire the
appropriate human and animal tissues samples and related information and enter
them into our biorepository, measure the level of gene expression in the samples
under standardized conditions and manage, analyze and distribute to customers
the massive amounts of resulting data.
Biorepository
We have established a global network of clinical centers where we have
agreements to collect human tissue samples. We believe this established network
provides us with a significant competitive advantage because it has enabled us
to acquire comprehensive data and gives us what we believe is superior access to
tissue samples for genomic analysis purposes.
At each center we have Institutional Review Board-approved protocols and
patient informed consent processes in place, which allow us use of the tissues
and related information. Tissues are obtained directly from the operating rooms
according to protocols we have established to preserve their quality and shipped
to our headquarters together with relevant clinical and pathology data extracted
from the clinical records of the patients from whom the tissue has been
obtained. To obtain normal and treated experimental animal tissues, we have
contracted with a clinical research organization that specializes in this area.
At our facilities, most human samples undergo rigorous quality control and
examination by a board-certified pathologist before accession into the
biorepository. The process includes taking photomicrographs of histologically
stained thin sections prepared from each sample which are captured in the
GeneExpress Suite and may be examined by users. As a result, there exists a
complete audit trail from the clinical center to entry into the database. We
have also set up a laser capture micro-dissection unit to allow us to separate
certain complex tissues into their constituent cell types, each of which may
then be analyzed independently.
Our human tissue collection contains at least 15 samples from each of the
major organ systems, because we believe multiple samples help assure statistical
accuracy and account for aberrant samples and inter-individual variation. The
animal samples consist of tissues from normal rats and mice and animals that
have been treated with drugs of interest for the ToxExpress and PharmExpress
Modules. We have also collected tissues from experimental animal disease models
and cell lines that are widely used in drug discovery research.
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Gene Expression Data Production
The expression levels of the genes in each sample is measured using
Affymetrix GeneChip microarrays. The current human GeneChip set comprises five
glass chips to which are attached small pieces of DNA from approximately 12,000
characterized genes and 50,000 gene fragments (transcripts). We expect that new
GeneChips will be available during 2001 and will eventually cover the entire
human genome. Our agreement with Affymetrix requires Affymetrix to supply us
with GeneChip microarrays on a nonexclusive basis and provides us with price
concessions, quality assurances and negotiated delivery requirements, which we
believe give us an advantage not shared by other companies using gene expression
technologies for commercial purposes.
Labeled DNA sequences from a tissue sample bind to complementary DNA
sequences on the GeneChip array and are detected using a fluorescent stain. By
detecting the positions of the fluorescent spots on the chip, researchers can
determine which genes were expressed in the sample. The brightness of the
fluorescent spot represents a precise, quantitative measure of the level of
expression of the gene. This measure is permanently stored and can be compared
across all the samples in the GeneExpress Suite. Currently, GeneChip microarrays
are also available for approximately 36,000 mouse and 24,000 rat genes, and we
use these to profile experimental animals and disease models and in toxicology
studies.
GeneChip microarrays are capable of measuring the expression levels of only
those genes and gene fragments for which sequence information is available and
for which probes have been placed on the chips. In order to obtain comprehensive
coverage of all the genes expressed in important tissue types, we use our
patented READS technology. The READS process does not depend on any prior
knowledge of gene sequence, is applicable to all animal and plant types, and is
extremely sensitive. We use READS to determine the expression levels of both
known and novel genes that are not represented on the GeneChip microarrays and
genes that are expressed at low abundance.
Data Management, Analysis and Distribution
The production process generates very large amounts of gene expression data,
which must be managed effectively and integrated with data from subscribers'
in-house databases and a growing number of public domain genomic and medical
databases available on the Internet. These various databases often have
different, incompatible structures, but our proprietary data management and
analysis software platform allows us and our customers to manage, integrate, and
query them as if they were part of a single database.
The GeneExpress Suite of databases is, at its core, a warehouse comprised of
three interrelated databases--the biological descriptions of the tissue samples
and the associated clinical data; the quantitative measurements of gene
expression in the samples; and, the GeneExpress Index. These three interrelated
databases are contained within an open Oracle 8.i database core. Running on top
of the data warehouse, through a structure known as the "analysis engine," is a
layer of analysis tools. These tools allow users to define sample and gene sets
and to generate extensive reports about the genes expressed in the samples
within the data warehouse. For example, users can ask for a:
- gene signature--the genes that are consistently expressed in samples of
a given tissue type;
- gene signature differential--how gene expression changes from one type
of sample to another, for example, from a normal tissue to its diseased
state;
- gene fold-change report--a quantification of changes, for instance, from
a normal to a diseased tissue, or from various tissues across stages of
disease progression;
- gene set--a defined gene or group of genes, which can be arbitrarily
defined by the user or by protein, enzyme, signaling or enzymatic
pathway, as well as chromosome location;
- electronic northern analysis (e-northern)--takes a user-defined gene set
and queries gene expression across one or more sample sets, with the
range of expression levels reported for each gene fragment in the gene
set across each sample set; and
- expression data tool--allows the user to retrieve and display expression
data values (individual or aggregate) for a set of genes and one or more
sample sets, and the expression values can be displayed in a table or
overlaying a pathway or chromosome map.
Then, through the GeneExpress Index, users can call up comprehensive
on-screen reports on any or all of the genes of interest.
From their desktops, users of the GeneExpress Suite of databases log on
remotely over secure Internet connections to a customer-specific server located
at Gene Logic's main computer facility or to a server on the customer's site.
Users interact directly with the GeneExpress 2000 software interface and its
client Java application, the GeneExpress Explorer, which provides a variety of
tools for
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searching the GeneExpress warehouse and for analyzing the data. The results can
be saved in a dedicated workspace management area, the Workspace Manager, and
can be shared with other members of a team or workgroup within the customer's
organization. Over time, users can construct and save the results of thousands
of in silico experiments, including: normal gene expression profiles of
important cell and tissue types; comparisons of diseased versus normal samples;
animals versus human; pathway maps and sets of valuable patient data. All of
these information sets can be integrated into their discovery and development
programs.
FLOW-THRU CHIP PROBE ARRAYS
The GeneExpress Suite of databases allows a researcher to rapidly identify a
subset of genes that may be relevant to a specific disease, research program or
drug discovery effort. The next step is to be able to profile the expression of
that subset of genes under specific experimental conditions in a high-throughput
manner. For example, a researcher may want to screen a chemical library looking
for those compounds that affect expression of the genes in a beneficial way, or
develop a screening system to assess the toxicological potential of a series of
new drug leads.
To fill this market need, we have developed and received patents on a
three-dimensional chip technology, called the Flow-thru Chip. The Flow-thru Chip
is a glass or silicon wafer traversed by hundreds of thousands of discrete
microscopic channels. Probes for the subset of genes of interest are attached to
the inner surfaces of these channels, and molecules from the samples to be
tested flow through the channels, coming into close proximity with the probes,
thus facilitating binding.
The Flow-thru Chip offers several features that make it well-suited to
high-throughput applications, including speed, sensitivity, relatively low cost,
and versatility.
Although we will continue to use the Flow-thru Chip internally, Gene Logic
does not itself intend to manufacture and market the Flow-thru Chip for
commercial sale. We are currently investigating alternative methods to finance
and commercialize further development of this technology.
INTELLECTUAL PROPERTY
We seek United States and international patent protection for major
components of our technology platform, including elements of our READS,
Flow-thru Chip and bioinformatic technologies. We also rely on trade secret
protection for certain of our confidential and proprietary information, and we
use license agreements both to access external technologies and assets and to
convey certain intellectual property rights to others. Our commercial success
will be dependent in part on our ability to obtain commercially valuable patent
claims and to protect our intellectual property portfolio.
As of December 31, 2000, we had exclusive rights to 18 issued patents, 16 of
which are United States patents, and 98 patent applications, 68 of which are
United States patent, or United States provisional patent, applications,
relating to our technologies. We have exclusive rights to United States patents
covering key aspects of READS gene expression analysis, gene expression analysis
using restriction enzymes, and the Flow-thru Chip technology.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual questions. Our business could be hurt by any of the following:
- the pending patent applications to which we have exclusive rights may
not result in issued patents;
- the claims of any patents which are issued may not provide meaningful
protection;
- we may not be successful in developing additional proprietary
technologies that are patentable;
- patents licensed or issued to us or our customers may not provide a
basis for commercially viable products or provide us with any
competitive advantages and may be challenged by third parties; and
- others may have patents that relate to our technology or business which
we might infringe and be unable to license on appropriate terms.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The U.S. Patent and Trademark
Office recently issued new guidelines that might limit the scope of available
patent protection. The degree of future protection for our proprietary rights,
therefore, is uncertain. Furthermore, others may independently develop similar
or alternative technologies, duplicate any of our technologies, and if patents
are licensed or issued to us, design around the patented technologies licensed
to or developed by us. In addition, we could incur substantial costs in
litigation if we are required to defend ourselves in patent suits brought by
third parties or if we initiate such suits.
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We are aware of a number of United States patents and patent applications
and related foreign patents and patent applications owned by third parties
relating to the analysis of gene expression or the manufacture and use of DNA
probe arrays. These other technologies may provide third parties with
competitive advantages over us and may hurt our business. In addition, some
third party patent applications contain broad claims, and it is not possible to
determine whether or not such claims will be narrowed during prosecution and/or
will be allowed and issued as patents, even if such claims appear to cover prior
art or have other defects. An owner or licensee of a patent in the field may
threaten or file an infringement action and we may or may not prevail in any
such action. The cost of defending an infringement action may be substantial,
which could significantly increase our expenses and increase our losses.
Furthermore, required licenses may not be made available on commercially viable
terms, if at all. Failure to obtain any required license could prevent us from
utilizing or commercializing one or more of our technologies.
We have applied, and intend to file additional applications, for patent
protection for methods relating to gene expression, for the disease-specific and
toxin-induced patterns of gene expression we identify and for the individual
disease genes and targets we discover. Such patents may include claims relating
to novel genes and gene fragments and to novel uses for known genes or gene
fragments identified through our discovery programs, as well as to related
business methods, databases and software tools. However, we may not be able to
obtain commercially meaningful patent protection for our discoveries; even if
patents are issued, the scope of the coverage or protection they would afford is
uncertain. Failure to secure such meaningful patent protection would endanger
our competitive position.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that our
potential products and processes and those of our customers may give rise to
claims of patent infringement. The public availability of partial or full
sequence information or the existence of patent applications related thereto,
even if not accompanied by relevant function or disease association, prior to
the time we apply for patent protection on a corresponding gene could hinder our
ability to obtain patent protection with respect to such gene or to the related
expression patterns. Furthermore, others may have filed, and in the future are
likely to file, patent applications covering genes, gene products or expression
profiles that are similar, or identical to, any for which we may seek patent
protection. These patent applications may have priority over patent applications
filed by us. Any legal action against us or our customers claiming damages and
seeking to enjoin commercial activities relating to the affected products and
processes could, in addition to subjecting us to potential liability for
damages, require us and our customers to obtain a license in order to continue
to manufacture or market the affected products and processes. We and our
customers may not prevail in any such action and any license required under any
patent may not be available on commercially acceptable terms, if at all. We
believe that there is likely to be significant litigation in the pharmaceutical
and biotechnology industries regarding patent and other intellectual property
rights. If we become involved in such litigation, it could consume a substantial
portion of our managerial and financial resources and negatively impact our
financial results.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. The new term of United States patents filed on or
after June 8, 1995 will commence on the date of issuance and terminate 20 years
from the earliest effective filing date of the application. Because the time
from filing to issuance of biotechnology patent applications is often more than
three years, a 20-year term from the effective date of filing may result in a
substantially shortened period of patent protection which may harm our patent
position, notwithstanding the possibility of term extension in certain
circumstances. If this change results in a shorter period of patent coverage,
our business could be harmed to the extent that the duration and level of the
royalties we are entitled to receive from our customers are based on the
existence of a valid patent covering the product subject to the royalty
obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We believe
that several elements of our gene expression drug discovery systems involve
proprietary know-how, technology or data that are not covered by patents or
patent applications. In addition, we have developed a proprietary index of gene
and gene fragment sequences which we update on an ongoing basis. Some of this
data will be the subject of patent applications, whereas other data will be
maintained as proprietary trade secret information. We have taken security
measures to protect our proprietary know-how and technologies and confidential
data and continue to explore further methods of protection. While we require all
employees, consultants and customers to enter into confidentiality agreements,
we cannot be certain that proprietary information will not be disclosed, that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets, or
that we can meaningfully protect our trade secrets. In the case of arrangements
with our customers that require the sharing of data, our policy is to make
available to our customers only such data as is relevant to our agreements with
such customers, under controlled circumstances, and only during the contractual
term of those agreements, and subject to a duty of confidentiality on the part
of our customer. However, such measures may not adequately protect our data. Any
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.
We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development processes.
We may not be able to maintain such rights on commercially reasonable terms, if
at all. Failure by us to
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maintain such rights could harm our business.
COMPETITION
Competition among entities attempting to identify the genes associated with
specific diseases and to develop products based on such discoveries is intense.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions, and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments.
We are aware that certain entities, including Incyte Genomics, Inc. and the
Celera Genomics Group of Applera Corporation, are using a variety of gene
expression analysis methodologies, including the use of chip-based systems, to
attempt to identify disease-related genes. In addition, numerous pharmaceutical
companies are developing genomic research programs, either alone or in
partnership with our competitors. Competition among such entities is intense and
is expected to increase. In order to compete against existing and future
technologies, we will need to demonstrate to potential customers that our
technologies and capabilities are superior to competing technologies.
Some of our competitors have substantially greater capital resources,
research and development staffs, facilities, manufacturing and marketing
experience, distribution channels and human resources than we do. These
competitors may discover, characterize or develop important genes, drug targets
or drug leads, drug discovery technologies or drugs in advance of us or our
customers or which are more effective than those developed by us or our
customers, or may obtain regulatory approvals of their drugs more rapidly than
we do or our customers do, any of which could have a material adverse effect on
any of our similar programs. Moreover, our competitors may obtain patent
protection or other intellectual property rights that could limit our rights or
our customers' ability to use our technologies or commercialize therapeutic,
diagnostic or agricultural products. We also face competition from these and
other entities in gaining access to cells, tissues and nucleic acid samples used
in our discovery programs.
