<PAGE> 1
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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 March 31, 1999.
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
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GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
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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 19,783,358 as of April 30, 1999.
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<PAGE> 2
GENE LOGIC INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998.........................3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998.............................................................4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998.............................................................5
Notes to Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................15
</TABLE>
PART II OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings..................................................................15
Item 2. Changes in Securities and Use of Proceeds..........................................15
Item 3. Defaults Upon Senior Securities....................................................15
Item 4. Submission of Matters to a Vote of Security Holders................................15
Item 5. Other Information..................................................................15
Item 6. Exhibits and Reports on Form 8-K...................................................16
Signatures.................................................................................17
</TABLE>
2.
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 11,936 $ 16,191
Marketable securities available-for-sale ................... 14,774 14,791
Due from collaborators ..................................... 3,028 3,779
Prepaid expenses ........................................... 972 842
Other current assets ....................................... 1,030 875
--------- ---------
Total Current Assets ................................... 31,740 36,478
Property and Equipment, net .................................... 10,394 10,189
Goodwill, net .................................................. 6,868 7,249
Intangible and Other Assets, net ............................... 1,839 1,650
--------- ---------
Total Assets ........................................... $ 50,841 $ 55,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................... $ 2,520 $ 2,123
Accrued expenses .......................................... 1,381 2,963
Accrued restructuring ..................................... 88 184
Current portion of capital lease obligation ............... 127 124
Current portion of long-term debt ......................... 1,269 1,292
Deferred revenue .......................................... 4,523 3,219
--------- ---------
Total Current Liabilities ............................. 9,908 9,905
Capital Lease Obligation ....................................... 67 100
Long-Term Debt ................................................. 3,474 3,789
Other Noncurrent Liabilities ................................... 506 484
--------- ---------
Total Liabilities .................................. 13,955 14,278
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 par value; 60,000,000 shares authorized;
19,771,270 and 19,651,756 shares issued and outstanding
as of March 31, 1999 and December 31, 1998,
respectively ............................................ 198 197
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding as of
March 31, 1999 and December 31, 1998 ................... -- --
Additional paid-in capital ................................ 102,858 102,670
Deferred compensation on stock options, net ............... (3,611) (3,986)
Accumulated other comprehensive loss ...................... (63) (46)
Accumulated deficit ....................................... (62,496) (57,547)
--------- ---------
Total Stockholders' Equity ............................. 36,886 41,288
--------- ---------
Total Liabilities and Stockholders' Equity ............. $ 50,841 $ 55,566
========= =========
</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
MARCH 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues .......................................... $ 4,067 $ 2,196
Expenses:
Research and development ........................ 7,031 3,237
General and administrative ...................... 1,773 1,596
Amortization of goodwill ........................ 381 --
-------- --------
Total expenses .............................. 9,185 4,833
-------- --------
Loss from operations ........................ (5,118) (2,637)
Interest income, net .............................. 239 607
Other income (expense) ............................ 30 (81)
-------- --------
Loss before income tax expense .............. (4,849) (2,111)
Income tax expense ................................ 100 --
-------- --------
Net loss .................................... $ (4,949) $ (2,111)
======== ========
Basic and Diluted Net Loss Per Common Share ....... $ (0.25) $ (0.15)
======== ========
Shares Used In Computing Basic and Diluted Net Loss
Per Common Share ................................ 19,710 13,900
======== ========
</TABLE>
See accompanying notes.
4.
<PAGE> 5
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss .......................................... $ (4,949) $ (2,111)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization ................. 707 292
Amortization of goodwill ...................... 381 --
Amortization of deferred compensation ......... 375 433
Loss on disposal of property and equipment .... -- 81
Changes in operating assets and liabilities:
Due from collaborators ........................ 751 647
Prepaid expenses .............................. (130) 10
Other current assets .......................... (155) (247)
Intangibles and other assets .................. (225) (156)
Accounts payable .............................. 397 445
Accrued expenses .............................. (1,582) 1,511
Accrued restructuring ......................... (96) --
Deferred revenue .............................. 1,304 (1,843)
Other noncurrent liabilities .................. 22 30
-------- --------
Net Cash Flows From Operating Activities ... (3,200) (908)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment ........... (876) (3,760)
Purchase of marketable securities
available-for-sale ......................... -- (4,266)
-------- --------
Net Cash Flows From Investing Activities ... (876) (8,026)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock ........ 189 --
Repayments of financing agreement ............. (48) (44)
Repayments of capital lease obligation and
equipment loans .............................. (320) (89)
-------- --------
Net Cash Flows From Financing Activities ... (179) (133)
-------- --------
Net Decrease in Cash and Cash Equivalents ......... (4,255) (9,067)
Cash and Cash Equivalents, beginning of period .... 16,191 46,522
-------- --------
Cash and Cash Equivalents, end of period .......... $ 11,936 $ 37,455
======== ========
Supplemental Disclosure:
Interest expense paid ......................... $ 112 $ 34
======== ========
</TABLE>
See accompanying notes.
5.
<PAGE> 6
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements include the accounts of
Gene Logic Inc. and its wholly owned subsidiary (the "Company"). The
accompanying unaudited consolidated financial statements have 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 March 31, 1999, consolidated
statements of operations for the three months ended March 31, 1999 and 1998 and
the consolidated statements of cash flows for the three months ended March 31,
1999 and 1998 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, 1998.
Comprehensive Loss
The Company accounts for comprehensive loss as prescribed by Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). Comprehensive income 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. The Company's other
comprehensive loss includes unrealized holding losses from marketable securities
available-for-sale for the three months ended March 31, 1999 and 1998 as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Net Loss ...................................... $(4,949) $(2,111)
Other comprehensive loss, net of tax:
Unrealized losses on marketable securities .. (17) (6)
Less - Reclassification adjustment for losses -- 2
------- -------
Total other comprehensive loss ............ (17) (4)
------- -------
Comprehensive loss ............................ $(4,966) $(2,115)
======= =======
</TABLE>
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 accumulated
unrealized gains and losses reported as a separate component of stockholders'
equity in the accompanying consolidated balances sheets. Realized gains and
losses and declines in value judged to be other than temporary for
available-for-sale securities are included in other income.
Goodwill
Goodwill, from the acquisition of Oncormed, Inc. ("Oncormed") in
September 1998, 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 $381,000
for the three months ended March 31, 1999. Accumulated amortization of goodwill
was $762,000 at March 31, 1999.
Revenue Recognition
Technology and database access fees are recognized evenly over the term
of the Company's collaboration 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. Revenues from pharmacogenomic services are recognized upon
completion of the services. Revenues for such amounts are deferred until earned.
Nonrefundable upfront payments received for the value of transferred
technology or other contractual rights that are not contingent upon future
performance under the terms of the collaboration agreements are recognized as
revenue upon execution of the agreements. 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, primarily based on man-months incurred to date compared with total
estimated man-months for development of such database.
NOTE 2. ACCRUED RESTRUCTURING
In connection with the acquisition of Oncormed, the Company recorded a
restructuring liability of approximately $1.6 million. 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
on-going economic value to the Company. The restructuring liability consisted 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 was included in the purchase price allocation performed in connection
with the acquisition. Management anticipates the restructuring activities as a
result of the acquisition will be substantially completed in 1999.
7.
