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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
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 NUMBER 0-23317
- --------------------------------------------------------------------------------
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)
(301) 987-1700
(Registrant's phone number, including area code)
----------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 19,646,071 as of October 31, 1998.
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GENE LOGIC INC.
TABLE OF CONTENTS
<TABLE>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 and December 31, 1997.....................3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997.........................................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.........................................................5
Notes to Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................................10
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................15
Item 2. Changes in Securities and Use of Proceeds..........................................16
Item 3. Defaults Upon Senior Securities....................................................16
Item 4. Submission of Matters to a Vote of Security Holders................................16
Item 5. Other Information..................................................................17
Item 6. Exhibits and Reports on Form 8-K...................................................17
Signatures.................................................................................18
</TABLE>
2.
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 24,145 $ 46,522
Marketable securities available for sale ................... 10,562 99
Due from collaborative partners............................. 2,506 1,000
Prepaid expenses ........................................... 551 481
Other current assets ....................................... 1,232 890
--------- ---------
Total Current Assets ................................... 38,996 48,992
Property and Equipment, net .................................... 9,489 4,211
Goodwill ....................................................... 8,211 --
Intangible and Other Assets, net ............................... 1,227 769
--------- ---------
Total Assets ........................................... $ 57,923 $ 53,972
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................... $ 1,675 $ 181
Accrued expenses .......................................... 2,878 1,371
Accrued restructuring ..................................... 1,597 --
Current portion of capital lease obligation ............... 122 115
Current portion of long-term debt ......................... 1,225 434
Deferred revenue .......................................... 1,683 4,436
--------- ---------
Total Current Liabilities ............................. 9,180 6,537
Capital Lease Obligation ....................................... 132 225
Long-Term Debt ................................................. 3,693 777
Other Noncurrent Liabilities ................................... 454 366
--------- ---------
Total Liabilities .......................................... 13,459 7,905
--------- ---------
Stockholders' Equity:
Common Stock, $.01 par value; 60,000,000 shares authorized; 196 139
19,644,093 and 13,899,250 shares issued and outstanding as
of September 30, 1998 and December 31, 1997, respectively
Preferred Stock, $.01 par value; 10,000,000 shares -- --
authorized; no shares issued and outstanding as of
September 30, 1998 and December 31, 1997 .................
Additional paid-in capital ................................ 102,666 64,882
Deferred compensation on stock options, net ............... (4,360) (6,278)
Unrealized loss on marketable securities .................. (8) (2)
Accumulated deficit ....................................... (54,030) (12,674)
--------- ---------
Total Stockholders' Equity ............................. 44,464 46,067
--------- ---------
Total Liabilities and Stockholders' Equity ............. $ 57,923 $ 53,972
========= =========
</TABLE>
See accompanying notes.
3.
<PAGE> 4
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ............................................... $ 2,743 $ 607 $ 8,618 $ 774
Expenses:
Research and development ............................. 4,090 1,501 11,234 3,338
General and administrative ........................... 1,673 1,206 4,991 2,442
Acquired in-process research and development ......... 35,196 -- 35,196 --
-------- -------- -------- --------
Total expenses ................................ 40,959 2,707 51,421 5,780
-------- -------- -------- --------
Loss from operations .......................... (38,216) (2,100) (42,803) (5,006)
Interest income, net ................................... 428 264 1,527 355
Other expense .......................................... -- -- (80) --
-------- -------- -------- --------
Loss before income tax expense ................ (37,788) (1,836) (41,356) (4,651)
Income tax expense ..................................... -- 100 -- 100
-------- -------- -------- --------
Net loss ...................................... (37,788) (1,936) (41,356) (4,751)
Accretion of mandatory redemption value of
Preferred Stock ...................................... -- 542 -- 909
-------- -------- -------- --------
Net loss attributable to common stockholders .. $(37,788) $ (2,478) $(41,356) $ (5,660)
======== ======== ======== ========
Basic and Diluted Net Loss Per Common Share ............ $ (2.54) $ (3.41) $ (2.88) $ (8.48)
======== ======== ======== ========
Shares Used In Computing Basic and
Diluted Net Loss Per Common Share ................... 14,906 726 14,345 667
======== ======== ======== ========
</TABLE>
See accompanying notes.
4.
<PAGE> 5
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ....................................................... $(41,356) $ (4,751)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization .............................. 1,141 383
Cancellation of note receivable ............................ -- 43
Amount due under research agreement ........................ -- 48
Amortization of deferred compensation ...................... 1,203 159
Acquired in-process research and development ............... 35,196 --
Loss on disposal of property and equipment ................. 81 --
Changes in operating assets and liabilities
(net of effects of acquisition):
Due from collaborative partners ............................ (1,433) (946)
Prepaid expenses ........................................... (69) (553)
Other current assets ....................................... (224) (233)
Intangibles and other assets ............................... (523) (275)
Accounts payable ........................................... 703 304
Accrued expenses ........................................... 318 517
Deferred revenue ........................................... (2,815) 3,272
Other noncurrent liabilities ............................... 89 232
-------- --------
Net Cash Flows From Operating Activities ................ (7,689) (1,800)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment ........................ (5,582) (1,785)
Increase in notes receivable from employees ................ -- (13)
Payment of acquisition costs, net of cash acquired ......... (755) --
Pre-acquisition advances to Oncormed ....................... (1,843) --
Purchase of marketable securities available for sale ....... (10,470) --
Proceeds from sale and maturity of
marketable securities available for sale ................. -- 4,397
-------- --------
Net Cash Flows From Investing Activities ................ (18,650) 2,599
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock ..................... 340 21
Proceeds from issuance of preferred stock .................. -- 20,000
Payments for stock issuance costs .......................... -- (873)
Proceeds from equipment loans .............................. 4,284 1,084
Repayments of financing agreement .......................... (136) --
Repayments of capital lease obligation and equipment loans.. (526) (175)
-------- --------
Net Cash Flows From Financing Activities ................ 3,962 20,057
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents ........... (22,377) 20,856
Cash and Cash Equivalents, beginning of period ................. 46,522 1,137
-------- --------
Cash and Cash Equivalents, end of period ....................... $ 24,145 $ 21,993
-------- --------
Supplemental Disclosure:
Interest expense paid ...................................... $ 117 $ 64
-------- --------
Non-Cash Transactions:
Issuance of Common Stock in Acquisition .................... $ 38,217 $ --
-------- --------
</TABLE>
See accompanying notes.