We will rely on our customers for support of certain of our discovery
programs and intend to rely on our customers for preclinical and clinical
development of related potential products and the manufacturing and marketing of
these products. Each of our customers is conducting multiple product development
efforts within each disease area that is the subject of its agreement with us.
Generally, our agreements with customers do not preclude the customer from
pursuing development efforts utilizing approaches distinct from that which is
the subject of our agreement with them. Any of our product candidates,
therefore, may be subject to competition with a potential product under
development by a customer.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Our agreement with Affymetrix provides us with
nonexclusive access to GeneChip probe arrays for our use in generating gene
expression databases for license to multiple third parties and custom databases
for license to a single third party. Accordingly, our competitors could obtain
licenses to use GeneChip probe arrays to develop their own gene expression
databases for internal use or may use other technologies to develop competitive
products and services.
Genomic technologies have undergone and are expected to continue to undergo
rapid and significant change. Our future success will depend in large part on
maintaining a competitive position in the genomics field. Rapid technological
development by us or others may result in products or technologies becoming
obsolete before we recover the expenses we incur in connection with our
development. Products offered by us could be made obsolete by less expensive or
more effective drug discovery technologies, including technologies that may be
unrelated to genomics. We may not be able to make the enhancements to our
technology necessary to compete successfully with newly emerging technologies.
GOVERNMENT REGULATION
Regulation of Drug Development and Commercialization
We do not plan to conduct clinical trials in humans or commercialize
therapeutic products discovered as a result of our gene, drug target and drug
lead discovery programs but intend to rely on our customers to conduct such
activities. Any new drug developed by the efforts of our customers as a result
of their use of our GeneExpress Suite or other products must undergo an
extensive regulatory review process in the United States and other countries
before it can be marketed. This regulatory process, which includes preclinical
studies and clinical trials, and may include post-marketing surveillance of each
compound to establish its safety and efficacy, can take many years and require
the expenditure of substantial resources. Data obtained from preclinical studies
and clinical trials are subject to varying interpretations that could delay,
limit or prevent marketing. Delays or rejections may also be encountered based
on changes in United States Food and Drug Administration policies for drug
review during the period of product development and FDA regulatory review of
each submitted new drug application, or NDA, in the case of new pharmaceutical
agents, or biologics license application, or BLA, in the case of biological
therapeutics. Delays may also be encountered in the regulatory review of any
diagnostic or agricultural product, where such review is required, and in
obtaining regulatory approval or authorization in foreign countries. Delays in
obtaining marketing approval or authorization could delay the commercialization
of any drugs or diagnostic or agricultural products developed
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by our customers, impose costly procedures on our customers' activities,
diminish any competitive advantages that our customers may attain and lessen our
potential royalties.
Even if regulatory approval or authorization is obtained, a marketed product
and its manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in, among other actions, recall,
withdrawal of approval, and/or seizure or injunction.
Violations of regulatory requirements at any stage during the process,
including preclinical studies and clinical trials, the review process,
post-marketing reports or studies approval or in good manufacturing practices,
may result in various adverse consequences to us, including:
- the FDA's delay in granting marketing approval or refusal to grant
marketing approval of a product;
- withdrawal of existing product approvals;
- recalls;
- operating restrictions; or
- the imposition of civil or criminal penalties against the manufacturer
and NDA or BLA holder.
No product resulting from the use of our databases has been released for
commercialization in the United States or elsewhere. In addition, no
investigational new drug application has been submitted for any such product
candidate. We expect to rely on our customers to file such applications and
generally direct the regulatory review process. We cannot be certain if or when
our customers will submit an application for regulatory review, or whether our
customers will be able to obtain marketing approval for any products on a timely
basis, if at all. If our customers fail to obtain required governmental
approvals, it will prevent them from marketing drugs or diagnostic products. The
occurrence of any of these events may cause our business, financial condition
and results of operations to suffer.
Regulation of Use of Human Tissue
Our access to and use of human or other tissue samples in the expansion of
our GeneExpress Suite of databases and the creation of custom discovery
databases may become subject to government regulation, both in the United States
and abroad. U.S. and foreign government agencies may also impose restrictions on
the use of data derived from human or other tissue samples. The FDA has issued
final and proposed regulations governing human cellular and tissue-based
products. None of these regulations are currently effective, and it is uncertain
whether, or how, they will impact our operations. If our access to or use of
human tissue samples, or our customers' use of data derived from such samples,
is restricted, our business will suffer.
Environmental Regulation
Our research and development activities in some cases involve the controlled
use of biological and other hazardous materials, chemicals and various
radioactive materials. We are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products. The risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of an accident, we could be
held liable for any damages that result, and any liability could exceed our
resources. Other than such laws and regulations governing the generation, use
and disposal of hazardous materials and wastes, and limiting workplace exposures
to these materials, we do not believe our current and proposed activities are
subject to any specific government regulation other than regulations affecting
the operations of companies generally.
Regulation of the Internet
There is an increasing body of law and regulation pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, on-line content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, copyright, trademark, trade secret,
taxation and the regulation of the sale of other specified goods and services
apply to the Internet. The requirement that we comply with any new legislation
or regulation, or any unanticipated application or interpretation of existing
laws, may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our products, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition.
Due to the global reach of the Internet, it is possible that, although our
transmissions over the Internet originate primarily in the
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State of Maryland, the governments of other states and foreign countries might
attempt to regulate Internet activity and our transmissions or take action
against us for violations of their laws. There can be no assurance that
violations of such laws will not be alleged or charged by state or foreign
governments and that such laws will not be modified, or new laws enacted, in the
future. Any of the foregoing could have a material adverse effect on our
business, results of operations and financial condition.
EMPLOYEES
As of December 31, 2000, we had 226 full-time employees, 66 of whom hold
doctoral degrees and 43 of whom hold other advanced degrees. Of these, 164 were
engaged in research and development, including bioinformatics, and 62 were
engaged in business development, finance, and general administration. None of
our employees is represented by a labor union or covered by a collective
bargaining agreement. We have not experienced any work stoppages and consider
our relations with our employees to be good. Our future success depends in
significant part on the continued service of our key scientific, technical and
senior management personnel and our continuing ability to attract and retain
highly qualified technical and managerial personnel. There is intense
competition for such qualified personnel in the areas of our activities and we
may not be able to continue to attract and retain the personnel necessary for
the development of our business. Failure to attract and retain key personnel
could cause our business, financial condition and results of operations to be
harmed.
MANAGEMENT
Our executive officers and their ages and positions as of March 1, 2001, are
as follows:
NAME AGE POSITION
----------------------------- --- ---------------------------------------------------
Mark D. Gessler ............. 39 President and Chief Executive Officer
Philip L. Rohrer, Jr ........ 44 Chief Financial Officer
Douglas Dolginow, M.D ....... 46 Senior Vice President, Pharmacogenomics
Eric M. Eastman, Ph.D ....... 48 Senior Vice President and Chief Technical Officer
Victor M. Markowitz, D.Sc ... 48 Senior Vice President and Chief Information Officer
David S. Murray ............. 54 Senior Vice President, Marketing and Sales
Mark D. Gessler has served as our Chief Executive Officer since June 2000,
and as our President since January 1999. Mr. Gessler served as our Chief
Operating Officer from January 1999 until June 2000. From June 1996 to October
1999, Mr. Gessler served as our Chief Financial Officer and, from June 1996 to
January 1999, was our Senior Vice President, Corporate Development. From
February 1993 to June 1996, he was with GeneMedicine, Inc., a gene therapy
company, most recently as Vice President, Corporate Development. Mr. Gessler
holds an MBA from the University of Tennessee.
Philip L. Rohrer, Jr., has served as our Chief Financial Officer since
October 1999. From May 1978 until August 1999, Mr. Rohrer held various positions
with BioWhittaker Inc., a biotechnology supply company, including Chief
Financial Officer from 1988 until December 1992 and again from September 1993
until August 1999. Mr. Rohrer served as Vice President and General Manager for
Diagnostic Products from September 1992 to September 1993. Mr. Rohrer holds an
A.B. in biology from Hood College and an M.S.M. from Frostburg State University.
Douglas Dolginow, M.D., has served as our Senior Vice President,
Pharmacogenomics since September 1998. Dr. Dolginow served as President and
Chief Operating Officer of Oncormed, Inc. from October 1993 and as a director
of Oncormed from May 1994 until joining us. Dr. Dolginow was Vice President of
Regional Operations for Nichols Institute, a clinical laboratory company, from
May 1991 to October 1993. From 1983 to 1991, he served as medical director for
multiple clinical laboratories including Highland General Hospital, Oakland,
California and Mt. Zion Hospital, San Francisco, California. Since 1984, he has
been an active member of the Clinical Faculty at the University of California,
San Francisco. Dr. Dolginow received an M.D. from the University of Kansas.
Eric M. Eastman, Ph.D., has served as Senior Vice President and Chief
Technical Officer since July 2000. From August 1997 to July 2000, Dr. Eastman
served as Vice President, Technology Management. From September 1996 to August
1997, Dr. Eastman served as Vice President, Scientific Operations. From 1993 to
1996, Dr. Eastman was Director, Gene Expression and Process Research and
Development at GeneMedicine, Inc., a gene therapy company. Dr. Eastman also
served as Vice President, Chief Scientific Officer of Lark Sequencing
Technologies from 1989 to 1993, and as Director of Molecular Biology and
Immunoassay Development at BIOTX, Inc., from 1986 to 1988. Dr. Eastman earned a
Ph.D. in human genetics and development from Columbia University college of
Physicians and Surgeons. Dr. Eastman also received a B.A. in biology from
Middlebury College and an M.S. in genetics and cell biology from the University
of Connecticut, Storrs.
Victor M. Markowitz, D.Sc., has served as our Senior Vice President and
Chief Information Officer since March 2000. He was Senior Vice President, Data
Management Systems from September 1998 to March 2000 and Vice President, Data
Management Systems from September 1997 to September 1998. Prior to joining us,
Dr. Markowitz was a staff scientist at Lawrence Berkeley
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National Laboratory and project leader in the laboratory's Data Management
Research and Development Group. Dr. Markowitz received his M.Sc. and D.Sc.
degrees in computer science from Technion, the Israel Institute of Technology.
David S. Murray has served as our Senior Vice President, Marketing and
Sales, since January 2000. From 1968 until January 2000, Mr. Murray held various
positions with Dun & Bradstreet Corporation, a business information provider,
including Executive Vice President, U.S., from 1994 until January 2000, and
President, Asia/Pacific-Latin America, from 1991 until 1994. Mr. Murray served
as Senior Vice President, Asia/Pacific-Latin America, from 1990 until 1991,
President, Japan, from 1989 until 1990, and Managing Director, Hong Kong, from
1987 until 1989. Mr. Murray holds a B.S. in business administration from Murray
State University.
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RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in the forward-looking statements made in this
Report on Form 10-K and presented elsewhere by management.
TO GENERATE SIGNIFICANT REVENUES, WE MUST RETAIN EXISTING AND OBTAIN ADDITIONAL
DATABASE CUSTOMERS.
Our strategy depends on entering into agreements to provide gene expression
information products to pharmaceutical, biotechnology and other companies. Each
of the agreements that we have with our customers is for a specific term, and
some of these agreements are terminable without penalty by our customers prior
to expiration. If any agreements are terminated or expire and are not renewed,
our business could suffer.
OUR SALES CYCLE IS LENGTHY AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO COMPLETE DEALS ON THE SCHEDULE
WE ANTICIPATE.
Our ability to obtain new customers for our database products depends upon
our customers' belief that our gene expression information products can help
accelerate their drug discovery efforts. Our sales cycle is typically lengthy
because we need to educate our potential customers and sell the benefits of our
products to a variety of constituencies within such companies. In addition, each
agreement involves the negotiation of unique terms. We may expend substantial
funds and management effort with no assurance that an agreement will result.
Actual and proposed consolidations of pharmaceutical and biotechnology companies
have affected, and may in the future affect, the timing and progress of our
sales efforts. Similarly, aggregate budgetary resources, as well as budgetary
timing cycles, of pharmaceutical and biotechnology companies can also affect the
timing and progress or our sales efforts.
OUR TECHNOLOGIES ARE NEW AND UNPROVEN AND MAY NOT ALLOW OUR CUSTOMERS TO DEVELOP
COMMERCIAL PRODUCTS.
Our technologies involve new and unproven approaches. They are based on the
assumption that information about gene expression and gene sequences may help
scientists better understand complex disease processes. There is limited
understanding of the roles of genes in these diseases. Few therapeutic products
based on gene discoveries have been developed and commercialized. Our
information and technologies may not enable us or our customers to identify drug
targets and drug leads. Even if they are successful in identifying drug targets
and drug leads based on their discoveries made using our gene expression
information products, our customers may not be able to discover or develop
commercially viable products. To date, no one has developed or commercialized
any therapeutic or diagnostic products based on our technologies. If we or our
pharmaceutical and biotechnology customers fail to identify genes useful for the
discovery and development of such products, our current and potential customers
may lose confidence in our products and company and our business may suffer as a
result.
OUR CUSTOMERS MAY NOT BE SUCCESSFUL IN DEVELOPING OR COMMERCIALIZING
THERAPEUTIC, DIAGNOSTIC OR OTHER LIFE SCIENCE PRODUCTS USING OUR GENE EXPRESSION
INFORMATION.
Development of therapeutic, diagnostic and other life science products based
on our customers' discoveries will also be subject to other risks of failure
inherent in their development or commercial viability. These risks include the
possibility that any such products will:
- be found to be toxic;
- be found to be ineffective;
- fail to receive necessary regulatory approvals;
- be difficult or impossible to manufacture on a large scale;
- be uneconomical to market;
- fail to be developed prior to the successful marketing of similar
products by competitors; or
- be impossible to market because they infringe on the proprietary rights
of third parties or compete with products marketed by third parties that
are superior.
Under our custom discovery research collaboration programs, if our customers
discover therapeutic, diagnostic or other life science products using gene
expression information resulting from our joint research efforts, we must rely
on them for product development, regulatory approval, manufacturing and
marketing of those products before we can realize potential milestone payments,
royalties and other payments we may be entitled to under the terms of these
research collaboration agreements. These custom discovery collaboration
agreements typically allow the customers significant discretion in electing
whether to pursue any of these
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activities. We cannot control the amount and timing of resources our custom
discovery customers may devote to these research programs or potential products.
As a result, we cannot be certain that our custom discovery customers will
choose to develop and commercialize such products. In addition, if a custom
discovery customer is involved in a business combination, such as a merger or
acquisition, or changes its business focus, its performance in its agreement
with us may suffer and, as a result, the opportunity for us to receive revenues
from milestone, royalty and similar payments from our custom discovery
agreements may suffer.