<PAGE> 8
The following table details the major components of the restructuring
liability relating to the Oncormed acquisition:
<TABLE>
<CAPTION>
CONTRACT
TERMINATION
PERSONNEL COSTS TOTAL
--------- ----------- -------
(in thousands)
<S> <C> <C> <C>
Restructuring liability ....... $ 373 $ 1,224 $ 1,597
1998 activity ................. (239) (1,174) (1,413)
------- ------- -------
Balance at December 31, 1998 .. 134 50 184
Activity through March 31, 1999 (96) -- (96)
======= ======= =======
Balance at March 31, 1999 ..... $ 38 $ 50 $ 88
======= ======= =======
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
In January 1999, the Company entered into a three year agreement with
Affymetrix, Inc. ("Affymetrix"), pursuant to which Affymetrix will supply its
GeneChip(R) probe arrays to the Company for the development of gene expression
databases. Under the terms of the agreement, the Company will pay Affymetrix
subscription fees for access to the probe arrays, purchase the probe arrays and
related instrumentation and software, and pay royalties to Affymetrix on
revenues generated from certain database subscriptions fees.
The Company's commitments under other research and license agreements do
not represent a significant expenditure in relation to the Company's total
research and development expense.
NOTE 4. 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 established 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 operations are treated as one operating
segment, genomic information products, software and research services, as the
Company only reports loss information on an aggregate basis to chief operating
decision makers of the Company. Approximately 95% of the revenues for the three
months ended March 31, 1999 were derived from four collaborators, each
contributing approximately 38%, 27%, 16% and 14%. For the three months ended
March 31, 1998, three collaborators contributed 100% of the revenues, each
contributing approximately 53%, 24% and 23%. Although the Company operates
exclusively in the United States, the Company recorded revenue for the three
months ended March 31, 1999 from major customers in Japan, Europe and the United
States of 38%, 30% and 27%, respectively, and for the three months ended March
31, 1998 of 53%, 24%, and 23%, respectively.
8.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements,
including statements as to the timing of availability of products under
development, the ability to commercialize products developed under
collaborations, the performance and utility of the Company's products and
services, and the adequacy of capital resources. Such statements reflect
management's current views of future events and are subject to risks and
uncertainties that could cause actual results to differ materially from those
projections. 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
database products and their use by existing and potential collaborators and
customers of the Company, the Company's ability to manage and maintain multiple,
concurrent collaborations, the Company's reliance on collaborators for
development and commercialization of products, the impact of technological
advances and competition, the Company's ability to enforce its intellectual
property rights, the impact of the intellectual property rights of others and
the Company's ability to enter into arrangements with new collaborators and to
maintain new and existing collaborations, the ability of the Company to
implement in a timely manner the programs and actions related to the Year 2000
issue, as well as other risks and uncertainties included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
GeneExpress(TM) and Flow-thru Chip(TM) are trademarks of the Company.
GeneChip(R) is a registered trademark of Affymetrix, Inc.
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 for use in
pharmaceutical, diagnostic and agricultural product research and development.
The Company has collaborations with the American Home Products Corp.'s
Wyeth-Ayerst Laboratories, Hoechst Schering AgrEvo GmbH, Japan Tobacco Inc.,
Merck & Company Inc., NV Organon, a business unit of Akzo Nobel NV, Procter &
Gamble Pharmaceuticals, Rhone-Poulenc Rorer Inc., Schering-Plough Corp. and
SmithKline Beecham PLC.
These agreements provide the Company with various combinations of
nonrefundable upfront payments, recurring technology and database access fees,
research funding and fees for pharmacogenomic services, certain additional
payments upon the attainment of research and product development milestones and
royalty payments based on sales of any products resulting from the
collaborations. Technology and database access fees are recognized evenly over
the term of the Company's collaboration 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 and royalties
are recognized when they are earned in accordance with the applicable
performance requirements and contractual terms. Revenues from pharmacogenomic
services are recognized upon completion of the services. Revenues for such
amounts are deferred until earned. Nonrefundable upfront payments received for
the value of transferred technology or other contractual rights that are not
contingent upon future performance under the terms of the collaboration
agreements are recognized as revenue upon execution of the agreements. The loss
of revenues from any individual material collaboration agreement, if terminated,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In an effort to address the growing needs of research and development in
the pharmaceutical industry, the Company is investing significant resources in
building its GeneExpress databases. These databases will contain expression
information from a wide variety of tissues from healthy, diseased and
drug-treated patients and from experimental animals. The initial GeneExpress
database will incorporate data obtained from GeneChip probe arrays under an
agreement with Affymetrix.
9.
<PAGE> 10
During 1999, the Company expects to commence marketing the GeneExpress
databases broadly to pharmaceutical companies and later in the year expects to
receive subscriptions fees from such database users.
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 and the successful
commercialization of its GeneExpress databases. Payments through collaborations
and subscriptions to the GeneExpress databases are expected to be the Company's
only sources of revenue for the foreseeable future. Significant 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. Through March 31, 1999, royalties
or other revenues from commercial sales of products paid to Gene Logic were
immaterial. 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's ability to enter into additional
collaborations and successfully commercialize its GeneExpress databases. 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 or that the Company will be able to successfully commercialize its
GeneExpress databases.
The Company has incurred operating losses in each year since its
inception. At March 31, 1999, excluding the $35.2 million non-recurring charge
incurred in connection with the acquisition of Oncormed, the Company had
accumulated operating losses of approximately $27.3 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
acquisition of Oncormed. 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 at least through 1999 primarily as a result
of increases in its expenses for research and development.
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.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of Oncormed in September 1998, the
Company allocated $35.2 million of the $39.2 million purchase price to
in-process research and development projects. This allocation represents the
estimated fair value based on discounted cash flow related to the incomplete
research and development projects. At the time of acquisition, the progress of
these projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date. The in-process research and development value consists of four
technology projects that involve either the development of technologies for
genomic databases or pharmacogenomics.
At March 31, 1999, additional progress had been achieved on each of the
four technology projects that were underway as of the acquisition. In general,
the Company believes that these research
10.
<PAGE> 11
and development projects are on track with management's plans at the time the
acquisition occurred. Through March 31, 1999, no significant adjustments have
been made in the economic assumptions or expectations that underlie the
Company's acquisition decision and related purchase accounting. All four
in-process research and development projects are active, and the Company is
advancing the technology at a rate consistent with originally-projected
completion dates. Specifically, the SNP Analysis Project and Recognizer Project
are substantially completed and the Gene Chip / Gene Expression Database
Development Project and Biorepository Project are expected to be substantially
completed during 1999. Because these technologies are interrelated with respect
to the development of genomic database and pharmacogenomic products, the Company
does not expect to derive any significant economic benefits from them until late
1999.
Remaining development efforts for the projects which are still
incomplete 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.
Funding for such projects has been and is expected to continue from existing
cash balances. The Company estimates the costs to complete the remaining
projects at approximately $1.1 million for the remainder of 1999. Total costs to
complete the projects from the date of acquisition are estimated to be
approximately $3.3 million.