5.
<PAGE> 6
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements of Gene Logic Inc. (the
"Company") have been prepared to give effect to the acquisition of Oncormed,
Inc. on September 28, 1998, which has been accounted for as a purchase
transaction. The accompanying unaudited consolidated financial statements have
also been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The consolidated balance sheet as of September 30,
1998, consolidated statements of operations for the three and nine months ended
September 30, 1998 and 1997 and the consolidated statements of cash flows for
the nine months ended September 30, 1998 and 1997 are unaudited, but include all
adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position, operating
results and cash flows for the periods presented. Although the Company believes
that the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information and footnote
information normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and Registration Statement on
Form S-4 (File No. 333-60135), both filed with the Securities and Exchange
Commission.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 sets standards for reporting and presentation of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Once adopted, it
requires reclassification adjustments and changes in presentation for all prior
periods shown. The impact of the adoption of SFAS No. 130 on the Company was not
material.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this statement in the fourth quarter of 1998.
6.
<PAGE> 7
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. As of September 30,
1998 and 1997, all of the Company's investments were classified as current as
the Company may not elect to hold investments until maturity in order to take
advantage of market conditions.
Revenue Recognition
Nonrefundable technology and database access fees are recognized evenly
over the term of the Company's collaboration agreements. Revenues from research
and development support and milestone payments are recognized when they are
earned in accordance with the applicable performance requirements and
contractual terms. Revenues from genomic screening services are recognized upon
completion of the services. Revenues for such amounts are deferred until earned.
Nonrefundable signing fees that are not contingent upon future
performance under the terms of collaboration agreements are recognized as
revenue upon execution of the agreements. Pursuant to a certain collaboration
agreement, the Company is creating a research database in exchange for a fixed
fee. Revenues from this collaboration are recognized on the
percentage-of-completion method, primarily based on man-months incurred to date
compared with total estimated man-months for development of such database. Under
such agreement, the full amount is to be paid by the collaborator in 1999. As of
September 30, 1998, unbilled receivables in the amount of approximately $1.1
million are due from such collaborator.
NOTE 2. ACQUISITION
On September 28, 1998, the merger (the "Merger") of Gene Logic Acquisition
Corp., a wholly-owned subsidiary of the Company, and Oncormed, Inc.
("Oncormed"), a publicly-held genomics company providing screening 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 4,849,815 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 since 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 $8.2 million, will be
amortized on a straight-line basis over five years. The purchase price was
allocated based on a fair value appraisal obtained from an independent third-
party appraisal company. 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 $2.36 per share basic and diluted for the three
months ended September 30, 1998.
7.
<PAGE> 8
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.
The operating results of Gene Logic Acquisition Corp. from September 28,
1998 (date of completion of the Merger) to September 30, 1998 are considered
immaterial. Had the Merger been completed at the beginning of each period
presented for the Company, unaudited pro forma results would have been as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 9,904 $ 1,343
Expenses 26,485 14,930
Amortization of goodwill 1,232 1,232
Interest income, net and other (2,148) 357
-------- --------
Net Loss $(15,665) $(15,176)
======== ========
Basic and Diluted Net Loss Per Share $ (0.82) $ (2.25)
======== ========
</TABLE>
Such unaudited pro forma amounts are not necessarily indicative of what
the actual consolidated results of operations might have been had the Merger
been effective at the beginning of each period presented.
NOTE 3. ACCRUED RESTRUCTURING
In connection with the Merger, the Company recorded a restructuring
liability consisting of $373,000 in costs associated with the involuntary
termination of ten Oncormed employees and approximately $1.2 million in contract
termination costs. This liability has been included in the purchase price
allocation performed in connection with the Merger. Management anticipates the
restructuring activities as a result of the Merger will be substantially
completed in 1999.
NOTE 4. LONG-TERM DEBT
In June 1998, the Company and Oxford Venture Leasing, LLC ("Oxford
Leasing") entered into a Master Loan and Security Agreement (the "Oxford Loan")
for the financing of laboratory, computer and office equipment. Under the Oxford
Loan, the Company may borrow up to $5.0 million through June 1999. In addition,
the Company entered into promissory notes with Oxford Leasing (the "Promissory
Notes") in the amounts of approximately $3.6 million and $706,000 during the
three months ended June 30, 1998 and September 30, 1998, respectively, which
bear interest at 8.8% and 7.8%, respectively. The Promissory Notes are payable
in 48 equal monthly installments including a 15.0% balloon payment at the end of
the initial term of each Promissory Note. The Company granted Oxford Leasing a
security interest, collateralized by all the equipment and fixtures acquired
under the Oxford Loan. Each Promissory Note has been assigned by Oxford Leasing
to Phoenixcor, Inc.
8.
<PAGE> 9
NOTE 5. STOCKHOLDERS' EQUITY
During July 1997, the Company sold 4,444,443 shares of Series C
Convertible Preferred Stock in a private placement for net proceeds of
approximately $19.1 million. During November 1997, the Company completed an IPO
of 3,347,000 shares of Common Stock (including exercise of the underwriters'
over-allotment option) at $8.00 per share, generating net proceeds of
approximately $23.9 million. In conjunction with the Company's IPO, all
outstanding shares of preferred stock were converted to common stock on a
one-to-one basis.