WE RELY ON GENECHIP PROBE ARRAYS SUPPLIED BY AFFYMETRIX TO BUILD OUR GENEEXPRESS
SUITE OF DATABASES.
Our ability to continue to build the GeneExpress Suite will depend in part
on the ability of Affymetrix to supply adequate quantities of high quality
GeneChip probe arrays, which are widely accepted as the state-of-the-art in
microarray technology. Affymetrix provides us with GeneChip probe arrays under
an agreement that expires on January 1, 2002, but which we have the option to
extend for up to two additional successive two-year terms. This agreement
provides us with nonexclusive access to GeneChip probe arrays for our use in
generating gene expression databases for license to multiple third parties and
custom discovery databases for license to a single third party. If Affymetrix
licenses GeneChip probe arrays to others, including our competitors, for similar
uses, our business may suffer. The agreement also prohibits us from buying
microarrays from third parties if Affymetrix can demonstrate that those third
party microarrays materially infringe Affymetrix's intellectual property rights.
If Affymetrix is unable or unwilling to supply us with GeneChip probe arrays, or
if such probe arrays are not available, or if the probe arrays are defective, we
will need to obtain access to alternative microarray technologies or expand the
use of our patented READS technology. Alternative microarray technologies may
not be available to us, or may only be available to us on unfavorable terms.
Restricted or curtailed access to GeneChip probe arrays could cause our business
to suffer by delaying or increasing the cost of expansion of the GeneExpress
Suite.
WE HAVE A HISTORY OF OPERATING LOSSES WHICH ARE LIKELY TO CONTINUE FOR SOME
TIME.
We have incurred operating losses in each year since our inception. At
December 31, 2000, we had accumulated operating losses of approximately $102.2
million. Our losses to date have resulted principally from costs incurred in the
development of our gene expression databases, the $35.2 million non-recurring
charge incurred in connection with our acquisition of Oncormed in 1998 and
selling, general and administrative costs associated with operations. We
commenced development of our GeneExpress Suite of databases in March 1999 and
released the first commercial version in November 1999. As of March 2001, we
have 15 pharmaceutical and biotechnology customers utilizing our GeneExpress
products and expect to dedicate substantially all of our resources for the
foreseeable future to further developing and maintaining our GeneExpress Suite
product line. While we recognize revenues from subscriptions to our GeneExpress
Suite of databases as well as revenues from our custom discovery database
agreements in the near term, we also expect to incur additional losses this year
and in future years and cannot accurately predict when we will achieve
profitability. These losses may increase in the near future as we expand our
product development activities. In addition, our custom discovery customers'
product development efforts, which utilize our custom gene expression database
products, are at an early stage and, accordingly, we do not expect our losses to
be substantially mitigated by revenues from milestone payments or royalties
under these agreements for a number of years, if ever.
IF OUR ACCESS TO NECESSARY TISSUE SAMPLES, INFORMATION OR LICENSED TECHNOLOGIES
IS RESTRICTED, WE WILL NOT BE ABLE TO CONTINUE TO DEVELOP OUR BUSINESS.
To continue to build our GeneExpress Suite and custom discovery database
products, we need access to normal and diseased human and other animal tissue
samples, other biological materials and related clinical and other information.
We compete with many other companies for these materials and information. We may
not be able to obtain, or maintain access to, these materials and information on
acceptable terms, if at all. In addition, government regulation in the United
States and foreign countries could result in restricted access to, or use of,
human and other tissue samples. If we lose access to sufficient numbers or
sources of tissue samples, or if tighter restrictions are imposed on our use of
the information generated from tissue samples, our business will suffer.
Some of our genomics and bioinformatics technologies have been acquired or
licensed from third parties, and we expect to acquire or license additional
technologies from third parties. Our product development activities could suffer
if we are not able to establish access to new or additional technologies that we
believe are important to our business.
ANY INADEQUACY IN THE PROTECTION OF OUR INTELLECTUAL PROPERTY COULD HURT OUR
BUSINESS.
Our success will depend in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. Legal standards relating to the validity and scope of claims in our
technology field are still evolving. Therefore, the degree of future protection
for our proprietary rights is uncertain. The risks and uncertainties that we
face with respect to our patents and other proprietary rights include the
following:
- the pending patent applications we have filed, or to which we have
exclusive rights, may not result in issued patents or may take longer
than we expect to result in issued patents;
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- the claims of any patents which are issued may not provide commercially
meaningful protection;
- we may not be able to develop additional proprietary technologies that
are patentable;
- the patents licensed or issued to us or our customers may not provide a
competitive advantage;
- other companies may challenge patents licensed or issued to us or our
customers;
- patents issued to other companies may harm our ability to do business;
- other companies may independently develop similar or alternative
technologies or duplicate our technologies; and
- other companies may design around technologies we have licensed and/or
patented.
We may apply for patent protection for methods relating to gene expression
and disease-specific patterns of gene expression that we identify as well as
individual disease genes and targets that we discover. These patent applications
may include claims relating to novel genes and gene fragments and to novel uses
for known genes or gene fragments identified from the use of our databases. We
may not be able to obtain meaningful patent protection for our discoveries. Even
if patents are issued, their scope of coverage or protection is uncertain.
We also rely on trade secret protection and confidentiality agreements to
protect our interests in proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce. We have taken security
measures to protect our proprietary know-how and confidential data and continue
to explore further methods of protection. While we require all employees,
consultants, and customers to enter into confidentiality agreements, we cannot
be certain that we will be able to meaningfully protect our trade secrets. Any
material leak of confidential data into the public domain, or to third parties,
could cause our business, financial condition and results of operations to
suffer.
WE MAY IN THE FUTURE BE SUBJECT TO LITIGATION AND PATENT INFRINGEMENT CLAIMS.
The technologies that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. In particular, we are aware of a number
of patents and patent applications owned by others relating to individual genes
and to the analysis of gene expression or the manufacture and use of DNA chips.
The risk of additional litigation will increase as the genomics, biotechnology
and software industries expand, more patents are issued and other companies
engage in other genomic-related businesses. Therefore, we could receive notices
from third parties alleging patent infringement.
Litigation thus may be necessary to:
- assert claims of infringement;
- enforce our patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
We could incur substantial litigation costs to defend ourselves in patent
suits brought by other companies or to initiate such suits. Substantial
litigation costs and potential adverse outcomes could cause our business,
financial condition and results of operations to suffer. In addition, litigation
could cause disruption in our business activities and divert management's time
and attention from the operation of our business.
INTERNATIONAL PATENT PROTECTION IS UNCERTAIN.
Patent law outside the United States is uncertain and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts, and may not be successful in
limiting the patent scope of competitors. Finally, some of our patent protection
in the United States is not available to us in foreign countries due to the laws
of those countries.
OUR BUSINESS AND THE PRODUCTS DEVELOPED USING THE INFORMATION IN OUR DATABASES
MAY BE SUBJECT TO GOVERNMENT REGULATION.
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Any new drug developed by the efforts of our pharmaceutical and
biotechnology customers as a result of their use of our GeneExpress Suite or
other gene expression information products must undergo an extensive regulatory
review process in the United States and other countries before it can be
marketed. This regulatory process can take many years and require substantial
expense. Changes in FDA policies and the policies of similar foreign regulatory
bodies can increase the delay for each new drug, product license and biological
license application. We expect similar delays in the regulatory review process
for any diagnostic product, where similar review, or other approval, is
required. Even if marketing clearance is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market.
No product resulting from the use of our gene expression information
products has been released for commercialization in the United States, or
elsewhere. In addition, no investigational new drug application has been
submitted for any such product candidate. We expect to rely on our customers to
file such applications and generally direct the regulatory review process. We
cannot be certain if or when our customers will submit any applications for
regulatory review, or whether our customers will be able to obtain marketing
clearance for any products on a timely basis, if at all. If our customers fail
to obtain required governmental clearances, it will prevent them from marketing
drugs or diagnostic products until such clearance can be obtained, if at all.
This will, in turn, reduce the chance of our ever receiving royalty payments
from our customers. The occurrence of any of these events may cause our
business, financial condition and results of operations to suffer.
In addition, our access to and use of human or other tissue samples in the
expansion of our GeneExpress Suite of databases and the creation of custom
discovery databases may become subject to government regulation, both in the
United States and abroad. United States and foreign government agencies may also
impose restrictions on the use of data derived from human, or other, tissue
samples. If our access to or use of human tissue samples, or our customers' use
of data derived from such samples, is restricted, our business will suffer.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number of our
employees and customers and the scope of our operations. In particular, we plan
significant growth in marketing and selling our GeneExpress Suite of databases
product line. This growth may continue to place a significant strain on our
management and operations. Our ability to manage this growth will depend upon
our ability to broaden our management team and our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer relationships and to
hire, train and manage our employees. Our future success is heavily dependent
upon growth and acceptance of our GeneExpress Suite products. If we cannot scale
our business appropriately or otherwise adapt to anticipated growth in this
area, a key part of our strategy may not be successful. In addition, we must
continue to invest in customer support resources as the number of database
customers and their requests for support increase. Our customers typically have
worldwide operations and may require support at multiple U.S. and foreign sites.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING RAPIDLY, AND WE MAY
FALL BEHIND OUR COMPETITORS.
There is intense competition among entities attempting to identify genes
associated with specific diseases and to develop products and services based on
these discoveries. We face competition in these areas from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government or other publicly funded agencies, both in the United States and
abroad. In particular, Incyte Genomics, Inc. has developed, launched and sold
subscriptions to gene expression reference database that may compete with our
GeneExpress Suite of databases. There may be others as well who are developing
competitive products. We are aware that certain entities are using a variety of
gene expression analysis methodologies, including the use of chip-based systems,
to attempt to identify disease-related genes. In addition, numerous
pharmaceutical companies are developing genomic research programs, either alone
or in partnership with our competitors. Competition among such entities is
intense and is expected to increase. In order to compete against existing and
future technologies, we will need to demonstrate to potential pharmaceutical and
biotechnology customers that our technologies and capabilities are superior to
competing technologies.
Some of our competitors have substantially greater capital resources,
research and development staffs, facilities, manufacturing and marketing
experience, distribution channels and human resources than do we. These
competitors may discover, characterize or develop important genes, drug targets
or drug leads, drug discovery technologies or drugs that occur in advance of us
or our customers' efforts, or which are more effective than those developed by
us or our customers. Furthermore, these competitors may obtain regulatory
approvals of their drugs more rapidly than do we or our customers. Moreover, our
competitors may obtain patent protection or other intellectual property rights
that would limit our rights or our customers' ability to use our products to
commercialize therapeutic or diagnostic products. We also face competition from
these and other entities in gaining access to cells, tissues and nucleic acid
samples used in our GeneExpress Suite of databases and custom discovery
programs. Any of these scenarios could have a material adverse effect on any of
our similar programs.
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We will continue to rely on our custom discovery collaboration customers for
support of certain of our discovery programs and intend to rely on these
customers for preclinical and clinical development of related potential products
and the manufacturing and marketing of any commercially viable products. Each of
our custom discovery customers is conducting multiple product development
efforts within each disease area that is the subject of their agreement with us.
Generally, our custom discovery agreements do not preclude the customer from
pursuing development efforts utilizing approaches distinct from that which is
the subject of our agreement with them. Any of our product candidates,
therefore, may be subject to competition with another potential product under
development by a customer.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs.
Genomic technologies have undergone, and are expected to continue to
undergo, rapid and significant change. Our future success will depend in large
part on maintaining a competitive position in the genomics field. Rapid
technological development by us or others may result in products or technologies
becoming obsolete before we recover the expenses incurred in connection with the
development of such technologies. Products offered by us could be made obsolete
by less expensive or more effective drug discovery technologies, including
technologies that may be unrelated to genomics. We may not be able to make the
enhancements to our technology necessary to compete successfully with newly
emerging technologies.
OUR REVENUES ARE DERIVED PRIMARILY FROM, AND ARE SUBJECT TO, RISKS FACED BY THE
PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.
We expect that our revenues in the foreseeable future will be derived
primarily from products provided to the pharmaceutical and biotechnology
industries. Accordingly, our success will depend directly upon their demand for
our gene expression information products. Our operating results may fluctuate
substantially due to reductions and/or delays in research and development
expenditures by companies in these industries. These reductions and/or delays
may result from factors such as:
- changes in economic conditions;
- changes in the regulatory environment affecting health care and health
care providers;
- pricing pressures and reimbursement policies;
- market-driven pressures on companies to consolidate and reduce costs;
and
- other factors affecting research and development spending.
None of these factors is within our control.
MULTIPLE FACTORS BEYOND OUR CONTROL MAY CAUSE FLUCTUATIONS IN OUR OPERATING
RESULTS AND MAY CAUSE OUR BUSINESS TO SUFFER.
Our revenues and results of operations may fluctuate significantly,
depending on a variety of factors, including the following:
- our success in selling, and changes in the demand for, our products;
- variations in the timing of payments from customers and the recognition
of these payments as revenues;
- the pricing of our products;
- the timing of our new product introductions, if any;
- changes in the research and development budgets of our customers and
potential customers;
- the introduction of new products and services by our competitors;
- regulatory actions;
- expenses related to, and the results of, litigation and other
proceedings relating to intellectual property rights;
- the cost and timing of our adoption of new technologies; and
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- the cost, quality and availability of cell and tissue samples, reagents
and related components and technologies, including those supplied to us
pursuant to contractual arrangements.
In particular, revenues from our database business are unpredictable
because:
- the sales cycle for our database products is lengthy;
- we are dependent upon continued commercial demand for the information we
gather and provide; and
- the time required to develop custom discovery databases can vary
significantly.
We will not be able to control many of these factors. In addition, if our
revenues in a particular period do not meet expectations, we may not be able to
adjust our expenditures in that period, which could cause our business to
suffer. We believe that period-to-period comparisons of our financial results
will not necessarily be meaningful. One should not rely on these comparisons as
an indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price may fall, possibly by a significant amount.
ANY FUTURE ACQUISITIONS WILL CREATE RISKS AND UNCERTAINTIES.