Although the Company has substantially completed two of the projects and
intends to complete the development of the remaining in-process technologies and
although management believes in the likelihood of their feasibility, there can
be no assurance that such remaining projects will be completed successfully, or
that any of the in-process technologies will achieve commercial success. If, at
a later date, the Company decides to no longer pursue one or all of these
technologies, decides to indefinitely postpone the research effort related to
one or all of the technologies, or determines that the discounted expected cash
flows will no longer meet projections, it will disclose that fact to
investors--explaining why it will not pursue commercialization or why the
research has been postponed (and when the research is expected to resume) and
how much of the purchase price the technologies (or projects) represent. If
these technologies are not successfully developed or commercially successful,
future results of operations of the Company may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
Descriptions of the Company's estimates used to determine the value
assigned to the in-process technologies and costs, timing and anticipated
benefits of completing the development of the in-process technologies are
forward-looking statements that involve risks and uncertainties. The Company's
actual costs and timing to complete development of the remaining technologies
and any benefits derived therefrom or from completed technologies will depend on
many factors, including the Company's ability to complete development of the
remaining 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. 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 acquisition 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and March 31, 1998
Revenue increased to $4.1 million for the three months ended March 31,
1999 from $2.2 million for the same period in 1998. The increase in revenues was
the result of the addition of new customers and expansion of prior customer
relationships. Of the 1999 revenues, thirty-eight percent (38%) were received
11.
<PAGE> 12
from Japan Tobacco; twenty-seven percent (27%) were received from Procter &
Gamble; sixteen percent (16%) were received from Organon; and fourteen percent
(14%) were received from AgrEvo. Revenues received from other sources were not
material.
Research and development expenses increased to $7.0 million for the
three months ended March 31, 1999 from $3.2 million for the same period in 1998.
The increase in research and development expenses was primarily attributable to
approximate increases of: (i) forty percent (40%) in research agreement
expenses, (ii) twenty-five percent (25%) in personnel expenses, (iii) fifteen
percent (15%) in laboratory supplies and (iv) ten percent (10%) in depreciation
expense. The increase in research and development expenses primarily relates to
the Company's efforts in building its GeneExpress databases which started in
1999, expansion of its target discovery and bioinformatics businesses to
accommodate new and expanded collaborations, and further development of its
Flow-thru Chip program. The Company expects research and development expenses to
increase as the Company expands its GeneExpress databases, maintains new and
expanding target discovery and bioinformatic collaborations, and further
develops the Flow-thru Chip.
General and administrative expenses increased to $1.8 million for the
three months ended March 31, 1999 from $1.6 million for the same period in 1998.
The increase in general and administrative expenses was attributable to the
Company's expansion of its business development efforts through additional new
hires and other general costs. The increases in these costs were somewhat offset
by a decrease in facility costs and legal expenses due to the delivery of the
new office and research facility in the first quarter of 1998 and the timing of
corporate activity. The Company expects that general and administrative expenses
will increase as the Company expands its product line and business development
efforts.
Amortization of goodwill was $381,000 for the three months ended March
31, 1999 as a result of the acquisition of Oncormed in September 1998.
Net interest income decreased to $239,000 for the three months ended
March 31, 1999 from $607,000 for the same period in 1998 primarily due to the
smaller cash and investment balance on hand as a result of funding the Company's
operating losses through March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1999, the Company financed its
operations through the sale of equity securities, payments under collaborative
agreements and equipment financing. In connection with its collaboration with
Procter & Gamble, the Company holds a promissory note of $500,000 that is due in
December 1999. The Company has also obtained $471,000 of capital lease financing
and $5.8 million under equipment loans. As of March 31, 1999, the Company had
approximately $26.7 million in cash and marketable securities, compared to $31.0
million as of December 31, 1998.
In connection with the acquisition of Oncormed, the Company acquired
in-process research and development, which is comprised of several technology
projects. The Company expects to spend approximately $3.3 million in total to
develop commercially viable products using such technologies and to begin to
generate revenues from them. Costs to complete the development of these
remaining technologies are estimated to be $1.1 million for the remainder of
1999. Funding for such efforts has been and is expected to continue 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.
In connection with the acquisition of Oncormed, the Company recorded a
restructuring liability of approximately $1.6 million. 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
on-going economic value to the Company. The restructuring liability consisted of
$373,000 in costs
12.
<PAGE> 13
associated with the involuntary termination of ten Oncormed employees and
approximately $1.2 million in contract termination costs. At March 31, 1999,
approximately $38,000 and $50,000 of the restructuring charge remained unpaid
relating to involuntary employment and contract terminations, respectively.
Management anticipates the restructuring activities as a result of the
acquisition will be substantially completed in 1999.
Net cash used in operating activities was $3.2 million for the three
months ended March 31, 1999, as compared to $908,000 for the three months ended
March 31, 1998. The Company has primarily used cash during 1999 and 1998 to fund
the Company's operating losses in addition to expenditures relating to
intangibles and other assets.
During the three months ended March 31, 1999 and 1998, the Company had
expenditures relating to intangibles and other assets of approximately $225,000
and $156,000, respectively. These expenditures were primarily for patent costs
and license fees. The Company amortizes such patent costs to research and
development expense over the useful life of the underlying patent upon its
issuance. License fees are amortized to research and development expense over
periods of approximately one to seventeen years. These expenditures are
necessary and are expected to increase to protect the Company's intellectual
property and to secure rights to current technology.
The Company's investing activities, other than purchases of
available-for-sale securities, consisted of capital expenditures,
which totaled $876,000 and $3.8 million for the three months ended March 31,
1999 and 1998, respectively. The decrease from year to year was primarily due to
the funding of tenant improvements and furniture purchases in the first quarter
of 1998 relating to the completion of the Company's new office and research
laboratory facility. The Company expects to have additional capital expenditures
in 1999 as it expands its facility requirements and acquires laboratory and
computer equipment to support expanding research and development activities. The
Company's capital expenditures in 1999 are expected to be less than those in
1998.
Net cash used in financing activities was $179,000 and $133,000 for the
three months ended March 31, 1999 and 1998, respectively. The increase in 1999
was due to increased repayments under an equipment financing which was offset by
the issuance of common stock under the Company's equity plans.
In June 1998, the Company entered into a loan agreement for the
financing of laboratory, computer and office equipment. Under the loan
agreement, the Company may borrow up to $5.0 million through June 1999. At March
31, 1999, the Company had borrowed approximately $4.8 million. The Company
expects to increase the borrowing under the loan agreement or obtain financing
from additional sources in 1999.
In January 1999, the Company entered into a three year agreement with
Affymetrix, pursuant to which Affymetrix will supply its GeneChip probe
arrays to the Company for the development of gene expression databases. Under
the terms of the agreement, the Company will pay Affymetrix subscription fees
for access to the probe arrays, purchase the probe arrays and related
instrumentation and software, and pay royalties to Affymetrix on revenues
generated from certain database subscriptions fees. The Company's commitments
under other research and license agreements do not represent a significant
expenditure in relation to the Company's total research and development expense.
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
subscriptions to its GeneExpress databases. Furthermore, the Company's ability
to achieve profitability will be dependent upon the ability of the Company to
enter into additional collaborations and successfully commercialize its
GeneExpress databases. There can be no assurance that the Company will be able
to negotiate additional collaborations in the future on acceptable terms, if at
all,
13.
<PAGE> 14
or that current or future collaborations will be successful and provide the
Company with expected benefits or that the Company will be able to successfully
commercialize its GeneExpress databases.