The Company continues to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations for its stock option plans. As such, the Company has recorded
the activity relating to deferred compensation on stock options for the nine
months ended September 30, 1998 as follows:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
------------
<S> <C>
Balance at December 31, 1997 $(6,278)
Amortization of deferred compensation 1,203
Write-off of forfeited stock options 715
-------
Balance at September 30, 1998 $(4,360)
=======
</TABLE>
NOTE 6. PRE-ACQUISITION ADVANCES TO ONCORMED
In connection with the Merger, the Company entered into a loan agreement
with Oncormed whereby the Company agreed to make available to Oncormed through
the earlier of the consummation of the Merger and February 28, 1999, a credit
facility of up to $2.0 million (the "Loan") to be used by Oncormed for working
capital purposes. As of the consummation of the Merger, the Company advanced to
Oncormed $1.5 million under the Loan. In addition, the Company paid certain
amounts on behalf of Oncormed in the amount of $323,000. These intercompany
transaction amounts have been eliminated in consolidation in the accompanying
consolidated financial statements at September 30, 1998.
NOTE 7. SUBSEQUENT EVENTS
In October 1998, the Company terminated the License, Services and
Marketing Agreement (the "License Agreement") with Incyte Pharmaceuticals, Inc.
("Incyte") it had assumed in connection with the Merger. As part of the
termination of the License Agreement, the Company repaid $924,000 that had been
prepaid by Incyte. Accordingly, this repayment amount has been recorded as
accrued restructuring in the accompanying consolidated financial statements at
September 30, 1998 (see Note 3).
9.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Financial Statements and the Notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and Registration
Statement on Form S-4 (File No. 333-60135 ), both filed with the Securities and
Exchange Commission.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Words such as "anticipates," "believes,"
"estimates," "expects," "projects," "intends" and other similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, the
extent of utilization of genomic information by the pharmaceutical industry in
both research and development, risks relating to the development of genomic
databases and their use by collaborators of the Company, the Company's ability
to manage and maintain multiple, concurrent collaborations, reliance on
collaborators for development and commercialization of products, if any, the
ability of the Company to realize the benefits expected as a result of the
Merger, the impact of technological advances and competition, as well as other
risks and uncertainties set forth in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and Registration Statement on Form S-4
(File No. 333-60135), both filed with the Securities and Exchange Commission.
Flow-thru Chip(TM) is a trademark of the Company.
OVERVIEW
The Company was incorporated in September 1994 and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify the
expression of genes, drug targets and drug leads. The Company has collaborations
with the Wyeth-Ayerst Research Division of American Home Products Corporation,
Hoechst Schering AgrEvo, Japan Tobacco Inc., Merck & Co., Inc., the N.V. Organon
business unit of Akzo Nobel N.V., Procter & Gamble Pharmaceuticals, Inc., Rhone-
Poulenc Rorer, Schering-Plough Research Institute and SmithKline Beecham. These
agreements provide the Company with various combinations of technology and
database access fees, signing fees and research funding, and provide certain
additional payments upon the attainment of research and product development
milestones and royalty payments based on sales of any products resulting from
the strategic alliances.
In September 1998, the Company completed the acquisition of Oncormed, a
genomics company that provides screening services and develops databases for use
primarily in pharmaceutical research and development. The transaction 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 $8.2 million,
will be amortized on a straight-line basis over five years. In connection with
the acquisition of Oncormed, the Company incurred a non-recurring charge to
operating results of $35.2 million as a result of the write-off of in-process
research and development that had not reached technological feasibility and has
no alternative future use. The value assigned to the in-process technologies was
determined by estimating the costs to develop such technologies into
commercially viable products, estimating the resulting net cash flows from such
technologies 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
10.
<PAGE> 11
technologies 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.
The in-process technologies are comprised of four on-going projects. Each
project involves either the development of technologies for genomic databases or
for pharmacogenomics. The four major research and development projects in
progress at the time of the acquisition were (i) the Gene Chip / Gene Expression
Database Development Project, (ii) the Biorepository Project, (iii) the
Recognizer Analysis Project and (iv) the SNP Analysis Project. The Gene Chip /
Gene Expression Database Development Project is designed to generate extensive
and quantitative gene expression data on a broad range of normal, diseased and
treated tissues. The Biorepository Project is intended to create novel protocols
for the collection, handling and storage of normal and diseased human tissues,
new methods for the extraction of genetic materials and new methods for the
microdissection of tissue. The goal of the Recognizer Analysis Project is to
develop novel algorithms and software tools for data mining of biological,
genetic and clinical data. The SNP Analysis Project is intended to provide a
rapid and low cost method to detect single nucleotide polymorphisms for genes of
interest.
Remaining development efforts for these projects are highly complex and
include the development and validation of the necessary biochemistry, molecular
biology, bioinformatic tools and information, as well as small-scale deployment
and commercial introduction. The Company anticipates that the projects will be
completed over the next twelve months. Following completion, the Company expects
to begin generating economic benefits from such technologies. Funding for such
projects is expected to be obtained from internally generated sources. The
Company estimates the costs to complete these projects at approximately $1.3
million in 1998 and approximately $2.6 million in 1999, for an aggregate of
approximately $3.9 million. Although the Company intends to complete the
development of these in-process technologies and management believes in the
likelihood of their feasibility, there can be no assurance that such projects
will be completed successfully, or that upon completion such technologies will
achieve commercial success.