We may acquire other assets, technologies and businesses. We cannot be sure,
however, that acquisition candidates will be available or will be available on
terms acceptable to us. Future acquisitions that we may complete involve risks
such as the following:
- we may be exposed to unknown liabilities of acquired companies;
- our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- combining the operations and personnel of the acquired businesses with
our own may be difficult and costly, and integrating or completing the
development and application of acquired technologies may disrupt our
business and divert management's time and attention;
- our relationships with key customers of acquired businesses may be
impaired due to changes in management and ownership of the acquired
businesses;
- we may be unable to retain key employees of the acquired businesses or
hire enough qualified technical personnel to staff new or expanded
operations;
- we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- our stockholders may be diluted if we pay for the acquisition with
equity securities.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL.
We are highly dependent on the principal members of our management,
operations and scientific staff and have entered into employment agreements with
many of these persons. The loss of any these persons' services could have a
material adverse effect on our business.
Our future success also will depend in part on the continued service of our
key scientific, software, bioinformatics and management personnel and our
ability to identify, hire and retain additional personnel. We experience intense
competition for qualified personnel. We may not be able to continue to attract
and retain personnel necessary for the development of our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO ENVIRONMENTAL
LIABILITY.
Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident, we could be held liable for damages or penalized with fines, and this
liability could exceed our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do
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not expect to make material additional capital expenditures for environmental
control facilities in the near term. However, we may have to incur significant
costs to comply with current or future environmental laws and regulations.
WE ARE EXPOSED TO PRODUCT LIABILITY AND RELATED RISKS.
We may be exposed to claims of liability from the use of products that
either we, or our customers, provide. For example, we may be subject to product
liability if our GeneExpress Suite of databases or custom discovery database
products contain inaccurate information, or if our information is derived based
on Affymetrix probe arrays that are proven defective, or if any of our customers
develops or commercializes a product discovered through the use of our
technology which results in injury or death to clinical trial participants or
patients. We currently maintain product liability and medical malpractice
insurance. Our insurance coverage may not be adequate to protect us against
future claims. Furthermore, our customers may not indemnify us against these
types of claims or may not themselves be adequately insured or, in the case of
smaller companies, have a net worth sufficient to satisfy any product liability
claims. A product liability claim, product recall or medical malpractice claim
could cause our business, financial condition and results of operations to
suffer.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE.
While we believe that existing cash and cash equivalents and anticipated
payments from customers will be sufficient to support our operations for the
foreseeable future, at some point we could require additional funding. We may
choose to raise additional capital due to market conditions or strategic
considerations even if we have sufficient funds for our operating plan. We may
seek funding through public or private equity offerings, debt financings or
arrangements with customers. If we raise additional capital by issuing equity or
convertible debt securities, this issuance may dilute share ownership and future
investors may be granted rights superior to those of current shareholders.
Additional financing may not be available when needed, or, if available, may not
be available on favorable terms. If we cannot obtain adequate financing on
acceptable terms when such financing is required, our business will be adversely
affected.
OUR STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock is likely to continue to be highly
volatile due to risks and uncertainties described in this Report on Form 10-K,
as well as other factors, including:
- conditions and publicity regarding the genomics or life sciences
industries generally;
- sales of substantial amounts of our stock by existing stockholders;
- price and volume fluctuations in the stock market which do not relate to
our operating performance; and
- comments by securities analysts, or our failure to meet analysts'
expectations.
Furthermore, the stock market has from time to time experienced extreme
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. In addition, in the past, class action lawsuits have
been initiated against biotechnology and pharmaceutical companies following
periods of volatility in the market prices of these companies' stock. In
general, decreases in our stock price would reduce the value of our
stockholders' investments and could limit our ability to raise necessary capital
or make acquisitions of assets or businesses. If litigation were instituted on
this basis, it could result in substantial costs and would divert management's
attention and resources. This could have a material adverse effect on our
business, financial condition and results of operations.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT MAY REDUCE THE MARKET PRICE OF
OUR COMMON STOCK.
Provisions of our Certificate of Incorporation and By-laws and Delaware law
could make it more difficult for a third party to acquire us, even if the
acquisition would be beneficial to our stockholders. This could prevent the
consummation of a transaction in which our stockholders could receive a
substantial premium over the current market price for their shares.
Our Certificate of Incorporation gives our board of directors the authority
to issue up to 10,000,000 shares of preferred stock and to determine the price,
rights, preferences and privileges and restrictions, including voting rights, of
those shares without any further vote or action by our stockholders. The rights
of the holders of common stock will be subject to, and may be harmed by, the
rights of the holders of any shares of preferred stock that may be issued in the
future. The issuance of preferred stock may delay, defer or prevent a change in
control, as the terms of the preferred stock that might be issued could
potentially prohibit our consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of
preferred stock. In addition, the issuance of preferred stock could have a
dilutive effect on our stockholders.
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We also have a classified board of directors serving staggered three-year
terms. This could delay or limit the removal of incumbent directors or the
assumption of control by stockholders, even if such removal or assumption of
control would be beneficial to stockholders, and also could discourage or make
more difficult a merger, tender offer or proxy contest, even if such events
would be beneficial, in the short term, to the interests of stockholders.
ITEM 2. PROPERTIES
Our headquarters consist of approximately 50,000 square feet of office and
research laboratory space located in Gaithersburg, Maryland under a lease which
expires in 2007. We also lease approximately 57,000 square feet of additional
office and research laboratory space in Gaithersburg, Maryland and 8,000 square
feet of office space in Berkeley, California under lease agreements with terms
expiring in 2010 and 2004, respectively.
ITEM 3. LEGAL PROCEEDINGS
On January 10, 2001, we and Incyte Genomics, Inc. settled our litigation and
entered into a settlement agreement to avoid further protracted litigation. The
pending lawsuits were dismissed with prejudice. Incyte granted us a world-wide,
nonexclusive license for the terms of the relevant patents, to use the process
at issue in the litigation: a process that Affymetrix, Inc. recommends we use in
the preparation of samples for use with the Affymetrix GeneChip platform. We
paid Incyte $9.0 million and we agreed on certain other matters regarding future
disputes and confidentiality of the settlement terms.
On December 28 2000, we entered into a settlement agreement which ended the
litigation brought in Illinois in October 1999 against Oncormed, Inc. and us.
The lawsuit was dismissed with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol GLGC since November 21, 1997. The following table sets forth for the
periods indicated the high and low closing prices for our common stock, as
reported by the Nasdaq National Market.
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 1999
First Quarter ................... $ 8.000 $ 4.375
Second Quarter .................. 5.219 3.438
Third Quarter ................... 6.906 3.688
Fourth Quarter .................. 28.125 5.438
YEAR ENDED DECEMBER 31, 2000
First Quarter ................... 144.625 24.750
Second Quarter .................. 46.250 18.438
Third Quarter ................... 35.500 16.563
Fourth Quarter .................. $ 25.813 $ 14.563
On March 1, 2001, the last reported sale price of our common stock on the
Nasdaq National Market was $20.625. As of March 1, 2001 there were approximately
262 holders of record of the Company's Common Stock.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results and current and anticipated cash needs.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of operations for the years ended December 31,
2000, 1999 and 1998 and with respect to the consolidated balance sheets at
December 31, 2000 and 1999 have been derived from audited consolidated financial
statements included as part of this Report on Form 10-K. The statements of
operations data for the years ended December 31, 1997 and 1996 and the balance
sheet data at December 31, 1998, 1997 and 1996 are derived from audited
financial statements not included in this Report on Form 10-K. The following
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report on Form 10-K.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................. $ 26,883 $ 19,202 $ 13,197 $ 2,047 $ --
Operating expenses:
Research and development ........................ 44,014 29,570 16,605 6,061 1,741
Selling, general and administrative ............. 17,770 9,194 7,552 3,825 1,345
Acquired in-process research and
development(1) ................................ -- -- 35,196 -- --
Amortization of goodwill ........................ 1,524 1,524 381 -- --
-------- -------- -------- -------- --------
Total operating expenses ............................. 63,308 40,288 59,734 9,886 3,086
-------- -------- -------- -------- --------
Loss from operations ................................. (36,425) (21,086) (46,537) (7,839) (3,086)
Interest income, net ................................. 13,706 685 1,844 745 221
Other income (expense) ............................... 234 30 (80) -- --
Income tax expense ................................... 210 220 100 100 --
-------- -------- -------- -------- --------
Net loss before cumulative effect of change in
accounting principle ............................ (22,695) (20,591) (44,873) (7,194) (2,865)
Cumulative effect of change in accounting
principle ....................................... (1,322) -- -- -- --
-------- -------- -------- -------- --------
Net loss ............................................. (24,017) (20,591) (44,873) (7,194) (2,865)
Accretion of mandatory redemption value of
preferred stock ................................. -- -- -- 1,286 494
-------- -------- -------- -------- --------
Net loss attributable to common stockholders ......... $(24,017) $(20,591) $(44,873) $ (8,480) $ (3,359)
======== ======== ======== ======== ========
Amounts per common share, basic and diluted:
Net loss before cumulative effect of change in
accounting principle ......................... $ (0.90) $ (1.04) $ (2.86) $ (3.97) $ (5.87)
Cumulative effect of change in accounting
principle .................................... (0.05) -- -- -- --
-------- -------- -------- -------- --------
Net loss ......................................... $ (0.95) $ (1.04) $ (2.86) $ (3.97) $ (5.87)
======== ======== ======== ======== ========
Shares used in computing basic and diluted net
loss per common share ............................ 25,209 19,833 15,681 2,138 572
======== ======== ======== ======== ========
DECEMBER 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities ............................... $229,482 $ 12,446 $ 30,982 $ 46,621 $ 5,671
Working capital ............................ 211,300 5,423 26,573 42,455 4,581
Total assets ............................... 289,533 41,166 55,566 53,972 7,819
Total long-term debt and capital lease
obligations .............................. 2,966 4,590 5,305 1,551 446
Total mandatorily redeemable convertible
preferred stock .......................... -- -- -- -- 10,471
Total stockholders' equity (deficit) ....... $253,715 $ 23,068 $ 41,288 $ 46,067 $ (4,187)
- ----------
(1) In connection with our acquisition of Oncormed, we incurred a non-recurring
charge of $35.2 million related to the write-off of acquired in-process
research and development.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. We generally use words such as "anticipate,"
"estimate," "plan," "project," "continuing," "ongoing," "expect," "management
believes," "we believe," "we intend" and similar expressions to indicate when we
are making forward-looking statements. You should not place undue reliance on
these forward-looking statements. The forward-looking statements speak only as
of the date on which they are made, and we undertake no obligation to update any
forward-looking statement. Forward-looking statements include statements about
the performance and utility of our products, the timing and availability of
products under development, the ability of our customers to develop products
identified using our products, the adequacy of capital resources and other
expectations, plans, objectives, assumptions or future events. These statements
involve estimates, assumptions and uncertainties that could cause actual results
to differ materially from those expressed for the reasons described in this
Report on Form 10-K. These risks and uncertainties include, but are not limited
to, the extent of utilization of genomic information by the pharmaceutical and
biotechnology industries in both research and development, our ability to retain
existing and obtain additional database customers, risks relating to the
development of genomic database products and their use by existing and potential
customers, the impact of technological advances and competition, our ability to
enforce our intellectual property rights, and the impact of the intellectual
property rights of others, as well as other risks and uncertainties set forth
below and in the section entitled "Risk Factors."
OVERVIEW
We were incorporated in September 1994 and have devoted substantially all of
our resources to the development, marketing and sales of our genomics
technologies, bioinformatics systems and database products for use in
pharmaceutical, biotechnology, life sciences, diagnostic and agricultural
product research and development.
Since 1997, we have developed custom gene expression databases designed for
our customers' internal research and development programs targeted to specific
therapeutic areas of interest, including heart failure, kidney disease,
osteoporosis, psychiatric disorders and other major illnesses. Building on this
know-how, in March 1999, we began developing the GeneExpress Suite of databases,
our large-scale reference database of gene expression information. The
GeneExpress Suite of databases contains information from a broad range of normal
and diseased human tissues, tissues from experimental animals, human and animal
cell lines and tissues that have been treated with various drugs. We completed
development of the first commercial version of the GeneExpress Suite in November
1999. We currently market the GeneExpress Suite through nonexclusive
subscriptions to customers in the pharmaceutical, biotechnology and diagnostic
industries, and are developing versions of the database suite to market to the
academic and government life science research community. We sold our first
subscription to the GeneExpress Suite in December 1999.
Typically, GeneExpress subscription agreement terms are for three years with
annual subscription fees ranging from $1.5 million to $4.0 million, depending
upon the level and type of information our customers obtain. Customers for our
custom discovery gene expression databases can provide us with various
combinations of recurring technology and database access fees, research fees,
additional payments upon the attainment of research and product development
milestones, royalty payments based on sales of any products resulting from their
use of our products, and nonrefundable up-front payments. In addition, our
business agreements can provide the right for early termination without penalty
to the customer.
Subscription fees to the GeneExpress Suite are recognized systematically
over the term of the subscription. Technology and database access fees are
recognized systematically over the term of each customer agreement. We recognize
revenues from research and development support when they are earned, which is
ordinarily when the work is performed or costs are incurred. Milestone payments
and royalties are recognized when they are earned in accordance with the
applicable performance requirements and contractual terms. Nonrefundable
up-front payments received are recognized as revenue systematically over the
term of the agreement. Under collaboration agreements in which we create
research databases in exchange for fixed fees, revenues from such collaborations
are recognized on the percentage-of-completion method.
Our future profitability will depend in part on the continued successful
commercialization of the GeneExpress Suite of databases and establishment of
agreements with additional customers which include various combinations of
genomic databases, bioinformatics software and genomics technology. Payments to
access the GeneExpress Suite are expected to be our primary source of revenue
for the foreseeable future. We have not received, and do not expect to receive,
significant royalty or other revenues from development and commercialization of
products by our customers using our databases and other technology for several
years, if at all. Revenues from our customers may be subject to significant
fluctuation in both timing and amount, and, therefore, our results of operations
for any period may not be comparable to the results of operations for any other
period.
We have incurred operating losses in each year since our inception. At
December 31, 2000, we had accumulated losses of approximately $102.2 million.