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 until the end of the year 2000. 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 acquisition of Oncormed 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 financing in the
future, which it may seek to raise 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, at the end of this year, 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 has implemented a program designed to address Year 2000
problems. A cross-functional Year 2000 project team has performed a
comprehensive review of internal computer systems, electronic devices and
software. In addition, the Company has identified material third parties which
the Company relies upon for its operations. The Company is performing internal
and external compliance audits and Year 2000 validation testing. The Company is
in the process of receiving Year 2000 certifications from third parties the
Company has material agreements with and formulating contingency plans. Systems
critical to the Company's business that are not Year 2000 compliant are being
replaced or corrected as they are identified through programming modifications
and/or software upgrades. The Company expects these projects to be successfully
completed in the second half of 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.
14.
<PAGE> 15
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.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the quarter ended March 31, 1999, the Company has sold and issued
the following securities which were not registered under the Securities Act of
1933, as amended (the "Securities Act"):
On March 12, 1999, the Company sold 8,812 shares of the Company's common
stock to Comdisco, Inc. ("Comdisco") pursuant to Comdisco's exercise of a
warrant dated April 15, 1997, at a purchase price of $2.20 per share. The sale
and issuance of the securities to Comdisco were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) promulgated
thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15.
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
++++ 10.50 Agreement, dated January 1, 1999, between Registrant and
Affymetrix, Inc.
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
- ------------
++++ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the three months ended
March 31, 1999.
16.
<PAGE> 17
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: May 14, 1999 By: /s/ Michael J. Brennan, M.D., Ph.D.
-------------------------------------
Michael J. Brennan, M.D., Ph.D.
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ Mark D. Gessler
-------------------------------------
Mark D. Gessler
President, Chief Operating Officer,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
17.
<PAGE> 1
EXHIBIT 10.50
***TEXT OMITTED AND FILED SEPARATELY
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4),
200.83 AND 240.24b-2
AGREEMENT
GENE LOGIC, INC.
AFFYMETRIX, INC.
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<PAGE> 2
<TABLE>
<S> <C>
1. INTRODUCTION............................................................. 1
2. DEFINITIONS.............................................................. 1
3. PROBE ARRAY SUPPLY....................................................... 5
4. AFFYMETRIX PROPRIETARY RIGHTS............................................ 7
5. COMPENSATION............................................................. 7
6. INTELLECTUAL PROPERTY.................................................... 12
7. PROJECT COORDINATION..................................................... 13
8. CONFIDENTIALITY.......................................................... 13
10. INDEMNITY................................................................ 15
11. TERM AND TERMINATION..................................................... 16
12. MISCELLANEOUS............................................................ 17
EXHIBIT A ...................................................................
EXHIBIT B....................................................................
EXHIBIT C ...................................................................
EXHIBIT D....................................................................
</TABLE>
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<PAGE> 3
AGREEMENT
This agreement ("Agreement") is effective as of January 1, 1999 ("Effective
Date") between Affymetrix, Inc. ("Affymetrix") a Delaware corporation having its
principal place of business at 3380 Central Expressway, Santa Clara, California
95051, and Gene Logic Inc., a Delaware corporation having its principal place of
business at 708 Quince Orchard Road, Gaithersburg, Maryland, 20878 ("Gene
Logic").
1. INTRODUCTION
1.1 Affymetrix has research, development, and manufacturing capabilities
and facilities, and has developed certain rights relevant to DNA probe
array based technology.
1.2 Gene Logic has research and development capabilities, and facilities to
conduct research and development activities for the generation of
databases useful in life sciences research.
1.3 Affymetrix and Gene Logic desire to enter into an agreement whereby
Affymetrix will supply Gene Logic with DNA probe arrays for use in Gene
Logic's development of database products and services.
1.4 In consideration of the mutual covenants and promises contained in this
Agreement, Affymetrix and Gene Logic agree as follows:
2. DEFINITIONS
2.1 "Affiliate" shall mean any corporation, company, partnership, joint
venture and/or firm which is controlled by or controls a Party or is
under common control with a Party, but only for so long as such
Affiliate remains an Affiliate of a Party, and only if such Affiliate
is bound by the terms of this Agreement. For purposes of this Section,
"control" shall mean, in the case of corporations (or equivalents of
corporations), direct or indirect ownership of more than 50% of the
stock having the right to vote for directors of such corporation or, in
the case of partnerships, more than 50% of the ownership interest in
such partnership.
2.2 "Chip Improvement Inventions" shall mean all inventions for which
patent applications are filed that are conceived or first reduced to
practice by an employee or contractor of a Party or its Affiliates
resulting from design or use of the Probe Arrays supplied hereunder,
and specifically those relating to probe array manufacturing
techniques, probe array layouts, probe array packaging techniques,
probe array assay techniques [...***...], and probe array software
analysis techniques [...***...], but not including software analysis
techniques for later processing of such data. It is to be understood
that inventions made independently of design or use of Probe Arrays
(such as those inventions made in the course of design or use of Gene
Logic's proprietary technologies or other non-Affymetrix technologies)
are not Chip Improvement Inventions within the meaning of this
Agreement. Chip Improvement Inventions shall further not include any
other inventions that are conceived of or reduced to practice by an
employee or
* CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE> 4
contractor of a Party or its Affiliates including, for example,
expression data or discoveries resulting therefrom, targets identified
through the use of the Probe Arrays, or correlations between genetic
sequences and function.
2.3 "Committee" shall mean the individuals designated by Gene Logic and
Affymetrix to serve on a coordinating committee as outlined in Section
7.
2.4 "Confidential Information" shall mean all information and materials,
patentable or otherwise, of a Party disclosed by or on behalf of such
Party to the other Party and which derive value to a Party from not
being generally known, including, but not limited to DNA sequences,
vectors, cells, substances, formulations, techniques, methodology,
equipment, data, reports, know-how, trade secrets, preclinical and
clinical trials and the results thereof, sources of supply, patent
positioning, and business plans, including any negative developments.
2.5 "Database" shall mean a collection of Datapoints derived from a Probe
Array which is made available for license broadly in whole or in part
for use to derive additional information. If Gene Logic utilizes a
larger database to derive or extract a more limited database for
license to a third party, it is understood that the Datapoints made
available to the third party are from the original, larger Database
unless the smaller Database is made broadly available to other third
parties.
2.6 "Datapoint" shall mean a Gene represented on a Probe Array and
comprises all probe pairs on the array that represent the Gene.
2.7 "Demonstration Database" shall refer to a database of gene expression
data that contains no more than the applicable maximum number of
Datapoints. [...***...]
2.8 "Fabrication Verification Criteria" shall mean Affymetrix' then current
quality control criteria for the applicable Probe Arrays.
2.9 "GATC Compliant" shall refer to software and/or databases meeting the
standards set forth in accordance with the Genetic Analysis Technology
Consortium ("GATC") standards group. In the event that the GATC
standards are no longer maintained, the Parties will negotiate in good
faith to provide substitute specifications for interoperability of
their respective software and databases.
2.10 "Gene" shall refer to a nucleic acid sequence encoding a distinct
RNA. A Gene may be represented by a partial nucleic acid sequence
representing an expressed sequence tag (EST). Multiple ESTs from the
same Gene are considered a single Gene. Polymorphic variants of a
nucleic acid sequence are considered a single Gene, provided that such
polymorphic variants must have at least [...***...] homology with the
underlying Gene. If a nucleic acid sequence encodes multiple distinct
RNAs due to alternative splicing, each alternative internal splice
variant is considered a distinct Gene.