Descriptions of the Company's estimates used to determine the valve assigned to
the in-process technologies and costs, timing and anticipated benefits of
completing the development of in-process technologies are forward-looking
statements that involve risks and uncertainties. The Company's actual costs and
timing to complete development of the technologies and any benefits derived
therefrom will depend on many factors, including the Company's ability to
complete development of the technologies successfully, to overcome remaining
technical obstacles and competing technologies, to gain market acceptance of
such products using such technologies and to adapt to market developments and
the availability to the Company of adequate capital resources to commercialize
such technologies. If the Company is unsuccessful in developing or
commercializing such technologies, the Company will not achieve the benefits
expected from acquiring such technologies or obtain a return on its investment
in connection with the Merger and would likely discontinue its operations with
respect to such technologies. Additionally, even if successfully completed,
these projects will require maintenance research and development after they have
reached a state of technological and commercial feasibility.
The Company estimated net cash flows from the in-progress technologies
based on estimates of revenues, research and development costs, general and
administrative costs and income taxes associated with such projects.
The estimated revenues from such projects are derived from the Company's
projections of collaborations using such technologies that will be established
over the useful life of such technologies. The economic terms, number and
timing of such collaborations and renewal rates are based on the Company's
experience with similar projects, comparable companies, current and anticipated
demands for such technologies in the pharmaceutical industry, expected trends in
technology, and the nature and expected timing of project developments by the
Company and its competitors. The estimated expenses, research and development
and general and administrative, are based on anticipated costs to complete the
acquired in-process technologies and fulfill the performance requirements under
the projected collaborations. These estimated costs are based on the Company's
experience in developing technologies for similar collaborations, including
expected hiring costs of laboratory and bioinformatics personnel for research
and development activities and software development, respectively. Additional
costs include laboratory-related expenses, such as tissue samples and related
reagents, collaborative research agreement expenses and capital expenditures.
General and administrative costs are expected to closely approximate the
Company's current cost structure.
A discount rate of 30% was used to present value the resulting cash
flow from the projects. This rate is similar to venture capital rates of
return, which management believes is a reasonable rate to apply due to the
inherent uncertainties in the estimates described above, including the
uncertainty surrounding the successful development of the acquired in-process
technologies, the useful lives of such technologies and the profitability
levels of such technologies.
Gene Logic's future profitability will depend in part on the successful
establishment of collaborations which include various combinations of genomic
databases, bioinformatics software and genomics technology. Payments through
collaborations and interest income are expected to be the Company's only sources
of revenue for the foreseeable future. Royalties or other revenues from
commercial sales of products developed from any therapeutic, diagnostic or
agricultural product identified using the Company's technologies are not
expected for several years, if at all. Revenues under collaborations may be
subject to significant fluctuation in both timing and amount, and, therefore,
the Company's results of operations for any period may not be comparable to the
results of operations for any other period. Furthermore, the generation of
significant revenues and profitability will depend upon the Company entering
into additional collaborations. There can be no assurance that the Company will
enter into additional collaborations on acceptable terms, if at all, or that
current or future collaborations will be successful.
The Company has incurred operating losses in each year since its
inception. At September 30, 1998, excluding the non-recurring charge of
approximately $35.2 million incurred in connection with the Merger, the Company
had an accumulated deficit of approximately $18.8 million. The Company's losses
have resulted principally from costs incurred in research and development and
from general and administrative costs associated with the Company's operations,
in addition to the charge incurred in connection with the Merger. These costs
have exceeded the Company's revenues which to date have been generated
principally from collaborations. The Company expects to incur additional
operating losses over the next few years as a result of increases in its
expenses for research and development capabilities.
The Company's quarterly operating results may fluctuate significantly as
a result of a variety of factors, including changes in the demand for the
Company's technologies and products, variations in revenues under
collaborations, including milestone payments, royalties, license fees and other
contract revenues, and the timing of new product introductions, if any, by the
Company. The Company's quarterly operating results may also fluctuate
significantly depending on changes in the research and development budgets of
the Company's collaborative partners, the introduction of new products by the
Company's competitors and other competitive factors, adoption of new
technologies, and the cost, quality and availability of cell and tissue samples
and related reagents.
11.
<PAGE> 12
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1998 and 1997
Revenue was $2.7 million and $8.6 million for the three months and nine
months ended September 30, 1998, respectively, compared to $607,000 and $774,000
for the same periods in 1997. The increase in revenues resulted from the
collaboration agreements which the Company entered into primarily during the
last year. Nonrefundable technology and database access fees are recognized
evenly over the term of the Company's collaboration agreements. Revenues from
research and development support and milestone payments are recognized when they
are earned in accordance with the applicable performance requirements and
contractual terms. Revenues from genomic screening services are recognized upon
completion of the services. Revenues for such amounts deferred until earned.
Nonrefundable signing fees that are not contingent upon future
performance under the terms of collaboration agreements are recognized as
revenue upon execution of the agreements. Pursuant to a certain collaboration
agreement, the Company is creating a research database in exchange for a fixed
fee. Revenues from this collaboration are recognized on the
percentage-of-completion method, primarily based on man-months incurred to date
compared with total estimated man-months for development of such database. Under
such agreement, the full amount is to be paid by the collaborator in 1999. As of
September 30, 1998, unbilled receivables in the amount of approximately $1.1
million are due from such collaborator.
Research and development expenses increased to $4.1 million and $11.2
million for the three months and nine months ended September 30, 1998,
respectively, compared to $1.5 million and $3.3 million for the same periods in
1997. The increase in research and development expenses for the three months
ended September 30, 1998 was attributable to: (i) a thirty percent (30%)
increase in personnel expenses, (ii) a twenty percent (20%) increase in research
agreement expenses, (iii) a thirteen percent (13%) increase in facility costs,
(iv) a ten percent (10%) increase in laboratory supplies, and (v) a ten percent
(10%) increase in depreciation expense as a result of the Company expanding its
target discovery and bioinformatics businesses and its Flow-thru Chip
development. The Company expects research and development expenses to continue
to increase as personnel and research and development activities are expanded to
accommodate new and existing collaborations.