Our losses have resulted principally from costs incurred in the development of
our gene expression databases, a $35.2 million non-recurring charge incurred in
connection with our acquisition of Oncormed and selling, general and
administrative costs associated with our operations. These costs have exceeded
our revenues which, to date, have been generated
23
24
principally from agreements for our custom databases and subscriptions to the
GeneExpress Suite of databases. We expect to incur additional operating losses
in future years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues increased $7.7 million or 40% to $26.9 million in 2000 from $19.2
million in 1999. The increase in revenues resulted primarily from additional
subscribers to the GeneExpress Suite of databases which was introduced in
December of 1999. Revenues in 2000 include the increase of $0.8 million after
giving the effect to the adoption of Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" which we adopted in the fourth quarter of
2000 with retroactive application to January 1, 2000. Payments from each of
Japan Tobacco and Procter & Gamble accounted for 10% or more of revenue for
2000, and payments from each of Aventis CropScience, Japan Tobacco and Procter &
Gamble accounted for 10% or more of revenue for 1999.
Research and development expenses increased to $44.0 million in 2000 from
$29.6 million in 1999. Of the increase in research and development expenses for
this period, $7.4 million was due to increased tissue acquisition and processing
costs and Affymetrix GeneChips usage and the remainder was primarily attributed
to $2.6 million in research agreement expenses. These increases were necessary
to expand and enhance the content and product offerings of the GeneExpress Suite
of databases. We expect research and development expenses to increase as we
expand the content and bioinformatic capabilities of the GeneExpress Suite of
databases.
Selling, general and administrative expenses increased to $17.8 million in
2000 from $9.2 million in 1999. These costs include the costs of corporate
operations, finance and accounting, human resources and other general
operations. Of the increase in selling, general and administrative expenses for
this period, $5.8 million was due to the establishment of our sales and
marketing efforts and the remainder of the increase was due to continued
expansion of our operations. Selling, general and administrative expenses are
expected to increase as we expand our product offerings and sales and marketing
efforts.
Amortization of goodwill was $1.5 million in 2000 and 1999, as a result of
the acquisition of Oncormed in September 1998.
Net interest income increased to $13.7 million in 2000 from $0.7 million in
1999 primarily due to investment of the proceeds of our public offering of
common stock in February 2000.
During 2000, we recorded a cumulative effect of an accounting change of $1.3
million related to the adoption of SAB 101.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues increased $6.0 million or 46% to $19.2 million in 1999 from $13.2
million in 1998. The increase in revenues primarily resulted from the expansion
of our relationships with Japan Tobacco and Procter & Gamble in late 1998 and
the addition of new custom database customers. Payments from each of Aventis
CropScience, Japan Tobacco and Procter & Gamble accounted for 10% or more of
revenues for 1999, and payments from each of Aventis CropScience, Japan Tobacco,
Organon and Procter & Gamble accounted for 10% or more of revenues for 1998.
Research and development expenses increased to $29.6 million in 1999 from
$16.6 million in 1998, primarily due to approximate increases of $5.4 million in
research agreement expenses, $2.7 million in laboratory supplies, and $2.4
million in personnel expenses. This increase primarily relates to our efforts in
building the GeneExpress Suite of databases which started in March 1999,
expansion of our custom database and bioinformatics software businesses to
accommodate new and expanded relationships with customers, and further
development of our Flow-thru Chip program.
Selling, general and administrative expenses increased to $9.2 million in
1999 from $7.6 million in 1998. These costs include the costs of corporate
operations, finance and accounting, human resources and other general
operations. The increase of $1.6 million was primarily attributed to an
approximate increase of $1.1 million in personnel expenses. This increase
largely relates to the expansion of our business development efforts, marketing
costs of new products, and other general costs necessary to support the
expansion of our operations.
Amortization of goodwill increased to $1.5 million in 1999 from $0.4 million
in 1998, as a result of the acquisition of Oncormed in September 1998.
Acquired in-process research and development was $35.2 million in 1998, as a
result of the non-recurring charge for the acquisition of Oncormed in September
1998.
Net interest income decreased to $0.7 million in 1999 from $1.8 million in
1998 primarily due to smaller cash and investment balances as a result of
funding our operating losses in 1999 and additional interest expense paid on
equipment loans.
24
25
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 2000, we have financed our operations
through the sale of equity securities, payments from customers, and equipment
and tenant improvement financing. In February 2000, we completed a public
offering of 4,680,000 shares of our common stock (including exercise of the
underwriters' over-allotment option), generating net proceeds of approximately
$247.5 million. As of December 31, 2000, we had obtained $6.3 million under
equipment and tenant improvement loans. As of December 31, 2000, we had
approximately $229.5 million in cash and marketable securities, compared to
$12.4 million as of December 31, 1999.
Net cash used in operating activities was $2.0 million in 2000 compared to
$12.5 million in 1999. The net increase in operating working capital for 2000 as
compared to 1999 was primarily due to the timing of payments for the Company's
obligations.
Our investing activities, other than sales, maturities and purchases of
available-for-sale securities, consisted primarily of capital expenditures, an
$8.1 million equity investment in NeuralStem Biopharmaceuticals, Ltd., $7.2
million for licenses and patent costs and $8.1 million for software and database
development costs. The increase in capital expenditures, which totaled $9.7
million and $3.2 million for the years ended December 31, 2000 and 1999,
respectively, was primarily due to purchases of laboratory equipment needed to
expand the content of the GeneExpress Suite of databases and $2.6 million of
tenant improvements related to our new office and laboratory facility. During
the first quarter of 2001, we expect tenant improvement expenditures to continue
as we complete the improvements to our new facility.
We have capitalized software and database development costs of $8.1 million
and $1.2 million for the years ended December 31, 2000 and 1999, respectively.
We incurred software development costs of $4.2 million and $1.2 million for the
years ended December 31, 2000 and 1999, respectively, related to ongoing efforts
to enhance the software interface of the GeneExpress Suite. Also, during 2000,
we incurred $3.8 million of database development costs related to the purchase
of data from N.V. Organon and the update of the GeneExpress Suite of databases
data as a result of Affymetrix's release of their HU-95 Human Genome GeneChip
set. This new set includes 60,000 human gene fragments and expressed sequence
tags ("ESTs") as compared to the HU-35 Human Genome GeneChip set which included
42,000 human gene fragments and ESTs. Software and database development costs
are being amortized over their expected useful lives of three and two years,
respectively. Software development and database development costs are expected
to continue as a result of ongoing efforts to further enhance the GeneExpress
Suite.
During December 2000, N.V. Organon terminated its collaboration agreement
with us. Upon termination, we received the $2.0 million owed to us and we
simultaneously purchased, for $2.0 million, an exclusive perpetual license to
data that was developed under this agreement. The purchased data is being
amortized over its expected useful life of three years. In addition, Organon
entered into a multi-year GeneExpress Suite subscription.
Our financing activities, other than the repayment of capital lease
obligations and equipment loans, consisted of the issuance of common stock
primarily through our public offering in February 2000 and the exercise of stock
options.
In January 1999, we entered into a three-year agreement with Affymetrix,
pursuant to which Affymetrix supplies its GeneChip probe arrays to us for the
development of gene expression databases. Under the terms of the agreement, we
pay Affymetrix subscription fees for access to the probe arrays, purchase the
probe arrays and related instrumentation and software, and will pay royalties to
Affymetrix on revenues generated from certain database subscription fees. Our
commitments under other research and license agreements do not represent a
significant expenditure in relation to our total research and development
expense.
In January 2001, we paid Incyte Genomics, Inc. $9.0 million in connection
with settlement of outstanding litigation. As part of the settlement agreement,
we acquired a world-wide, nonexclusive license for the terms of the relevant
patents, to use a process that Affymetrix recommends we run in the preparation
of samples for use with the Affymetrix GeneChip platform. A portion of the
payment to Incyte has been recorded as a license and is being amortized over its
expected useful life of five years.
To date, all revenue received by us has been generated principally from our
custom database customers and subscriptions to the GeneExpress Suite of
databases. However, we expect that substantially all increases in revenue for
the foreseeable future will come from subscribers to the GeneExpress Suite of
databases. Furthermore, our ability to achieve profitability will be dependent
upon our ability to successfully commercialize the GeneExpress Suite of
databases and enter into additional arrangements with customers.
We believe that existing cash and cash equivalents and anticipated payments
from customers will be sufficient to support our operations and repayment of
equipment loans for the foreseeable future. These estimates are forward-looking
statements that involve risks and uncertainties. Our actual future capital
requirements and the adequacy of our available funds will depend on many
factors, including those discussed under "Risk Factors."
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, we changed our method of accounting for revenue
in accordance with Staff Accounting Bulletin No.
25
26
101, "Revenue Recognition in Financial Statements." Prior to 2000, we recognized
as revenue certain nonrefundable up-front payments for the value of data
purchased, transfer of technology or other contractual rights that were not
contingent upon future performance under the terms of the agreement upon signing
of the agreement or when collected. Under the new accounting method adopted
retroactive to January 1, 2000, we now defer these nonrefundable up-front
payments and recognize them as revenue systematically over the life of the
related collaboration agreements. The cumulative effect of the change on prior
years resulted in a charge of $1.3 million, which is included in the net loss
for the year ended December 31, 2000. The effect of the change on the year ended
December 31, 2000 was to increase revenue and decrease net loss before the
cumulative effect of the accounting change by $0.8 million ($0.03 per share).
The impact for the year ended December 31, 2001 will be an increase in revenue
and a decrease in net loss of $0.5 million.
NEW PRONOUNCEMENT
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 modifies the accounting for
derivatives and hedging activities and is effective for us on January 1,
2001. Because of our limited use of derivative instruments, SFAS 133 will not
have a material effect on our financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold any financial instruments subject to significant
market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto, together
with the Report of Independent Auditors and Report of Independent Public
Accountants thereon, appear at pages F-1 through F-21 of this Report on Form
10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported with respect to fiscal year ended December 31, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Election of Directors,"
contained in the Company's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the end of the Company's fiscal year ended December 31,
2000 (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Management" in Part I, Item 1 of
this Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.
26
27
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Certain Transactions" contained
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF GENE LOGIC INC
Report of Independent Auditors and Report of Independent Public Accountants ... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 .................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 ............................................ F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000 ................................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 ............................................ F-6
Notes to Consolidated Financial Statements .................................... F-7
(a)2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable and therefore have been omitted.
(a)3. INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 By-Laws, as amended and restated.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate.(1)
*10.1 Form of Indemnity Agreement entered into between Registrant and
its directors and officers. (1)
*10.2 Registrant's 1997 Equity Incentive Plan(the "Stock Plan") (1)
*10.3 Form of Stock Option Agreement under the Stock Plan.(1)
*10.4 Form of Stock Option Grant Notice.(1)
*10.5 Registrant's Employee Stock Purchase Plan and related offering
document.(1)
*10.6 Registrant's 1997 Non-Employee Directors' Stock Option Plan, as
corrected.(3)
*10.7 Form of Nonstatutory Stock Option under the 1997 Non-Employee
Directors' Stock Option Plan.(1)
*10.12 Employment Agreement, dated October 31, 1995, between the
Registrant and Michael J. Brennan.(1)
*10.13 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
*10.14 Employment Agreement, dated May 16, 1996, between the Registrant
and Mark D. Gessler.(1)
*10.15 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Mark D. Gessler.(1)
10.22 Lease Agreement, dated August 22, 1997, between Registrant and
ARE-708 Quince Orchard, LLC(1)
10.22a First Amendment to Lease, dated July 21, 2000, between
Registrant and ARE-708 Quince Orchard, LLC
27
28
10.27 Share Purchase Agreement, dated September 9, 1997, between
Registrant and Japan Tobacco Inc.(1)
10.28 License Agreement, dated May 22, 1996, between
Registrant and Yale University.(1)(A)
10.29 Amendment, dated October 1, 1997, to the License Agreement
between Registrant and Yale University.(1)(A)
10.30 Sole Commercial Patent License Agreement, dated June 15, 1997,
between Registrant and Lockheed Martin Energy Research
Company.(1)(A)
10.31 License Agreement, dated May 30, 1997, between Registrant and
Dr. Kenneth L. Beattie.(1)(A)
*10.45 Amended and Restated Employment Agreement, dated April 1, 1999,
between Registrant and Douglas Dolginow.(6)
10.46 Loan Agreement, dated July 6, 1998, between Registrant and
Oncormed, Inc.(2)
10.50 Agreement, dated January 1, 1999, between Registrant and
Affymetrix, Inc.(5)(B)
*10.53 Promissory Note, dated April 8, 1999 between the Registrant and
Douglas Dolginow.(6)
*10.54 Pledge and Security Agreement, dated April 8, 1999, between the
Registrant and Douglas Dolginow.(6)
*10.55 Executive Severance Plan, as amended March 2000.(7)
*10.58 Employment Agreement, dated October 11, 1999, between Registrant
and Philip L. Rohrer, Jr.(8)
*10.59 Employment Agreement, dated January 4, 2000, between Registrant
and David S. Murray.(9)
10.62 Series A Preferred Stock Purchase Agreement, dated April 20,
2000, Between Registrant and NeuralStem Biopharmaceutical, Ltd.
(9)(C)
*10.63 Employment Agreement, dated September 1, 1997, between
Registrant And Victor M. Markowitz.(9)
10.67 Lease Agreement, dated July 21, 2000 between Registrant and
ARE-50 West Watkins Mill, LLC.(10)
*10.68 Employment Agreement, dated September 7, 1996, between
Registrant and Eric M. Eastman.
*10.69 Amendment to Employment Agreement, dated July 9, 1997, between
Registrant and Eric M. Eastman.
11.1 Statement regarding computation of per share loss.
21.1 List of Subsidiaries.(4)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
- ----------
* Indicates management compensatory plan, contract or arrangement.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1,
filed October 7, 1997, as amended, (No. 333-37317) and incorporated herein
by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-4 (No.
333-60135), filed on July 29, 1998, as amended, and incorporated herein by
reference.
(3) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed on November 16, 1998, and
incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1998, filed on March 31, 1999, and incorporated herein
by reference.
(5) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, filed on May 14, 1999, and incorporated
herein by reference.
(6) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, filed on August 13, 1999, and incorporated
herein by reference.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, filed on November 15, 1999, and
incorporated herein by reference.
(8) Filed as and exhibit to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1999, filed on March 30, 2000, and incorporated
herein by reference.
(9) Filed as an exhibit to Registrant's Quarterly Report on From 10-Q for the
quarter ended March 31, 2000, filed on May 15, 2000, and incorporated
herein by reference.
(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed on November 14, 2000, and
incorporated herein by reference.
(A) Confidential treatment has been granted with respect to certain portions of
this exhibit pursuant to an Order Granting Application Under the Securities
Act of 1933 and Rule 406 Thereunder Respecting Confidential Treatment dated
November 20, 1997.
(B) Confidential treatment has been granted with respect to certain portions of
this exhibit pursuant to an Order Granting
28
29
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated July 16, 1999.