2.11 "Gene Logic's Area Of Interest" shall mean the use of Probe Arrays as a
research tool to generate gene expression data for a) generating
databases for license to third parties for value; and b) performing
Services.
* CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE> 5
2.12 "Lot" shall refer to the standard minimum quantities Probe Arrays are
made available to third parties, as set forth in Affymetrix' price list
and specifications.
2.13 "Net Sales" shall mean the aggregate United States Dollar equivalent of
gross revenues derived by or payable to Gene Logic or its Affiliates
for or on account of the license of Databases to third parties less a)
credits or allowances, if any, actually granted on account of price
adjustments, recalls, rejections, or return of items previously sold,
b) prompt payment or actual trade or quantity discounts actually
allowed and taken, c) excises, sales taxes, value added taxes,
consumption taxes, duties, foreign withholding tax actually withheld,
or other taxes imposed upon and paid with respect to such sales
(excluding income or franchise taxes of any kind) and d) insurance and
delivery costs actually incurred. No deduction shall be made for any
item of cost incurred by Gene Logic or its Affiliates in preparing,
manufacturing, shipping, or selling Databases except as permitted
pursuant to a), b), c) and d) above. Net Sales shall not include any
transfer between Gene Logic and any of its Affiliates for re-license or
resale. If Gene Logic or an Affiliate licenses or sells to or through a
distributor (which is not an Affiliate of Gene Logic), Net Sales shall
be the gross revenues received by Gene Logic and/or the applicable
Affiliate from the license of the Database to such distributor. Any
such distributor arrangement must be under reasonably conventional
distributor terms. In the event that Gene Logic or any of its
Affiliates licenses a Database to third parties for other than monetary
value in whole or in part, such transfer shall be considered a license
hereunder for accounting and royalty purposes. Net Sales for any such
transfers shall be determined on a country-by-country basis and shall
be the average price of arms length licenses by Gene Logic or its
Affiliates in such country during the royalty reporting period in which
such transfer occurs, or if no such arms length licensing occurred in
such country during such period, during the last period in which such
arms length sales occurred. If no arms length licenses have occurred in
a particular country, Net Sales for such transfer shall be the average
price of arms length licenses in all countries. If a Database is sold
or licensed as part of a system, package, or combination product, Net
Sales shall be calculated by multiplying the Net Sales of the
combination product by the fraction A/B where "A" is the average unit
price of the Database when licensed separately and "B" is the average
unit price of the combination product. If the Database is not licensed
separately, the Parties shall negotiate in good faith the appropriate
percentage of the unit price of the combination product to be assigned.
2.14 "Party" shall mean Affymetrix or Gene Logic. "Parties" shall mean
Affymetrix and Gene Logic.
2.15 "Physical Defects" shall mean defects resulting from the
manufacture or handling of Probe Arrays by Affymetrix prior to
shipment, such that [...***...]. Such determination must be made
pursuant to Affymetrix' then current GeneChip expression assay
protocols.
2.16 "Probe Arrays" shall mean a solid support having an array of
polynucleotides with known location and sequence fabricated by
Affymetrix pursuant to this Agreement for use in expression analysis.
* CONFIDENTIAL TREATMENT REQUESTED
-5-
<PAGE> 6
2.17 "Proprietary Probe Arrays" shall refer to Probe Arrays which contain
substantial proprietary genetic information of a third party for which
incremental fees are due by Affymetrix to such third party associated
with the use of such proprietary genetic information.
2.18 "Services" shall mean the use of Probe Arrays in generation of data
that will be provided to only one third party.
2.19 "Significant Physical Defects" shall refer to Physical Defects in Probe
Arrays which meet [...***...]. It is understood that the criteria for
Significant Physical Defects are more stringent than [...**...]. The
Committee will provide input to Affymetrix' normal criteria for
Significant Physical Defects and revised criteria will be adopted in
the definition of Significant Physical Defects which are adopted for
use broadly by similar probe arrays. Until such criteria are
established, the Parties understand that the specific examples
identified in Exhibit D will be included or not included as Significant
Physical Defects, as appropriate. The list in Exhibit D will be
reasonably updated by the Parties until such time as the Committee has
agreed upon such normal criteria.
2.20 "System(s)" shall mean fluidics station(s), work station(s), probe
array reader(s), and associated software, such software licensed to
Gene Logic, and such fluidics station(s) and probe array reader(s) sold
to Gene Logic.
2.21 "Term" shall mean the period beginning on the Effective Date and ending
on a date [...***...] from the Effective Date, unless extended pursuant
to Section 5.1. "Initial Term" shall refer to the initial [...***...]
portion of the Term. "Extended Term" shall refer to the potential
extension of the Term by [...***...] pursuant to Section 5.1. For any
extension of the Term to the Extended Term, the applicable maximum
number of Datapoints in a Demonstration Database shall be negotiated by
the Parties in good faith.
2.22 "Trigger Event" shall mean any or all of the following, whenever and
however often it occurs: (a) Affymetrix licenses or intends to license
[...***...]; or b) Affymetrix licenses or intends to license
[...***...]; or c) [...***...]. For purposes of this Section 2.22,
"substantial value" shall mean cumulative payments from a single
customer, in cash or kind, of more than $[...***...]. It is understood
that such licenses are not intended to allow license of multiple
Demonstration Databases to a single customer of the same species that
can be combined into a larger Database. For purposes of this Section
2.22 "intends to license" shall mean either a) senior management of
Affymetrix has made external Database licensing part of its written
commercial plan; or b) resources have been or will be committed to
development of Databases for external licensing by approval of a budget
of Affymetrix.
3. PROBE ARRAY SUPPLY
3.1 Probe Arrays may be ordered only in full Lots. Only those expression
Probe Arrays sold at standard Affymetrix US catalog prices will be
available pursuant to this Agreement.
* CONFIDENTIAL TREATMENT REQUESTED
-6-
<PAGE> 7
3.2 Beginning on the Effective Date, Affymetrix will deliver such
quantities of the appropriate Probe Arrays which have passed the
Fabrication Verification Criteria at or before the time specified in a
properly rendered forecast made pursuant to Section 3.4, or, for the
first 3 months of the Term, according to a forecast previously supplied
by Gene Logic and attached as Exhibit C. Affymetrix will replace Probe
Arrays that have Physical Defects.
3.3 In no event will Affymetrix be obligated to provide more than
[...***...] Probe Arrays in any one month period.
3.4 Beginning on the Effective Date and on the first business day of each
month during the Term of this Agreement, Gene Logic will provide a
reasonable, good faith forecast of Probe Arrays to be supplied by
Affymetrix during the following [...***...]-month period or the period
until the end of the Term if less than [...***...] months (such
forecasts to be supplied by number of Probe Arrays and part number) to
Gene Logic and its Affiliates. The forecast will be provided according
to a mechanism and on forms to be agreed upon in good faith by the
Parties. The first and second month of such forecast (part number and
individual quantity) shall constitute a firm order. The subsequent
months of such forecast will be for capacity planning purposes only,
and shall not constitute a firm commitment. If the number of ordered
Probe Arrays forecast for a month increases by more than [...***...]
from the immediately preceding firm forecast for such month then the
number of such Probe Arrays above the [...***...] increase shall be
supplied in a reasonable time, but shall not be subject to penalty or
breach on account of late supply thereof.