General and administrative expenses increased to $1.7 million and $5.0
million for the three months and nine months ended September 30, 1998,
respectively, compared to $1.2 million and $2.4 million for the same periods in
1997. The increase for the three months ended September 30, 1998 is due
primarily to: (i) a fifty percent (50%) increase in personnel expenses, (ii) a
thirty percent (30%) increase in facility costs, and (iii) a ten percent (10%)
increase in depreciation expense as a result of the Company's expanding
operations and business development efforts. The Company expects that general
and administrative expenses will continue to increase as the Company continues
to expand its operations.
Net interest income increased to $428,000 and $1.5 million for the three
months and nine months ended September 30, 1998, respectively, from $264,000 and
$355,000 for the same periods in 1997 due to the investment of proceeds from the
Company's private placement of equity securities and initial public offering in
1997.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1998, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payments from collaborative partners, a
capital lease and equipment loans. In November 1997, the Company completed an
initial public offering of 3,347,000 shares of its Common Stock (including
exercise of the underwriters' over-allotment option), generating net proceeds of
approximately $23.9 million. The
12.
<PAGE> 13
private placements of equity securities have provided the Company with aggregate
gross proceeds of approximately $33.2 million. The Company has received, as of
September 30, 1998, $9.9 million under its collaborations for technology and
database access fees, signing fees and research funding. In connection with the
Company's collaboration with Hoechst Schering AgrEvo ("AgrEvo"), the Company
holds a promissory note for $1.0 million due from AgrEvo in January 1999. The
Company has also obtained $471,000 of capital lease financing and $5.4 million
under equipment loans. As of September 30, 1998, the Company had approximately
$34.7 million in cash and marketable securities, compared to $46.6 million as of
December 31, 1997.
In connection with the Merger, the Company entered into a loan agreement
with Oncormed whereby the Company agreed to make available to Oncormed through
the earlier of the consummation of the Merger and February 28, 1999, a credit
facility of up to $2.0 million (the "Loan") to be used by Oncormed for working
capital purposes. As of the consummation of the Merger, the Company advanced to
Oncormed $1.5 million under the Loan. In addition, the Company paid certain
amounts on behalf of Oncormed in the amount of $323,000. These intercompany
transaction amounts have been eliminated in consolidation in the accompanying
consolidated financial statements at September 30, 1998. The Company expects to
continue to pay certain amounts on behalf of its wholly-owned subsidiary, Gene
Logic Acquisition Corp., until such subsidiary generates working capital
sufficient to support its operations.
In connection with the Merger, the Company acquired in-process research
and development, which is comprised of several individual on-going technologies.
Remaining development efforts for these projects are highly complex and include
the development and validation of the necessary biochemistry, molecular biology
and bioinformatic tools and information, as well as small-scale deployment and
commercial introduction. The Company expects to spend approximately $3.9 million
over the next 12 months in order for the Company to develop commercially viable
products using such technologies and to begin to generate revenues from such
technologies. Costs to complete development of these technologies are estimated
to be $1.3 million in 1998 and $2.6 million in 1999. Funding for such efforts is
expected to be obtained from internally generated sources. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.
Descriptions of costs, timing and anticipated benefits of completing the
development of such technologies are forward-looking statements that involve
risks and uncertainties. The Company's actual costs and timing to complete
development of the technologies and any benefits derived therefrom will depend
on many factors, including the Company's ability to complete development of the
technologies successfully, to overcome remaining technical obstacles and
competing technologies, to gain market acceptance of products using such
technologies and to adapt to market developments and the availability to the
Company of adequate capital resources to commercialize such technologies. There
can be no assurance that the Company will be successful in developing and
commercializing such technologies. If the Company is unsuccessful in developing
or commercializing such technologies, the Company will not achieve the benefits
expected from acquiring such technologies or obtain a return on its investment
in connection with the Merger and would likely discontinue its operations with
respect to such technologies.
The Company recorded a restructuring liability as a result of the Merger
consisting of $373,000 in costs associated with the involuntary termination of
ten Oncormed employees and approximately $1.2 million in contract termination
costs, including the termination of the License Agreement with Incyte in which
the Company repaid $924,000 that had been prepaid by Incyte. The Company intends
to terminate additional agreements that it deems to have no on-going economic
value to the Company. The estimated costs to terminate such agreements have been
included within the recorded restructuring liability. The Company believes that
the termination of additional agreements will not adversely affect the Company's
operations. There can be no assurance, however, that the termination of such
agreements will not have an adverse effect on the Company's operations.
Net cash used in operating activities was $7.7 million for the nine
months ended September 30, 1998, as compared to net cash used in operating
activities of $1.8 million for the nine months ended September 30, 1997. The
increase in net cash used in operating activities resulted from timing of
payments from collaborative partners, revenue recognized under collaborations
and timing of payments relating to the Company's obligations. The Company's
investing activities, other than purchases, sales and maturities of available
for sale securities, primarily consisted of capital expenditures, which totaled
$5.6 million for the nine months ended September 30, 1998, as compared to $1.8
million for the nine
13.
<PAGE> 14
months ended September 30, 1997. The increase was primarily due to funding
tenant improvements relating to the completion of the Company's new office and
research laboratory facility in February 1998 and purchases of laboratory and
computer equipment and furniture to support the Company's expanding business. In
addition, the Company had cash outlays of approximately $2.0 million as a result
of the acquisition of Oncormed. Net cash provided by financing activities was
$4.0 million for the nine months ended September 30, 1998, as compared to net
cash provided by financing activities of $20.0 million for the nine months ended
September 30, 1997. The decrease is due to proceeds from the Company's private
placement of equity securities in 1997 which was offset by proceeds received
under an equipment loan that was entered into in June 1998.
As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $8.9 million to offset federal and state income
taxes. The Company's research and development tax credit carryforwards were
approximately $331,000 as of December 31, 1997 for federal income tax purposes.
If not utilized, the federal and state net operating loss carryforwards will
expire through 2012.