(C) Confidential treatment has been granted with respect to certain portions of
this exhibit pursuant to an Order Granting Application Under the Securities
Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
Treatment dated August 24, 2000.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 2000, the Registrant did not file any
reports on Form 8-K.
29
30
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29th day of
March, 2001.
GENE LOGIC INC.
By: /s/ MARK D. GESSLER
-------------------
Mark D. Gessler
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
- ------------------------------ ----------------------------------- --------
/s/ MARK D. GESSLER President, Chief Executive Officer, March 29, 2001
------------------- and Director
(Mark D. Gessler) (Principal Executive Officer)
/s/ PHILIP L. ROHRER, JR. Chief Financial Officer March 29, 2001
------------------------- (Principal Financial and
(Philip L. Rohrer, Jr.) Accounting Officer)
/s/ MICHAEL J. BRENNAN Chairman of the Board March 29, 2001
----------------------
(Michael J. Brennan, M.D., Ph.D.)
/s/ JULES BLAKE Director March 29, 2001
---------------
(Jules Blake, Ph.D.)
/s/ CHARLES L. DIMMLER, III Director March 29, 2001
---------------------------
(Charles L. Dimmler III)
/s/ G. ANTHONY GORRY Director March 29, 2001
--------------------
(G. Anthony Gorry, Ph.D.)
30
31
GENE LOGIC INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors and Report of Independent
Public Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gene Logic Inc.
We have audited the accompanying consolidated balance sheet of Gene Logic
Inc. (a Delaware corporation) and subsidiary as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gene Logic Inc.
and subsidiary as of December 31, 2000, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2000
the Company changed its method of revenue recognition for certain nonrefundable
up-front customer payments.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
February 9, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gene Logic Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Gene Logic
Inc. (a Delaware corporation) and subsidiary as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. and
subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States.
Our audits were made for the purposes of forming an opinion on the basic
consolidated financial statements and schedule taken as a whole. Schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
February 22, 2000
F-2
33
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
-------- -------
ASSETS
Current Assets:
Cash and cash equivalents................................. $229,482 $ 5,294
Marketable securities available-for-sale.................. -- 7,152
Due from customers........................................ 2,968 3,549
Inventory................................................. 2,295 1,735
Prepaid expenses.......................................... 2,537 822
Other current assets...................................... 6,382 1,335
-------- -------
Total Current Assets................................. 243,664 19,887
Property and Equipment, net................................. 15,994 10,527
Long-term Investments....................................... 9,081 1,000
Notes Receivable from Employees............................. 75 735
Goodwill, net............................................... 4,201 5,725
Intangibles and Other Assets, net........................... 16,518 3,292
-------- -------
Total Assets......................................... $289,533 $41,166
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 5,908 $ 4,506
Litigation settlement payable............................. 9,000 --
Accrued expenses.......................................... 9,028 2,759
Current portion of capital lease obligation............... -- 192
Current portion of long-term debt......................... 1,335 1,335
Deferred revenue.......................................... 7,093 5,672
-------- -------
Total Current Liabilities............................ 32,364 14,464
Capital Lease Obligation.................................... -- 201
Deferred Revenue............................................ 1,141 --
Long-Term Debt.............................................. 1,631 2,862
Other Noncurrent Liabilities................................ 682 571
-------- -------
Total Liabilities.................................... 35,818 18,098
-------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding as of
December 31, 2000 and 1999............................. -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; and 26,111,561 and 20,005,688 shares issued
and outstanding as of December 31, 2000 and 1999,
respectively........................................... 261 200
Additional paid-in capital................................ 356,347 103,497
Deferred compensation on stock options, net............... (738) (2,488)
Accumulated other comprehensive loss...................... -- (3)
Accumulated deficit....................................... (102,155) (78,138)
-------- -------
Total Stockholders' Equity........................... 253,715 23,068
-------- -------
Total Liabilities and Stockholders' Equity........... $289,533 $41,166
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
34
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- --------
Revenues.................................................... $ 26,883 $ 19,202 $ 13,197
Expenses:
Research and development.................................. 44,014 29,570 16,605
Selling, general and administrative....................... 17,770 9,194 7,552
Acquired in-process research and development.............. -- -- 35,196
Amortization of goodwill.................................. 1,524 1,524 381
-------- -------- --------
Total expenses......................................... 63,308 40,288 59,734
-------- -------- --------
Loss from operations................................... (36,425) (21,086) (46,537)
Interest Income, net........................................ 13,706 685 1,844
Other Income (Expense)...................................... 234 30 (80)
-------- -------- --------
Loss before income tax expense and cumulative effect of
change in accounting principle....................... (22,485) (20,371) (44,773)
Income Tax Expense.......................................... 210 220 100
-------- -------- --------
Net loss before cumulative effect of change in
accounting principle................................. (22,695) (20,591) (44,873)
Cumulative effect of change in accounting principle.... (1,322) -- --
-------- -------- --------
Net loss............................................... $(24,017) $(20,591) $(44,873)
======== ======== ========
Basic and Diluted Net Loss Per Common Share:
Net loss before cumulative effect of change in
accounting principle................................. $ (0.90) $ (1.04) $ (2.86)
Cumulative effect of change in accounting principle.... (0.05) -- --
-------- -------- --------
Net loss............................................... $ (0.95) $ (1.04) $ (2.86)
======== ======== ========
Shares Used in Computing Basic and Diluted Net Loss per
Common Share.............................................. 25,209 19,833 15,681
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
35
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
------------------ ADDITIONAL OTHER
NUMBER PAR PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED COMPREHENSIVE
OF SHARES VALUE CAPITAL COMPENSATION LOSS DEFICIT LOSS
---------- ----- ---------- ------------ ------------- ----------- -------------
Balance at January 1, 1998......... 13,899,250 $139 $ 64,882 $(6,278) $ (2) $ (12,674)
Issuance of common stock in
connection with exercise of stock
options.......................... 875,636 9 197 -- -- --
Issuance of common stock in
connection with Employee Stock
Purchase Plan.................... 27,290 -- 140 -- -- --
Issuance of common stock in
connection with acquisition of
Oncormed, Inc.................... 4,849,580 49 38,166 -- -- --
Net change in unrealized losses
from marketable securities....... -- -- -- -- (44) -- $ (44)
Write-off of forfeited stock
options.......................... -- -- (715) 715 -- --
Amortization of deferred
compensation..................... -- -- -- 1,577 -- --
Net loss........................... -- -- -- -- -- (44,873) (44,873)
--------
Comprehensive loss................. -- -- -- -- -- -- $(44,917)
---------- ---- -------- ------- ---- --------- ========
Balance at December 31, 1998....... 19,651,756 197 102,670 (3,986) (46) (57,547)
Issuance of common stock in
connection with exercise of stock
options.......................... 249,860 2 498 -- -- --
Issuance of common stock in
connection with Employee Stock
Purchase Plan.................... 62,766 1 269 -- -- --
Issuance of common stock in
connection with exercise of
Warrants......................... 41,306 -- -- -- -- --
Issuance of stock options to
consultants...................... -- -- 60 -- -- --
Net change in unrealized losses
from marketable securities....... -- -- -- -- 43 -- $ 43
Amortization of deferred
compensation..................... -- -- -- 1,498 -- --
Net loss........................... -- -- -- -- -- (20,591) (20,591)
--------
Comprehensive loss................. -- -- -- -- -- -- $(20,548)
---------- ---- -------- ------- ---- --------- ========
Balance at December 31,1999........ 20,005,688 200 103,497 (2,488) (3) (78,138)
Issuance of common stock in
connection with exercise of stock
options.......................... 1,163,240 11 4,633 -- -- --
Issuance of common stock in
connection with Employee Stock
Purchase Plan.................... 159,875 2 647 -- -- --
Issuance of common stock in
connection with exercise of
Warrants......................... 102,758 1 (1) -- -- --
Issuance of common stock in
connection with secondary
offering, net of issuance
costs............................ 4,680,000 47 247,410 -- -- --
Issuance of stock options to
consultants...................... -- -- 732 -- -- --
Net change in unrealized losses
from marketable securities....... -- -- -- -- 3 -- $ 3
Write-off of forfeited stock
options.......................... -- -- (571) 571 -- --
Amortization of deferred
compensation..................... -- -- -- 1,179 -- --
Net loss........................... -- -- -- -- -- (24,017) (24,017)
--------
Comprehensive loss................. -- -- -- -- -- -- $(24,014)
---------- ---- -------- ------- ---- --------- ========
Balance at December 31, 2000....... 26,111,561 $261 $356,347 $ (738) $ -- $(102,155)
========== ==== ======== ======= ==== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
36
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash Flows From Operating Activities:
Net loss.................................................. $(24,017) $(20,591) $(44,873)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Acquired in-process research and development............ -- -- 35,196
Amortization of goodwill................................ 1,524 1,524 381
Depreciation and amortization........................... 6,812 3,391 1,760
Amortization of deferred compensation................... 1,179 1,498 1,577
Other non-cash expense.................................. 732 60 --
Loss on disposal of property and equipment.............. 52 -- 80
Changes in operating assets and liabilities (net of
effects of acquisition):
Due from customers...................................... 581 230 (2,706)
Inventory............................................... (560) (1,634) (101)
Prepaid expenses........................................ (1,715) (81) (193)
Other current assets.................................... (5,889) (417) 67
Other assets............................................ (61) (14) (7)
Accounts payable........................................ 1,402 2,383 1,401
Litigation settlement payable........................... 9,000 -- --
Accrued expenses........................................ 6,269 (204) 450
Accrued restructuring................................... -- (184) (1,163)
Deferred revenue........................................ 2,562 1,453 (1,247)
Other noncurrent liabilities............................ 111 87 118
-------- -------- --------
Net Cash Flows From Operating Activities.............. (2,018) (12,499) (9,260)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (9,685) (3,229) (6,873)
Purchase of equity investment............................. (8,081) -- --
Purchases of licenses and patent costs.................... (7,194) (670) (964)
Software and database development costs................... (8,066) (1,158) --
Decrease (increase) in notes receivable from employees.... 663 (778) --
Payment of acquisition costs, net of cash acquired........ -- -- (755)
Pre-acquisition advances to Oncormed, Inc................. -- -- (1,843)
Purchase of marketable securities available-for-sale...... -- -- (14,737)
Proceeds from sale and maturity of marketable securities
available-for-sale...................................... 7,155 7,682 --
-------- -------- --------
Net Cash Flows From Investing Activities.............. (25,208) 1,847 (25,172)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock in public
offering................................................ 262,080 -- --
Issuance costs of public offering......................... (14,623) -- --
Proceeds from issuance of other common stock.............. 5,293 770 346
Proceeds from equipment loans............................. -- -- 4,765
Proceeds from note payable................................ -- 425 --
Repayments of financing agreement......................... -- (98) (183)
Repayments of capital lease obligations and equipment
loans................................................... (1,336) (1,342) (827)
-------- -------- --------
Net Cash Flows From Financing Activities.............. 251,414 (245) 4,101
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ 224,188 (10,897) (30,331)
Cash and Cash Equivalents, beginning of period.............. 5,294 16,191 46,522
-------- -------- --------
Cash and Cash Equivalents, end of period.................... $229,482 $ 5,294 $ 16,191
======== ======== ========
Supplemental Disclosure:
Interest paid............................................. $ 408 $ 415 $ 271
======== ======== ========
Non-Cash Transactions:
Issuance of common stock in acquisition................... $ -- $ -- $ 38,215
======== ======== ========
Equity investment......................................... $ -- $ 1,000 $ --
======== ======== ========
Equipment acquired under capital lease.................... $ -- $ 300 $ --
======== ======== ========
Capital lease termination................................. $ 288 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
37
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Gene Logic Inc. (the "Company") was incorporated in Delaware on September
22, 1994. The Company is a leading supplier of integrated genomic information
and bioinformatics related to gene activity in human disease and toxicity to
enable global pharmaceutical, biotechnology, life sciences and diagnostic
companies to reduce the time, risk and cost involved in developing drugs against
human disease. Through the systematic and industrialized application of
genomics, the Company provides a growing portfolio of gene expression-based
products. These products include the Company's flagship product, the GeneExpress
Suite of databases and custom, proprietary gene expression databases focused on
single disease indications. Customers utilize the Company's products to discover
drug targets, prioritize therapeutic compounds, predict toxicity, determine drug
efficacy via pharmacogenetics, and facilitate clinical trial development and
patient management. Currently, a number of global pharmaceutical and
biotechnology companies utilize the Company's various gene expression products
throughout their drug discovery and development programs.
Principles of Consolidation
The consolidated financial statements include the accounts of Gene Logic
Inc. and its wholly owned subsidiary. All material intercompany accounts and
transactions have been eliminated in consolidation.
In September 1998, the Company's wholly owned subsidiary, Gene Logic
Acquisition Corp., merged with Oncormed, Inc. ("Oncormed"), a publicly traded
genomics company, and issued 4,849,580 (reduced for fractional shares) shares of
the Company's Common Stock. The acquisition of Oncormed has been accounted for
as a purchase, and the consolidated financial statements herein reflect the
inclusion of the operating results of Gene Logic Acquisition Corp. since the
acquisition date.
Use of Estimates
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, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
Comprehensive Loss
The Company accounts for comprehensive loss as prescribed by Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Comprehensive income (loss) is the total net income (loss) plus all changes in
equity during the period except those changes resulting from investment by
owners and distribution to owners. Total comprehensive loss was $24.0 million,
$20.5 million and $44.9 million for the years ended December 31, 2000, 1999 and
1998, respectively.
Concentration of Credit Risk
Cash, cash equivalents and marketable securities available-for-sale are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in corporate debt securities, commercial
paper and bonds, and notes and bonds issued by the U.S. government and its
agencies and, by policy, seeks to ensure both liquidity and safety of principal.
The policy also limits investments to certain types of instruments issued by
institutions with
F-7
38
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
strong investment grade credit ratings and places restrictions on their terms,
geographic origin and concentrations by type and issuer.
Cash and Cash Equivalents
Cash and cash equivalents are defined as liquid investments with maturities
of 90 days or less when purchased that are readily convertible into cash. All
other investments are reported as marketable securities available-for-sale. Cash
and cash equivalents as of December 31, 2000 and 1999, are comprised of:
2000 1999
-------- ------
(IN THOUSANDS)
Cash...................................................... $ 2,468 $1,607
Corporate commercial paper................................ 227,014 3,687
-------- ------
Total........................................... $229,482 $5,294
======== ======
Marketable Securities Available-for-Sale
All marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. Realized
gains and losses and declines in value judged to be other than temporary for
available-for-sale securities are included in other income.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventory consists primarily of
Affymetrix, Inc. ("Affymetrix") GeneChips(R) and tissue samples. At December 31,
2000 and 1999, all inventory is classified as raw materials.
Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Furniture and fixtures...................................... 3 - 10 years
Computers and office equipment.............................. 1 - 5 years
Lab equipment............................................... 3 - 5 years
Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.
Long-Term Investment
During 2000, the Company purchased an interest in NeuralStem
Biopharmaceuticals, Ltd. ("NeuralStem"), a company commercializing proprietary,
patented central nervous system stem cell technology as new therapeutics and
research tools for drug discovery. The carrying value of the investment in
NeuralStem is approximately $8.1 million and consists of Series A Convertible
Preferred Stock. The Company's voting stock interest in NeuralStem constituted
26.7% and 20.7% of the outstanding voting securities at the time of investment
and December 31, 2000, respectively. The Company accounts for this investment
under the equity method of accounting. The Company holds no common stock
interest in NeuralStem.
F-8
39
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Under an agreement with Avalon Pharmaceuticals, Inc. (formerly Therapeutic
Genomics, Inc.) ("Avalon"), the Company received convertible preferred stock in
1999. The Company accounts for this investment under the cost method of
accounting, as the Company holds less than 10% of Avalon's voting stock
outstanding under such arrangement and does not exert significant influence over
Avalon.
Goodwill
Goodwill, from the acquisition of Oncormed, represents the excess of the
purchase price over the fair market value of the net assets acquired. Goodwill
is being amortized over five years at a rate of approximately $1.5 million per
year. Amortization expense was $1.5 million for each of the years ended December
31, 2000 and 1999, respectively, and $0.4 million for the year ended December
31, 1998. Accumulated amortization of goodwill was $3.4 million and $1.9 million
as of December 31, 2000 and 1999, respectively.
Intangibles and Other Assets
Intangibles and other assets consists primarily of licenses, patent costs,
goodwill and software and database development costs. Licenses to technology and
data and patent costs are being amortized over their expected useful lives of
approximately two to nineteen years.
In accordance with the provisions of the Financial Accounting Standards
Board Statement No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," beginning in 1999 the Company has
capitalized certain software development costs incurred in developing certain
products upon the demonstration of technological feasibility. Software
development costs are being amortized over their expected useful life of three
years upon release of the software or upgrades.
During 2000, the Company incurred $2.2 million of costs related to the
update of the GeneExpress Suite of databases with the new Affymetrix, Inc. HU-95
Human Genome GeneChip set. This set includes 60,000 human gene fragments and
expressed sequence tags ("ESTs") as compared to the previous HU-35 Human Genome
GeneChip set which included 42,000 human genes and ESTs. These database
development costs are being amortized over their expected useful life of two
years.
During December 2000, the Company purchased, for $2.0 million, an exclusive
perpetual license to data that was developed under an agreement with the Company
(see Note 10). This database development cost is being amortized over its
expected useful life of three years.
Impairment of Long-Lived Assets
Long-lived assets, consisting principally of property and equipment,
long-term investments and intangible assets, including acquired licenses, patent
costs, goodwill and software and database development costs, are evaluated for
possible impairment through a review of undiscounted expected future cash flows.
If the sum of the undiscounted expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized.
Research and Development
Research and development costs are charged to operations when incurred or
acquired (See Note 8).
F-9
40
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Revenue Recognition
Subscription fees to the GeneExpress Suite of databases are recognized
systematically over the term of the subscription agreement. Technology and
database access fees are recognized systematically over the term of the
Company's customer agreements. Revenues from research and development support
are recognized when they are earned, which is ordinarily when the work is
performed or costs are incurred. Milestone payments are recognized as revenue in
accordance with the applicable performance requirements and contractual terms.
Nonrefundable up-front payments are recognized as revenue systematically over
the term of the agreement. Under collaboration agreements in which the Company
creates a research database in exchange for a fixed fee, revenues from such
collaborations are recognized on the percentage-of-completion method.
Change in Accounting Method
Effective January 1, 2000, the Company changed its method of accounting for
revenue in accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." Prior to 2000, the Company recognized as
revenue certain nonrefundable up-front payments for the value of data purchased,
transfer of technology or other contractual rights that were not contingent upon
future performance under the terms of the agreement upon signing of the
agreement or when collected. Under the new accounting method adopted retroactive
to January 1, 2000, the Company now defers these nonrefundable up-front payments
and recognizes them as revenue systematically over the life of the related
collaboration agreements. The cumulative effect of the change on prior years
resulted in a charge of $1.3 million which is included in the net loss for the
year ended December 31, 2000. The effect of the change on the year ended
December 31, 2000 was to increase revenue and decrease net loss before the
cumulative effect of the accounting change by $0.8 million ($0.03 per share).
The pro forma amounts presented below were calculated assuming the
accounting change was made retroactively to prior periods.
BASIC AND DILUTED
NET LOSS PER
REVENUES NET LOSS COMMON SHARE
-------- -------- -----------------
(IN THOUSANDS)
Year ended December 31:
1999....................................... $20,021 $19,772 $1.00
1998....................................... 11,057 47,013 3.00
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
F-10
41
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Basic and Diluted Net Loss Per Common Share
Net loss per common share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from all
outstanding stock options and warrants are excluded from the computation, as
their effect is antidilutive.
Stock Option Plans
Prior to January 1, 1996, the Company's policy was to account for its stock
option plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
NOTE 2 -- MARKETABLE SECURITIES
As of December 31, 1999, the Company's investment portfolio consisted of
corporate commercial bonds whose amortized cost approximated its fair value. All
marketable securities had maturities greater than one year, but less than
eighteen months. As of December 31, 1999, all of the Company's investments were
classified as current as the Company may not hold its investments until maturity
in order to take advantage of market conditions.
NOTE 3 -- NOTES RECEIVABLE FROM EMPLOYEES
During April 1999, the Company issued promissory notes to three officers of
the Company totaling $0.8 million to offset tax liabilities for unrealized
capital gains resulting from stock option exercises. Two notes aggregating $0.6
million plus accrued interest were repaid in 2000. The remaining note is
required to be repaid in four equal annual installments together with accrued
interest, bears interest at 5.25% and is collaterally secured. The fair value of
the remaining promissory note approximates its carrying value at December 31,
2000.
F-11
42
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 2000 and
1999:
2000 1999
------- -------
(IN THOUSANDS)
Furniture and fixtures.................................... $ 1,024 $ 998
Computers and office equipment............................ 9,535 5,499
Lab equipment............................................. 8,802 5,998
Lab equipment under capital leases........................ -- 771
Leasehold improvements.................................... 5,349 2,720
------- -------
24,710 15,986
Less -- Accumulated depreciation.......................... (8,716) (5,459)
------- -------
Property and Equipment, net............................... $15,994 $10,527
======= =======
Depreciation expense was $3.9 million, $3.2 million and $1.7 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 5 -- INTANGIBLES AND OTHER ASSETS
Intangibles and other assets includes the following as of December 31, 2000
and 1999:
2000 1999
------- ------
(IN THOUSANDS)
Licenses................................................... $ 7,573 $ 930
Patents.................................................... 1,988 1,469
Software development costs................................. 5,378 1,158
Database development costs................................. 3,846 --
Other...................................................... 113 52
------- ------
18,898 3,609
Less -- Accumulated amortization........................... (2,380) (317)
------- ------
Intangibles and Other Assets, net.......................... $16,518 $3,292
======= ======
Amortization expense was $2.9 million, $0.2 million and $0.1 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 6 -- ACCRUED EXPENSES
Accrued expenses consists of the following as of December 31, 2000 and
1999:
2000 1999
------ ------
(IN THOUSANDS)
Property additions.......................................... $2,857 $ 78
Professional fees........................................... 1,105 781
Payroll, taxes and benefits................................. 4,910 1,788
Consulting.................................................. 156 112
------ ------
Total............................................. $9,028 $2,759
====== ======
F-12
43
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 7 -- LICENSE ARRANGEMENTS
The proprietary rights and technical information covered by various patent
and patent applications have been licensed by the Company from third parties.
These licenses will continue for the life of the respective patent or until
terminated by either party. The license costs are being amortized over their
expected useful lives, but not greater than the life of the related patents.
Certain agreements call for the payment of royalties over the life of the
patents or a shorter life if no patents are issued.
NOTE 8 -- ACQUISITION
On September 28, 1998, the merger (the "Merger") of Gene Logic Acquisition
Corp., a wholly owned subsidiary of the Company, and Oncormed, a publicly held
genomics company providing pharmacogenomic services and developing databases for
use primarily in pharmaceutical research and development, was completed. As a
result of the Merger, Gene Logic Acquisition Corp. is the surviving corporation
and Oncormed has ceased to exist. In connection with the Merger, the Company
issued 4,849,580 (reduced for fractional shares) shares of its Common Stock in
exchange for all of the capital stock of Oncormed. In addition, outstanding
warrants for shares of Oncormed were converted into warrants for the Company's
Common Stock at exercise prices ranging from $14.77 to $28.89 per share. No
value has been included in the purchase price allocation for the warrants
assumed because their value, calculated using the Black-Scholes model, is
immaterial. All outstanding Oncormed preferred stock was converted into Common
Stock of the Company upon the consummation of the Merger, and no stock options
were assumed by the Company in the Merger.
The Merger has been accounted for as a purchase transaction and,
accordingly, the purchase price of approximately $39.2 million was allocated to
certain assets and liabilities based on their respective fair market values. The
excess of the purchase price over the estimated fair market value of the net
assets acquired was accounted for as goodwill. The amount allocated to goodwill,
approximately $7.6 million, is being amortized on a straight-line basis over
five years. Allocations were made to certain intangible assets, including work
force, and to "in-process research and development" consisting of technologies
which had not reached technological feasibility and had no alternative future
use, including in-process technologies relating to genomic databases and
pharmacogenomics. The write-off of in-process research and development resulted
in a non-recurring charge to the Company's operating results of $35.2 million,
or $2.24 per share basic and diluted, for the year ended December 31, 1998. The
amount charged to earnings was determined by estimating the costs to develop the
in-process technologies into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the net cash flows
back to their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the acquired
in-process technologies. If these projects are not successfully developed,
future results of operations of the Company may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
NOTE 9 -- ACCRUED RESTRUCTURING
In connection with the Merger, the Company recorded a restructuring
liability of approximately $1.6 million to integrate Oncormed into the Company
following the acquisition. The objective of the restructuring plan was to
eliminate redundant general and administrative employees of Oncormed and
terminate contracts that the Company deemed to have no ongoing economic value to
the Company. The restructuring liability consisted of $0.4 million in costs
associated with the involuntary termination of ten Oncormed employees and
approximately $1.2 million in contract termination costs, including the
termination of a certain agreement with Incyte Genomics, Inc. (formerly Incyte
Pharmaceuticals, Inc.) ("Incyte") in which the Company repaid $0.9 million that
had been prepaid by Incyte. This liability has been included in
F-13
44
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 9 -- ACCRUED RESTRUCTURING -- (CONTINUED)
the purchase price allocation performed in connection with the Merger. The
restructuring activities were substantially completed in 1999.
The following table details the major components of the restructuring
liability relating to the Oncormed acquisition:
CONTRACT
TERMINATION
PERSONNEL COSTS TOTAL
--------- ----------- -------
(IN THOUSANDS)
Restructuring Liability................................ $ 373 $ 1,224 $ 1,597
1998 Activity........................................ (239) (1,174) (1,413)
----- ------- -------
Balance at December 31, 1998........................... 134 50 184
1999 Activity........................................ (134) (50) (184)
----- ------- -------
Balance at December 31, 1999........................... $ -- $ -- $ --
===== ======= =======
NOTE 10 -- BUSINESS AGREEMENTS
As of December 31, 2000, the Company's business portfolio consisted of
agreements with 13 pharmaceutical and biotechnology companies utilizing the
Company's various gene expression products, which include 11 subscription
agreements for access to the Company's GeneExpress Suite of databases, one
agreement to supply a proprietary gene expression database for a fixed fee and
five agreements to perform custom collaborative discovery research. Some of
these agreements are with the same pharmaceutical and/or biotechnology company.
Under the GeneExpress subscription agreements, each subscriber has agreed to
pay, during the term of the agreement, annual subscription fees to receive
non-exclusive access to selected Modules or DataSuites of the Company's
GeneExpress Suite. The custom discovery research agreements provide the Company
with various technology and database access fees, research funding and up-front
payments. In addition, certain of these agreements provide for additional
payments upon attainment of research and product development milestones and
royalty payments based on sales of any products that result from the use of the
Company's technology or proprietary database information. The Company's business
agreements can provide the right for early termination without penalty to the
customer.
During December 2000, N.V. Organon terminated its Collaboration and License
Agreement with the Company. Under the agreement, the Company received the $2.0
million which was outstanding and simultaneously purchased, for $2.0 million, an
exclusive perpetual license to data that was developed under this agreement. In
addition, N.V. Organon entered into a multi-year GeneExpress database
subscription.
F-14
45
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 11 -- INCOME TAXES
The actual income tax expense for the years ended December 31, 2000, 1999
and 1998, is different from the amount computed by applying the statutory
federal income tax rates to losses before income tax expense. The reconciliation
of these differences is as follows:
2000 1999 1998
-------- ------- --------
(IN THOUSANDS)
Tax benefit at federal statutory rate.................. $ (8,166) $(7,001) $(15,223)
State income taxes, net of federal income tax effect... (1,105) (949) (2,069)
Acquired in-process research and development........... -- -- 13,593
Benefit from stock option compensation................. (12,846) (391) (423)
Other.................................................. (145) 1,082 989
Net operating loss valuation adjustment................ -- (2,058) --
Increase in valuation allowance........................ 22,472 9,537 3,233
-------- ------- --------
Income tax expense..................................... $ 210 $ 220 $ 100
======== ======= ========
The tax effect of cumulative temporary differences at December 31, 2000,
1999 and 1998, follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Deferred Tax Assets:
Tax carryforwards................................... $ 49,698 $ 28,407 $ 18,668
Contract revenues................................... 1,511 8 117
Amortization........................................ 423 495 491
Start-up costs...................................... -- 129 221
Accrued vacation.................................... 297 160 127
Other............................................... 550 195 324
-------- -------- --------
52,479 29,394 19,948
Less -- Valuation allowance......................... (51,620) (29,148) (19,611)
-------- -------- --------
Net deferred tax assets.......................... $ 859 $ 246 $ 337
======== ======== ========
Deferred Tax Liabilities:
Capitalized software costs.......................... $ 490 $ 43 $ 43
Depreciation........................................ 86 36 98
Other............................................... 283 167 196
-------- -------- --------
Net deferred tax liabilities..................... $ 859 $ 246 $ 337
======== ======== ========
At December 31, 2000, Net Operating Loss carryforwards ("NOLs") for income
tax purposes are approximately $122.5 million, including approximately $30.0
million related to Oncormed prior to the Merger. The Company also has research
and development tax credit carryforwards of approximately $2.4 million as of
December 31, 2000. The carryforwards, if not utilized, will expire in increments
from 2008 through 2020. Utilization of the net operating losses and credits may
be subject to an annual limitation as provided by the Internal Revenue Code of
1986, and there can be no guarantee that such NOLs will ever be fully utilized.