3.5 Probe Arrays will be packed in Affymetrix' standard shipping packages
and shipped to the address specified by Gene Logic. Deliveries will be
F.O.B. Affymetrix' facility or the facility of its sales
representative. Affymetrix will ship via a carrier selected by Gene
Logic or, if none is specified by Gene Logic, Affymetrix will select
the carrier. Title and risk of loss of damage for deliveries will pass
to Gene Logic upon Affymetrix' actual delivery of the Probe Arrays to
the carrier for shipment to Gene Logic. Gene Logic will pay all
shipping costs, duties, and sales taxes. Gene Logic will advise
Affymetrix if insurance is desired on any shipments of Probe Arrays,
and will reimburse Affymetrix for all such insurance charges.
3.6 Affymetrix will provide Gene Logic with [...***...] qualified
instructor-days of training in use of Probe Arrays and Systems at
Affymetrix' expense and in schedules to be mutually and reasonably
agreed. In cases where Gene Logic elects to have training at
Affymetrix' facility, travel and expenses of Gene Logic personnel will
be paid by Gene Logic. Additional training will be reasonably provided
by Affymetrix to Gene Logic at the request of Gene Logic at the then
current commercial terms.
3.7 Gene Logic may not: 1) transfer the Probe Arrays provided by Affymetrix
pursuant to this Agreement to third parties other than Affiliates; or
2) transfer data generated therewith to any third party other than i)
Affiliates or ii) subscribers to a Database, or iii) in the case of
Services, to a single third party; or 3) provide services to any third
party, other than to Affiliates, using the Probe Arrays provided by
Affymetrix pursuant to the Agreement except as to those Probe Arrays
where i) the service recipient agrees to limit further distribution of
the data to other third parties consistent with Affymetrix' normal
probe array supply terms
* Confidential treatment requested
-7-
<PAGE> 8
as set forth in Exhibit A and updated from time to time with advance
notice to Gene Logic (it being understood that the service terms in
Exhibit A may be reasonably modified with mutual agreement of
Affymetrix and Gene Logic consistent with the terms of this Agreement),
and ii) the fee for Probe Arrays used in Services is paid pursuant to
Section 5.3; or 4) allow any third party, other than Affiliates for use
in Gene Logic's Area of Interest, to use the Probe Arrays supplied by
Affymetrix to Gene Logic under this Agreement; or 5) otherwise use the
Probe Arrays delivered hereunder outside of Gene Logic's Area of
Interest; or 6) reuse the Probe Arrays; or 7) use such Probe Arrays in
diagnostic or other settings requiring FDA or other regulatory agency
approval unless Gene Logic obtains such approval and such Probe Arrays
are to be used in a clinical trial (and such Probe Arrays are not for
microbial or pathogenic organisms). Gene Logic will allow Affymetrix
reasonable, periodic (but not more often than quarterly) access to the
Systems during regular business hours and with advance written notice
to ensure compliance with the prohibition against reuse.
3.8 All Databases transferred to a third party by Gene Logic pursuant to
this Agreement must be GATC Compliant. Gene Logic will bear its
internal costs of GATC compliance.
3.9 Gene Logic may not sell or license the Databases through a distributor
or agent unless such distributor or agent is approved in advance in
writing by Affymetrix. Such approval will not be unreasonably withheld
unless such agent or distributor is involved in legal proceedings with
Affymetrix.
3.10 Affymetrix will provide sufficient genetic information to identify the
Genes on a Probe Array. If Affymetrix updates its Probe Arrays to
include additional or different genetic sequence information,
Affymetrix will provide information to the best of its ability to allow
for Gene Logic to compare its data with prior results.
3.11 Gene Logic and Affymetrix will reasonably cooperate in joint
promotional activities of the Databases generated hereunder. Gene Logic
will reasonably provide Affymetrix with marketing materials for such
Databases, and Affymetrix will reasonably provide materials relating to
such Databases to its potential Probe Array customers to facilitate
direct contact with Gene Logic.
4. AFFYMETRIX PROPRIETARY RIGHTS
4.1 Until the end of the Term, Gene Logic will not buy arrays of diverse
nucleic acids on solid supports from a third party when such third
party arrays materially infringe or would materially infringe the
patent or copyright rights of Affymetrix or its Affiliates. In order to
enforce this provision Affymetrix must provide Gene Logic a) reasonable
and prompt written notice of such infringement upon Affymetrix becoming
aware of such infringement, and b) reasonable evidence of such
infringement, with which counsel for Gene Logic reasonably concurs.
This paragraph shall not confer on Gene Logic or any third party any
rights under the patent rights of Affymetrix.
5. COMPENSATION
5.1 Gene Logic shall pay to Affymetrix a fee of $[...***...] according to
the following payment schedule: [...***...] at the end of
* CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE> 9
every three month period thereafter during the Term (including any
Extended Term). Gene Logic may extend the Term by [...***...] by
providing written notice to Affymetrix no later than 90 days before the
end of the Initial Term. If so extended [...***...], Affymetrix will
negotiate in good faith for an additional extension of the Term of the
Agreement under similar terms for an additional [...***...], provided
that Gene Logic must provide at least [...***...] days written notice
before the end of the initial Extended Term of its desire to negotiate
in good faith for such extension.
5.2 For each expression Probe Array (excluding those Probe Arrays for use
in Services) delivered to Gene Logic or its Affiliates that meet the
Fabrication Verification Criteria, Gene Logic will pay a fixed fee of
[...***...]. Proprietary Probe Arrays will be discounted equivalently
provided that genetic information access fees actually paid by
Affymetrix to a third party are not discounted and only to the extent
that the genetic information access fees are not reflected in the list
price of standard equivalently sized probe arrays.
5.3 For those Probe Arrays used in Services, Gene Logic will pay Affymetrix
[...***...] or, if applicable, the price then available to that
particular third party recipient of such Services (if lower). As to
those third parties who benefit from such lower prices, such third
party will be invoiced directly by Affymetrix. Affymetrix will release
use restriction in such third parties solely to permit performance of
Services.
5.4 At the time and in the manner hereinafter provided, Gene Logic shall
pay to Affymetrix an [...***...] for each license of a Database to a
third party; provided, however, that with respect to each such license,
the minimum royalty payable for each successive 12-month period
commencing with the inception of such license shall be calculated
according to the following schedule:
<TABLE>
<CAPTION>
[...***...]
--------------------------------------------
[...***...] [...***...] [...***...] [...***...]
----------- ----- ------------ --------------
<S> <C> <C> <C> <C>
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
</TABLE>
* CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
[...***...] [...***...] [...***...]
* For purposes of calculating the minimum annual royalty [...***...].
</TABLE>
Royalties accruing pursuant to this Section 5.4 shall be subject to
[...***...].
5.5 [...***...]. In the event that, notwithstanding their respective good
faith efforts, the Parties are unable in a reasonable period of time to
negotiate mutually satisfactory royalty provisions with respect to such
Net Sales, the Parties shall refer the matter to arbitration in
accordance with Section 12.7; provided, however, that in connection
with such arbitration the Parties shall each submit a detailed proposal
describing the royalty provisions that such Party desires to have apply
to such Net Sales and the arbitrator or arbitration panel selected for
the arbitration with such Section shall be required to choose one
Party's proposal without modification. The arbitrator or arbitration
panel shall choose the proposal that is closest in its entirety to the
provisions that the arbitrator or arbitration panel determines best
reflect current market conditions for license of databases, and the
Parties shall be entitled to introduce evidence with respect thereto.