To date, all revenue received by the Company has been generated
principally from its collaborations. The Company expects that substantially all
revenue for the foreseeable future will come from collaborative partners and
interest income. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
collaborations. There can be no assurance that the Company will be able to
negotiate additional collaborations in the future on acceptable terms, if at
all, or that current or future collaborations will be successful and provide the
Company with expected benefits.
In June 1998, Gene Logic and Oxford Venture Leasing, LLC ("Oxford
Leasing") entered into a Master Loan and Security Agreement (the "Oxford Loan")
for the financing of laboratory, computer and office equipment. Under the Oxford
Loan, Gene Logic may borrow up to $5.0 million through June 1999. In addition,
Gene Logic entered into promissory notes with Oxford Leasing (the "Promissory
Notes") in the amounts of approximately $3.6 million and $706,000 during the
three months ended June 30, 1998 and September 30, 1998, respectively, which
bear interest at 8.8% and 7.8%, respectively. The Promissory Notes are payable
in 48 equal monthly installments including a 15.0% balloon payment at the end of
the initial term of each Promissory Note. Gene Logic granted Oxford Leasing a
security interest, collateralized by all the equipment and fixtures acquired
under the Oxford Loan. Each Promissory Note was assigned by Oxford Leasing to
Phoenixcor, Inc.
The Company believes that existing cash and marketable securities and
anticipated cash flow from its current collaborations will be sufficient to
support the Company's operations for at least the next 24 months. The estimate
for the period for which the Company expects its available cash balances and
estimated cash flow from its current collaborations to be sufficient to meet its
capital requirements is a forward-looking statement that involves risks and
uncertainties. The Company's actual future capital requirements and the adequacy
of its available funds, will depend on many factors, including progress of its
discovery programs, the number and breadth of these programs, the ability of the
Company to establish and maintain additional collaboration and licensing
arrangements, the commercial success of the in-process technologies acquired in
the Merger and the progress of the development and commercialization efforts
of the Company's collaborative partners. These factors also include the level of
the Company's activities relating to its independent discovery programs and to
the development and commercialization rights it retains in its collaboration
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights. The Company expects that
it will require significant additional financings in the future, which it may
seek to raise
14.
<PAGE> 15
through public or private equity offerings, debt financing or additional
collaboration and licensing arrangements. No assurance can be given that
additional financing or collaboration and licensing arrangements will be
available when needed, if at all, or that, if available, will be obtained on
terms favorable to the Company and its stockholders. To the extent that the
Company raises additional capital by issuing equity or convertible debt
securities, ownership dilution to stockholders will result. If adequate
financing is not available when needed, the Company may be required to curtail
significantly one or more of its research and development programs or to obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies,
discoveries or potential products, or to grant licenses on terms that are not
favorable to the Company, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. In the
event that adequate funds are not available, the Company's business would be
adversely affected.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company uses a significant number of computer software programs and
operating systems in connection with its database products, services and
internal operations. Such software and systems were purchased and installed with
a view towards Year 2000 compliance. Nevertheless, Year 2000 problems could
affect the Company's research and development, financial, administrative and
communication operations.
The Company is in the process of formulating and implementing a program
designed to address any Year 2000 problems. As a result, a project team has
performed an initial review of all internal computer systems and is developing
and implementing a more detailed assessment to include internal and external
compliance audits, Year 2000 validation testing, Year 2000 certification from
third parties the Company has material agreements with and contingency plans.
Systems critical to the Company's business identified as non-Year 2000 compliant
will be replaced or corrected through programming modifications and/or software
upgrades. In addition, third parties such as vendors, major collaborative
partners, service suppliers, communication providers and banks will be asked to
verify, through a compliance assurance questionnaire, their Year 2000 readiness.
The Company expects these projects to be successfully completed in 1999. The
estimated timing of completion of these efforts is a forward-looking statement
that involves risk and uncertainties, including the risk that such efforts will
not adequately address such Year 2000 problems and that, as a result, the
Company's business will be adversely affected. The Company has not assessed
software and systems which were acquired from Oncormed in connection with the
Merger, however, the Company plans to undertake a review commensurate with its
review of existing software and systems.
External and internal costs specifically associated with modifying
internal software for Year 2000 compliance are expensed as incurred. To date,
costs have not been material and are not expected to be in the future. Such
costs do not include normal system upgrades and replacements. Based on the
Company's current plans and efforts to date, the Company believes that changes
mandated by the Year 2000 issue will not cause any material adverse effects on
the Company's business, financial condition and results of operations. There is
no guarantee, however, that all problems will be foreseen and corrected, or that
no material disruption of the Company's business will occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold any financial instruments subject to
significant market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
15.
<PAGE> 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the quarter ended September 30, 1998, the Company has not sold or
issued any securities which were not registered under the Securities Act of
1933, as amended (the "Securities Act").
On November 20, 1997, the Company's Form S-1 Registration Statement
(File no. 333-37317) was declared effective by the Securities and Exchange
Commission. The Registration Statement, as amended, covered the offering of
3,000,000 shares of the Company's Common Stock, $.01 par value. The offering
commenced on November 21, 1997 and the sale to the public of 3,000,000 shares of
Common Stock at $8.00 per share was completed on November 26, 1997 for an
aggregate price of $24.0 million. The Registration Statement covered an
additional 450,000 shares of Common Stock that the underwriters had the option
to purchase solely to cover over-allotments. The managing underwriters for the
offering were BancAmerica Robertson Stephens, Hambrecht & Quist LLC and UBS
Securities LLC. On December 22, 1997, the underwriters exercised their option to
purchase 347,000 additional shares of Common Stock. A total of 3,347,000 shares
of Common Stock were sold in the offering at an aggregate price of approximately
$26.8 million. All of the shares sold in the offering were sold by the Company.