As a
F-15
46
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 11 -- INCOME TAXES -- (CONTINUED)
result of cumulative losses, the Company has recorded a full valuation allowance
against its net deferred tax assets as management believes it is more likely
than not that the assets will not be realizable.
NOTE 12 -- LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999, consists of the following:
2000 1999
------- -------
(IN THOUSANDS)
Equipment loans:
Variable rate equipment loan.............................. $ 2,382 $ 3,383
9.0% equipment loan....................................... 210 405
Other..................................................... 374 409
------- -------
2,966 4,197
Less -- Current portion..................................... (1,335) (1,335)
------- -------
Total long-term debt.............................. $ 1,631 $ 2,862
======= =======
As of December 31, 2000, principal payments on long-term debt are as
follows (in thousands):
Year ending December 31,
2001...................................................... $1,335
2002...................................................... 1,331
2003...................................................... 40
2004...................................................... 42
2005...................................................... 44
2006 and thereafter....................................... 174
------
$2,966
======
In June 1998, the Company entered into a loan agreement for the financing
of laboratory, computer and office equipment. The Company borrowed approximately
$4.8 million under this agreement, bearing interest ranging from 7.6% to 8.8%.
The loan agreement is being repaid in 48 equal monthly installments including a
15.0% balloon payment at the end of the term. The Company granted the lender a
security interest, collateralized by all the equipment and fixtures acquired
under the loan.
In March 1997, the Company entered into a loan agreement for the purchase
of laboratory and computer equipment. The Company borrowed approximately $1.1
million under this agreement, bearing interest at 9.0%. The loan is being repaid
in 48 equal monthly installments. The Company has granted the lender a security
interest, collateralized by all of the equipment and fixtures acquired under the
loan.
Interest expense was $0.4 million, $0.4 million and $0.3 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 13 -- STOCKHOLDERS' EQUITY
On February 1, 2000, the Company completed a public offering of its common
stock at $56.00 per share. The Company sold 4,680,000 shares, including the
underwriters' over-allotment option. Net proceeds to the Company, after
deducting the underwriting discounts and commissions and offering expenses, were
approximately $247.5 million.
F-16
47
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company conducts all of its operations from leased facilities,
primarily in Gaithersburg, Maryland and Berkeley, California under operating
leases with varying terms expiring through 2010. These leases obligate the
Company to pay building operating costs and also contain renewal provisions.
Future minimum lease payments on these operating leases as of December 31,
2000, are as follows (in thousands):
Year ending December 31,
2001...................................................... $2,325
2002...................................................... 2,552
2003...................................................... 2,617
2004...................................................... 2,586
2005...................................................... 2,519
2006 and thereafter....................................... 9,216
-------
$21,815
=======
Rent expense for the years ended December 31, 2000, 1999 and 1998, was $2.1
million, $1.8 million and $1.5 million, respectively.
Contingencies
Clinical trials, manufacturing, marketing and sale of any of the Company's
customers' potential therapeutic, diagnostic or agricultural products may expose
the Company to liability claims from the use of such products. The Company
currently maintains product liability and medical malpractice insurance.
Litigation
The Company is not subject to any pending litigation.
NOTE 15 -- 401(K) RETIREMENT PLAN
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the "401(k) Plan") for its employees under Section 401(k) of the Internal
Revenue Code. Under this plan, all employees 18 years of age or older and with
at least one day of service with the Company are eligible, starting on the
calendar quarter, to contribute from 0% to 15% of their salary. Employee
contributions are 100% vested. The Company is not required to make any
contributions to the 401(k) Plan and has not made any contributions through
December 31, 2000.
NOTE 16 -- STOCK BASED COMPENSATION
During 1996, the Company instituted a stock plan (the "Stock Plan"), which
was amended and restated in 1997, whereby the Company's Compensation Committee
of the Board of Directors (the "Committee"), at its discretion, can grant
options, award stock or provide opportunities to make direct purchases of stock
to employees, officers, directors and consultants of the Company and related
corporations. The Stock Plan authorizes the grant of options for up to 8,600,000
shares of common stock. At December 31, 2000, there were 1,592,574 shares
reserved for issuance under the Stock Plan. During 1997, the Company adopted a
Directors' stock plan (the "Directors' Plan") to provide for granting of options
to non-employee directors of the Company. The Directors' Plan is administered by
the Committee which is authorized to grant options of up to
F-17
48
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 16 -- STOCK BASED COMPENSATION -- (CONTINUED)
325,000 shares of common stock. At December 31, 2000, there were 152,500 shares
reserved for issuance under the Directors' Plan. Options are to be granted at
the fair market value of the common stock at the grant date. The options, awards
and opportunities to purchase stock expire at the earlier of termination or the
date specified by the Committee at the date of grant, but not more than ten
years. During 1997, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 500,000 shares of common stock. The
Purchase Plan allows employees to purchase common stock of the Company, through
payroll deductions of up to a maximum of 15% of their salary, at 85% of the
price of the shares at the time of purchase. At December 31, 2000, there were
250,069 shares reserved for issuance under the Purchase Plan.
The following is a rollforward of option activity for the years ended
December 31, 2000, 1999 and 1998:
SHARES SUBJECT TO
OUTSTANDING OPTIONS
SHARES -----------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------- ---------- ----------------
BALANCE AT JANUARY 1, 1998.................... 3,374,697 2,497,360 $ 1.21
Options granted............................. (1,556,000) 1,556,000 $ 5.52
Options exercised........................... -- (875,636) $ 0.23
Options cancelled........................... 292,588 (292,588) $ 3.78
---------- ---------- ------
BALANCE AT DECEMBER 31, 1998.................. 2,111,285 2,885,136 $ 3.57
Additional authorization.................... 1,200,000 -- --
Options granted............................. (1,622,463) 1,622,463 $ 5.57
Options exercised........................... -- (249,860) $ 2.01
Options cancelled........................... 328,725 (328,725) $ 5.02
---------- ---------- ------
BALANCE AT DECEMBER 31, 1999.................. 2,017,547 3,929,014 $ 4.41
Additional authorization.................... 1,500,000 -- --
Options granted............................. (2,466,560) 2,466,560 $46.82
Options exercised........................... -- (1,163,721) $ 4.02
Options cancelled........................... 694,087 (694,087) $19.66
---------- ---------- ------
BALANCE AT DECEMBER 31, 2000.................. 1,745,074 4,537,766 $25.16
========== ========== ======
Options to purchase a total of 2,003,371, 1,442,735 and 722,345 at December
31, 2000, 1999, and 1998, respectively, were exercisable. The weighted-average
grant-date fair value of options granted during the years ended December 31,
2000, 1999, and 1998 was $37.66, $3.50, and $3.19, respectively.
During the year ended December 31, 1997, the Company granted options with
exercise prices below fair value. The Company recorded deferred compensation of
$6.9 million at December 31, 1997, and compensation expense of $1.2 million,
$1.5 million and $1.6 million for the years ended December 31, 2000, 1999 and
1998, respectively, related to these option grants.
F-18
49
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 16 -- STOCK BASED COMPENSATION -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 2000 LIFE PRICE 2000 PRICE
-------------- -------------- ----------- -------- -------------- --------
$0.15 - $4.13.......... 1,175,264 7.3 Years $ 2.80 693,915 $ 2.42
$4.14 - $8.50.......... 1,056,233 8.1 Years $ 5.57 463,104 $ 5.62
$8.51 - $50.00......... 1,267,135 9.3 Years $28.33 292,387 $26.00
$50.01 - $62.88........ 900,685 9.1 Years $62.77 520,928 $62.84
$62.89 - $123.00....... 138,449 9.1 Years $90.74 33,037 $92.14
--------- --------- ------ --------- ------
$0.15 - $123.00........ 4,537,766 8.5 Years $25.16 2,003,371 $23.79
========= ========= ====== ========= ======
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates, consistent with the
method of SFAS No. 123, the Company's net loss and loss per common share would
have been changed to the pro forma amounts for the years ended December 31,
2000, 1999 and 1998 as indicated below:
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss before cumulative effect of change
in accounting principle.................. $(59,298) $(22,852) $(45,853)
Cumulative effect of change in accounting
principle................................ (1,322) -- --
-------- -------- --------
Net loss.................................... $(60,620) $(22,852) $(45,853)
======== ======== ========
Basic and diluted net loss per common share:
Net loss before cumulative effect of change
in accounting principle.................. $ (2.35) $ (1.15) $ (2.92)
Cumulative effect of change in accounting
principle................................ (0.05) -- --
-------- -------- --------
Net loss.................................... $ (2.40) $ (1.15) $ (2.92)
======== ======== ========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model for the years ended December 31, 2000,
1999 and 1998, with the following assumptions:
2000 1999 1998
-------------- -------------- --------------
Expected volatility.......... 143.0% 98.0% 86.0%
Risk-free interest rate...... 5.04% to 6.70% 4.57% to 6.97% 4.18% to 5.61%
Expected lives............... 3 years 1 - 3 years 1 - 3 years
Dividend rate................ 0% 0% 0%
NOTE 17 -- RELATED PARTY TRANSACTIONS
During 1999, the Company entered into a GeneExpress subscription with
Avalon Pharmaceuticals, Inc. At the time, a director of the Company also served
as a director for Avalon.
F-19
50
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 17 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
During 1999, the Company issued promissory notes to three officers of the
Company totaling $0.8 million to offset tax liabilities for unrealized capital
gains resulting from stock option exercises. In February 2000, two of the notes
were paid in full including accrued interest to date (see Note 3).
NOTE 18 -- SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting
information about operating segments in annual and interim financial statements
and related disclosures about its products, services, geographic areas and major
customers. The Company's operates in one operating segment.
The following is a breakdown of revenue by major customers exceeding ten
percent (10%) of such revenues and by geographic areas:
MAJOR CUSTOMERS GEOGRAPHIC AREA
--------------------- --------------------
A B C D JAPAN EUROPE US
--- --- --- --- ----- ------ ---
For the year ended:
December 31, 2000..................... 32% 18% -- -- 32% -- 18%
December 31, 1999..................... 43% 25% -- 12% 43% 12% 25%
December 31, 1998..................... 34% 23% 24% 18% 34% 42% 23%
NOTE 19 -- SUBSEQUENT EVENT
On January 10, 2001, the Company and Incyte settled outstanding litigation
and entered into a settlement agreement to avoid further protracted litigation.
The pending lawsuits were dismissed with prejudice. Incyte granted the Company a
world-wide, nonexclusive license for the terms of the relevant patents, to use
the process at issue in the litigation: a process that Affymetrix recommends the
Company use in the preparation of samples for use with the Affymetrix GeneChip
platform. In January 2001, the Company paid Incyte $9.0 million and agreed on
certain other matters regarding future disputes and confidentiality of the
settlement terms. Total litigation costs, including the payment under the
settlement agreement to Incyte, were approximately $14.0 million of which $7.5
million was paid by the Company's insurance carriers. A portion of the payment
to Incyte has been recorded as a license and is being amortized over its
expected useful life of five years.
F-20
51
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 20 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999 restated for the cumulative effect of
change in accounting principle as more fully described in Note 1.
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
MARCH 31 MARCH 31 JUNE 30 JUNE 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
---------- -------- ---------- -------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Revenues.......................... $ 4,998 $ 5,328 $ 6,544 $ 6,789 $ 5,269 $ 5,394 $ 9,373
Net loss before cumulative effect
of change in accounting
principle....................... (4,984) (4,654) (5,057) (4,812) (7,970) (7,845) (5,385)
Cumulative effect of change in
Accounting principle............ -- (1,322) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss.......................... $(4,984) $(5,976) $(5,057) $(4,812) $(7,970) $(7,845) $(5,385)
======= ======= ======= ======= ======= ======= =======
Basic and diluted net loss per
common share:
Net loss before cumulative effect
of change in accounting
principle....................... $ (0.21) $ (0.20) $ (0.20) $ (0.19) $ (0.31) $ (0.30) $ (0.21)
Cumulative effect of change in
accounting principle............ -- (0.06) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss.......................... $ (0.21) $ (0.25) $ (0.20) $ (0.19) $ (0.31) $ (0.30) $ (0.21)
======= ======= ======= ======= ======= ======= =======
1999
Revenues.......................... $ 4,067 $ 5,212 $ 4,223 $ 5,700
Net loss.......................... $(4,949) $(4,385) $(5,387) $(5,869)
Basic and diluted net loss per
common share.................... $ (0.25) $ (0.22) $ (0.27) $ (0.29)
F-21
52
GENE LOGIC INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCRUED RESTRUCTURING CHARGES:
AMOUNTS
DUE AMOUNTS
BALANCE AT NEW TO CHARGED ADJUSTMENTS
BEGINNING RESTRUCTURING ACQUISITIONS AGAINST TO ACCRUED BALANCE AT
DESCRIPTION OF YEAR CHARGES (1) ACCRUAL AMOUNTS END OF YEAR
----------- ---------- ------------- ------------ ------- ----------- -----------
(IN THOUSANDS)
December 31, 1999............ $184 $-- $ -- $ (184) $ -- $ --
==== === ====== ======= ===== ====
December 31, 1998............ $ -- $-- $1,597 $(1,163) $(250) $184
==== === ====== ======= ===== ====
- ---------------
Notes:
(1) Restructuring liability recorded in connection with the merger with
Oncormed, Inc. The liability has been included in the purchase price
allocation performed in connection with the merger.