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 11
5.6 Except as to royalty payments, all amounts referred to in this Section
5 will be invoiced by Affymetrix when due. Royalty payments will be due
as specified in Section 5.7. All Probe Arrays will be deemed accepted
unless they are returned to Affymetrix within 45 days of delivery to
Gene Logic, with written explanation of the basis on which such Probe
Arrays have been returned on Affymetrix' standard "Return Materials
Authorization" according to the procedures provided for in such Return
Materials Authorization. All payments will be made to Affymetrix thirty
(30) days from the date of invoicing by Affymetrix. Late payments shall
bear interest at the rate of [...***...] % per month. All payments in
this Agreement will be made in the form of a check or wire transfer to
Affymetrix in U.S. Dollars.
5.7 Gene Logic shall deliver to Affymetrix, within sixty (60) days after
the end of each calendar quarter, a written report showing its
computation of payments due under Section 5.4 of this Agreement,
including any Net Sales of licenses of Databases by Gene Logic or its
Affiliates during such calendar quarter. All Net Sales shall be
segmented in each such report according to licenses by Gene Logic and
each Affiliate on a country by country basis, including the rates of
exchange used to convert such royalties to U.S. Dollars from the
currency in which the licenses were made. For the purposes of this
Agreement, the rates of exchange to be used for converting royalties to
U.S. Dollars shall be those published for the purchase of U.S. Dollars
in the Wall Street Journal for the last business day of the calendar
quarter for which payment is due. Simultaneously with the delivery of
each such report, Gene Logic shall tender payment in U.S. Dollars of
all royalties shown to be due therein. Where royalties are due for
licenses of Databases in a country where, by reason of currency
regulations it is impossible or illegal for Gene Logic or its
Affiliates to transfer royalty payments to Affymetrix, such royalties
shall be deposited in whatever currency is allowable in a bank in that
country that is reasonably acceptable to Affymetrix. Any and all income
or similar taxes imposed or levied on account of the receipt of
royalties payable under this Agreement which are required to be
withheld by Gene Logic shall be paid by Gene Logic on behalf of
Affymetrix and shall be paid to the proper taxing authority. Proof of
payment shall be secured and sent to Affymetrix as evidence of such
payment in such form as required by the tax authorities having
jurisdiction over Gene Logic or its Affiliates. Such taxes shall be
deducted from the royalty that would otherwise be remitted by Gene
Logic or its Affiliates.
5.8 Systems may be acquired/licensed by Gene Logic and its Affiliates at a
[...***...] to Affymetrix' list prices and under otherwise standard
terms.
5.9 As to transactions with other Affymetrix customers, Affymetrix has not
made, and will not make, its DNA probe array technology available for
the generation of [...***...] for license on terms more favorable,
taken as a whole, to those customers than those offered to Gene Logic
in this Agreement without offering such terms to Gene Logic. Such terms
shall be offered only for the overlapping period of Probe Array supply
in situations where Probe Arrays are made available at prices/royalties
lower than those provided herein. It is understood that if one of the
following term(s) is more favorable to any such customer, Gene Logic
shall be offered such more favorable terms, provided that if Gene Logic
accepts such term(s), Gene Logic shall accept other terms under which
such customer has obtained the benefit of such more favorable term: a)
price for Affymetrix' probe arrays;
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 12
b) [...***...]; c) [...***...] using Affymetrix' probe arrays; and d)
the ability to terminate such transaction at lower fees before the end
of the term. Furthermore, as to Easy Access transactions under which
subscribers are not able to license databases, if Affymetrix lowers one
or both of i) its published [...***...] (which Affymetrix reasonably
markets and is paid such fees); or ii) [...***...], Affymetrix shall
make such technology access fees and per probe array fees available to
Gene Logic.
5.10 Affymetrix will maintain a running record of the average variance from
the delivery times specified in Section 3.4. In the event that the
average delivery time in any calendar quarter for Probe Arrays
delivered to Gene Logic is more than [...***...] greater than the times
specified in Section 3.4, the price of all Probe Arrays scheduled to be
delivered during the next quarter shall be decreased by [...***...] for
each business day that such average is more than 15 days late. Until
such time as commercial standards and commercial incentives for
Significant Physical Defects are adopted, in the event that more than
[...***...] of the Probe Arrays delivered to Gene Logic in a
[...***...] during the Term are replaced for Significant Physical
Defects, all such Probe Arrays that are replaced by Affymetrix for
Significant Physical Defects will be considered to be delivered
[...***...]late in the above calculation. It is understood that
commercial standards and commercial incentives regarding replacement
for Significant Physical Defects will be no less favorable to Gene
Logic than those in this Section 5.10.
5.11 Affymetrix will provide early access to new product releases to Gene
Logic in a manner consistent with its Easy Access "Gold" customers.
5.12 Promptly following Gene Logic's request, Affymetrix agrees to negotiate
in good faith for supply to Gene Logic during the Term of custom Probe
Arrays under reasonable financial terms.
5.13 Affymetrix will sell Gene Logic Probe Arrays for internal research and
development activities (outside of the database development activities
described herein) pursuant to Affymetrix' standard terms and
conditions. [...***...].
5.14 Affymetrix will reasonably advise Gene Logic before first license of a
specific mammalian gene expression Database to third parties, and shall
use reasonable efforts to advise Gene Logic of the development of
mammalian gene expression Databases where Affymetrix has the legal
right to do so. Affymetrix will use reasonable efforts to obtain for
Affymetrix the right to provide such notice to Gene Logic.
6. INTELLECTUAL PROPERTY
6.1 Any invention made during the course of and as part of this Agreement
shall be owned according to inventorship of the relevant applications,
provided that Gene Logic (and its Affiliates) agree to assign to
Affymetrix at Affymetrix' cost all Chip Improvement Inventions. Gene
Logic agrees to communicate periodically technology improvements and
developments relating to probe array technology to the Committee,
excluding those improvements made independently of the use of Probe
Arrays (such as those made in the
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 13
course of the design or use of Gene Logic's proprietary technologies or
other non-Affymetrix technologies).
6.2 [...***...]
6.3 [...***...]
6.4 Gene Logic will reasonably provide recognition of Affymetrix by way of
display of its trademarks in its database products generated pursuant
to this Agreement. Such products will be maintained at reasonable
quality, and Affymetrix grants a non-exclusive right to use its
trademarks on such products. Gene Logic will allow Affymetrix
reasonable review and approval of the use of such trademarks.
6.5 Affymetrix and Gene Logic will negotiate in good faith for Gene Logic
to act as an agent for license of Affymetrix' Expression Data Mining
Tool ("EDMT") Software for use with Gene Logic's database products.