Expenses incurred by the Company through December 31, 1997 in connection
with the issuance and distribution of Common Stock in the offering included
underwriting discounts, commissions and allowances and other expenses of
approximately $1.9 million and $1.0 million, respectively. Total offering
expenses of approximately $2.8 million resulted in net offering proceeds to the
Company of approximately $23.9 million. No expenses were paid to directors,
officers or affiliates of the Company or 10% owners of any class of equity
securities of the Company.
Of the net offering proceeds to the Company of approximately $23.9
million, through September 30, 1998, approximately $2.3 million had been used to
fund tenant improvements, approximately $3.2 million had been used to fund
capital expenditures, approximately $667,000 had been used to repay obligations
under a capital lease and equipment loans, approximately $2.0 million had been
used for the Oncormed acquisition, approximately $11.0 million had been used for
expansion of internal research and development capabilities and approximately
$4.9 million had been used for general corporate purposes. No payments were made
to directors, officers or affiliates of the Company or 10% owners of any class
of equity securities of the Company. Based on the foregoing, the Company has
spent all proceeds from the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Stockholders on September 28, 1998 (the
"Special Meeting"). At the Special Meeting, the Company's stockholders approved
and adopted the Agreement and Plan of Merger and Reorganization between the
Company, Gene Logic Acquisition Corp., a wholly-owned subsidiary of the Company,
and Oncormed, and approved the merger of Oncormed with and into Gene Logic
Acquisition Corp.
At the Special Meeting, 10,001,403 shares out of a total of 14,788,445
shares of Common Stock outstanding as of the record date were represented in
person or by proxy.
16.
<PAGE> 17
The proposal considered at the Special Meeting was voted on as follows:
1. Proposal to approve and adopt the Agreement and Plan of Merger and
Reorganization between the Company, Gene Logic Acquisition Corp. and Oncormed
and approve the merger of Oncormed with and into Gene Logic Acquisition Corp.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
--------- ------------- ---------------
<S> <C> <C>
9,187,929 395,335 418,139
</TABLE>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
10.6 The Company's 1997 Non-Employee Directors' Stock Option
Plan, as corrected.
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
B) REPORTS ON FORM 8-K:
The Company filed a report on Form 8-K on July 6, 1998 related to
an Agreement and Plan of Merger and Reorganization between the
Company, Gene Logic Acquisition Corp. and Oncormed.
The Company filed a report on Form 8-K on October 8, 1998 related
to the consummation of the merger between Gene Logic Acquisition
Corp. and Oncormed.
17.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENE LOGIC INC.
Date: November 16, 1998 By: /s/ Michael J. Brennan, M.D., Ph.D.
------------------------------------
Michael J. Brennan, M.D., Ph.D.
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: November 16, 1998 By: /s/ Mark D. Gessler
------------------------------------
Mark D. Gessler
Senior Vice President, Corporate Development
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
18.
<PAGE> 1
EXHIBIT 10.6
GENE LOGIC INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON SEPTEMBER 29, 1997
APPROVED BY STOCKHOLDERS ON NOVEMBER 11, 1997
1. PURPOSE.
(a) The purpose of the 1997 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each director of Gene Logic Inc. (the
"Company") who is not otherwise at the time of grant an employee of or
consultant to the Company or of any Affiliate of the Company (each such person
being hereafter referred to as a "Non-Employee Director") will be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of persons
now serving as Non-Employee Directors of the Company, to secure and retain the
services of persons capable of serving in such capacity, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the Company (the
"Board") unless and until the Board delegates administration to a committee, as
provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee composed of
two (2) or more members of the Board (the "Committee"). If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board.
The Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate one hundred twenty five thousand
(125,000) shares of the Company's common stock. If any option granted under the
Plan shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such option shall again become
available for the Plan.
1.
<PAGE> 2
(b) The stock subject to the Plan may be unissued shares or reacquired shares,
bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(a) Each person who is first elected or appointed to the Board as a Non-Employee
Director after the Adoption Date shall automatically be granted, on the date of
such initial election or appointment, an option to purchase thirty thousand
(30,000) shares of common stock of the Company on the terms and conditions set
forth herein (hereinafter, an "Initial Grant").
(b) Immediately following each annual meeting of stockholders, each person who
is then a Non-Employee Director and who has continuously served as a
Non-Employee Director for the six (6)-month period prior to the date of the such
annual meeting of stockholders, shall automatically be granted, an option to
purchase seven thousand five hundred (7,500) shares of common stock of the
Company on the terms and conditions set forth herein (hereinafter, an "Annual
Grant").
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and, unless
sooner terminated as set forth herein, expires on the date ("Expiration Date")
ten (10) years from the date of grant. If the optionee's service as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate terminates for any reason or for no reason, the option shall terminate
on the earlier of the Expiration Date or the date twelve (12) months following
the date of termination of all such service; provided, however, that if such
termination of service is due to the optionee's death, the option shall
terminate on the earlier of the Expiration Date or eighteen (18) months
following the date of the optionee's death. In any and all circumstances, an
option may be exercised following termination of the optionee's service as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate only as to that number of shares as to which it was exercisable as of
the date of termination of all such service under the provisions of subparagraph
6(e).
(b) The exercise price of each option shall be equal to one hundred percent
(100%) of the Fair Market Value of the stock (as such term is defined in
subsection 9(e) of this Plan) subject to such option on the date such option is
granted.
(c) The optionee may elect to make payment of the exercise price under one of
the following alternatives:
(i) In cash (or check) at the time of exercise;
2.
<PAGE> 3
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in The Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its Fair Market
Value on the date immediately preceding the date of exercise; or
(iii) Pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company either prior to the issuance of shares of the
Company's common stock or pursuant to the terms of irrevocable instructions
issued by the optionee prior to the issuance of shares of the Company's common
stock.
(iv) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) through 6(c)(iii) above.
(d) An option shall be transferable only to the extent specifically provided in
the option agreement; provided, however, that if the option agreement does not
specifically provide for the transferability of an option, then the option shall
not be transferable except by will or by the laws of descent and distribution,
or pursuant to a qualified domestic relations order satisfying the requirements
of Rule 166-3 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and shall be exercisable during the lifetime of the person to whom the
option is granted only by such person (or by his guardian or legal
representative) or transferee pursuant to such an order. Notwithstanding the
foregoing, the optionee may, by delivering written notice to the Company in a
form satisfactory to the Company, designate a third party who, in the event of
the death of the optionee, shall thereafter be entitled to exercise the option.
(e) (i) An Initial Grant shall become exercisable in four (4) equal annual
installments measured from the date of grant, commencing on the one (1)-year
anniversary of the date of grant of the option, and (ii) an Annual Grant shall
become exercisable one (1) year from the date of grant, provided that, with
respect to any grant under the Plan, the optionee has, during the entire period
prior to such vesting installment date, continuously served as a Non-Employee
Director or employee of or consultant to the Company or any Affiliate of the
Company, whereupon such option shall become fully exercisable in accordance with
its terms with respect to that portion of the shares represented by that
installment.
(f) The Company may require any optionee, or any person to whom an option is
transferred under subparagraph 6(d), as a condition of exercising any such
option: (i) to give written assurances satisfactory to the Company as to the
optionee's knowledge and experience in financial and business matters; and (ii)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
These requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (x) the issuance of the shares upon the exercise of the
option has been registered under a then currently-effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or (y) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then
3.
<PAGE> 4
applicable securities laws. The Company may require any optionee to provide such
other representations, written assurances or information which the Company shall
determine is necessary, desirable or appropriate to comply with applicable
securities laws as a condition of granting an option to the optionee or
permitting the optionee to exercise the option. The Company may, upon advice of
counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.
(g) Notwithstanding anything to the contrary contained herein, an option may not
be exercised unless the shares issuable upon exercise of such option are then
registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company shall
keep available at all times the number of shares of stock required to satisfy
such options.
(b) The Company shall seek to obtain from each regulatory commission or agency
having jurisdiction over the Plan such authority as may be required to issue and
sell shares of stock upon exercise of the options granted under the Plan;
provided however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred under
subparagraph 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such option unless and
until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Nothing in the Plan or in any instrument executed pursuant thereto shall
confer upon any Non-Employee Director any right to continue in the service of
the Company or any Affiliate in any capacity or shall affect any right of the
Company, its Board or stockholders or any Affiliate, to remove any Non-Employee
Director pursuant to the Company's Bylaws and the provisions of Delaware General
Corporations Law.
4.
<PAGE> 5
(c) No Non-Employee Director, individually or as a member of a group, and no
beneficiary or other person claiming under or through him, shall have any right,
title or interest in or to any option reserved for the purposes of the Plan
except as to such shares of common stock, if any, as shall have been reserved
for him pursuant to an option granted to him.
(d) In connection with each option made pursuant to the Plan, it shall be a
condition precedent to the Company's obligation to issue or transfer shares to a
Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal, state or local withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
(e) As used in this Plan, "Fair Market Value" means, as of any date, the value
of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap, the Fair Market Value of a share of
common stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in common stock) on the last market
trading day prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(ii) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any
option granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan and outstanding options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options. Such adjustments shall be made by the Board, the
determination of which shall be final, binding and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate
5.
<PAGE> 6
of the Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors, then to the extent not
prohibited by applicable law, the time during which options outstanding under
the Plan may be exercised shall be accelerated prior to such event and the
options terminated if not exercised after such acceleration and at or prior to
such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan and/or some
or all outstanding options granted under the Plan. However, except as provided
in paragraph 10 relating to adjustments upon changes in stock, no amendment
shall be effective unless approved by the stockholders of the Company to the
extent stockholder approval is necessary for the Plan to satisfy the
requirements of Rule 16b-3 promulgated under the Exchange Act or any Nasdaq or
securities exchange listing requirements.
(b) Rights and obligations under any option granted before any amendment of the
Plan shall not be impaired by such amendment unless (i) the Company requests the
consent of the person to whom the option was granted and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on August 31, 2007. No options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in effect
shall not be impaired by suspension or termination of the Plan, except with the
consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events described
in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board.
(b) No option granted under the Plan shall be exercised or become exercisable
unless and until the Plan is approved by the stockholders of the Company.
6.
<PAGE> 1
EXHIBIT 11.1
GENE LOGIC INC.
SEPTEMBER 30, 1998
Statement Re: Computation of Per Share Earnings
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- ------- --------- -------
<S> <C> <C> <C> <C>
BASIC AND DILUTED:
Weighted average common shares outstanding 14,906 726 14,345 667
Net loss $ (37,788) $(1,936) $ (41,356) $(4,751)
Accretion of mandatory redeemable value of
convertible preferred stock -- 542 -- 909
--------- ------- --------- -------
Net loss attributable to common stockholders $ (37,788) $(2,478) $ (41,356) $(5,660)
========= ======= ========= =======
Net loss per common share $ (2.54) $ (3.41) $ (2.88) $ (8.48)
========= ======= ========= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,145
<SECURITIES> 10,562
<RECEIVABLES> 2,506
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,996
<PP&E> 11,219
<DEPRECIATION> (1,730)
<TOTAL-ASSETS> 57,923
<CURRENT-LIABILITIES> 9,180
<BONDS> 0
0
0
<COMMON> 196
<OTHER-SE> 44,268
<TOTAL-LIABILITY-AND-EQUITY> 57,923
<SALES> 0
<TOTAL-REVENUES> 8,618
<CGS> 0
<TOTAL-COSTS> 51,421
<OTHER-EXPENSES> 80
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (41,356)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,356)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