7. PROJECT COORDINATION
7.1 The parties will form the Committee to aid in coordinating the
performance of this Agreement. The Committee will have general
responsibility for directing the day to day performance of this
Agreement pursuant to the terms of this Agreement. The Committee shall
be composed of such representatives of Affymetrix and Gene Logic as
each shall respectively appoint and be reasonably acceptable to the
other Party. Each Party by its representative(s) shall cast one vote on
the Committee. A quorum shall consist of at least one Committee
representative from each Party. The Committee shall act only with the
concurring votes of both Parties. A Party's representatives shall serve
at the discretion of such Party and may be substituted for or replaced
at any time by such Party. The Committee shall meet at least quarterly
during the Term, except at such times as the Parties mutually believe
there are no significant agenda items. The site of such meetings shall
alternate
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 14
between the offices of Affymetrix and Gene Logic, (or any other site
mutually agreed upon by the Parties) or be arranged by video
conference. The proceedings of all meetings of the Committee shall be
prepared alternately by the Parties, unless otherwise agreed, and sent
to both Parties. In the event that the Committee is unable to reach a
decision by unanimous action with respect to any matter and such
inability continues for a period of forty-five (45) days after the date
on which the matter is first submitted to the Committee, each Party
shall refer the matter to the Chief Executive Officers of Affymetrix
and Gene Logic for resolution. Each Party shall set forth in writing a
proposed solution to the impasse. If an acceptable resolution is not
achieved, either party may choose to arbitrate the issue(s) in
accordance with Section 12.7. The Parties shall use reasonable efforts
to continue performance of this Agreement during any such dispute.
7.2 In addition, the Committee will participate in development of
appropriate standards for Significant Physical Defects. Affymetrix will
communicate potential standards for Significant Physical Defects and
commercially reasonable standards so reviewed will be adopted in the
first calendar year of the Term.
8. CONFIDENTIALITY
8.1 For a period of 5 years from disclosure to the other Party, each Party
shall maintain the Confidential Information of the other Party in
confidence (including the terms of this Agreement), and shall not
disclose, divulge, or otherwise communicate such Confidential
Information of the other, or use it for any purpose, except as
permitted or contemplated by this Agreement, and in order to carry out
the terms and objectives of this Agreement. The Parties will use
reasonable precautions to prevent and restrain the unauthorized
disclosure of such Confidential Information of the other Party. The
provisions of this paragraph shall not apply to Confidential
Information which:
8.1.1 was known or used by the receiving Party or its
Affiliates without any restriction on disclosure,
prior to its date of disclosure to the receiving
Party, as evidenced by the prior written records of
the receiving Party or its Affiliates; or
8.1.2 either before or after the date of the disclosure to
the receiving Party is lawfully disclosed without
restriction on disclosure to the receiving Party or
its Affiliates by an independent, unaffiliated third
party rightfully in possession of the Confidential
Information, provided that if such Confidential
Information is provided to the receiving Party by a
third party rightfully in possession of the
Confidential Information, but with restrictions on
disclosure, the receiving Party may use such
Confidential Information in accordance with such
restrictions of the third party;
8.1.3 either before or after the date of the disclosure to
the receiving Party becomes published or generally
known to the public through no fault or omission of
the receiving Party or its Affiliates;
8.1.4 is required to be disclosed by the receiving Party or
its Affiliates to comply with applicable laws, to
comply with a court order, or to comply with
governmental regulations, provided that the receiving
Party provides prior written notice of such
disclosure to the other Party and takes reasonable
and lawful actions to avoid and/or minimize the
degree of such disclosure;
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<PAGE> 15
8.1.5 is independently developed by the receiving Party or
its Affiliates without reference to the Confidential
Information.
8.2 Affymetrix may not publish the results of use of the Probe Arrays
without approval of Gene Logic. Gene Logic may at its option publish
results of the use of the Probe Arrays. Subject to the limitations of
Section 3 above Gene Logic may publish the results of its research at
its sole discretion. In the event that Gene Logic chooses to publish
such results, if Affymetrix scientists have contributed to such work,
authorship will be according to scientific input and Affymetrix will
cooperate in such publications. If it is decided that publications will
be made pursuant to this Section, Affymetrix and Gene Logic will
provide the other Party draft versions of all publications reporting
results of the use of the Probe Arrays, and will provide at least 60
days for technical review thereof, and will allow for removal of
Confidential Information. For purposes of this Section "publication"
shall refer to conventional scientific publications and not to the
license of database products.
9. WARRANTY
9.1 Both Parties to this Agreement represent and warrant that they have the
full right and authority to enter into and perform this Agreement.
9.2 Affymetrix warrants that the Probe Arrays delivered hereunder do not
incorporate the trade secret or copyright rights of a third party.
Affymetrix DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS
OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES
RELATING TO INTELLECTUAL PROPERTY, MERCHANTABILITY, AND FITNESS FOR A
PARTICULAR PURPOSE. Affymetrix shall have no liability under any theory
of strict liability, negligence, whether active or passive, or products
liability. Affymetrix' entire liability shall in no event exceed the
compensation hereunder. Affymetrix shall have no liability for any
consequential, incidental, or special damages. Gene Logic understands
that the risks of loss herein are reflected in the price of the Probe
Arrays and access fees and that the terms would have been different if
there had been a different allocation of risk.
9.3 All Chip Improvement Inventions made available to Affymetrix hereunder
shall be on an as-is basis. Gene Logic DISCLAIMS ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES RELATING TO INTELLECTUAL PROPERTY,
MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE. Gene Logic makes
no warranty that it will ever develop any Database or that it will be
able to license any Database, if developed. Gene Logic shall have no
liability under any theory of strict liability, negligence, whether
active or passive, or products liability on account of the license of
Database or the sale of Chip Improvement Inventions. Gene Logic shall
have no liability for consequential, incidental, or special damages.
10. INDEMNITY
10.1 Affymetrix will indemnify Gene Logic against liability and will settle
or defend any suit or proceeding brought against Gene Logic and its
Affiliates to the extent based on a claim that
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<PAGE> 16
the Probe Arrays delivered hereunder directly infringe an issued patent
in the United States of America, the European Patent System (EPO), or
Japan. Affymetrix will indemnify Gene Logic against liability and will
settle or defend any suit or proceeding brought against Gene Logic to
the extent based on a claim that the Probe Arrays delivered hereunder
indirectly (i.e. through contributory infringement or inducement)
infringe an issued patent in the United States of America, EPO, or
Japan if a) a hybridization method using probe arrays, or probe arrays
themselves, or equivalent hybridization devices are specifically
identified as an element of the claims of such patent in a device
claim, or use of these is specifically identified as an element of the
claims of such patent in a method claim, and b) the patentability of
such device or method claims was materially related to the recitation
of the hybridization method or the probe arrays or equivalent
hybridization device, or their use. Affymetrix shall have no liability
under this paragraph to the extent that the alleged infringement arises
out of any addition or modification to the Probe Arrays or their use by
Gene Logic not specified by Affymetrix, or Gene Logic's combination of
the Probe Arrays with other devices not specified by Affymetrix. The
indemnifying Party shall pay all damages and costs finally awarded
against the indemnified Party for such infringement. For this paragraph
to apply the indemnified Party must inform the indemnifying Party
within 14 days of notice of any claim or suit being made or brought,
and give the indemnifying Party the full authority, information, and
assistance necessary to settle or defend such suit or proceeding. The
indemnifying Party shall not be bound in any manner by any settlement
made without its prior written consent. Any liability hereunder shall
be limited to access fees, chip fees, and royalties actually paid
hereunder. In the event that the Probe Arrays are held to infringe and
their use is enjoined as a result of infringement for which it has
indemnified Gene Logic, Affymetrix may obtain for Gene Logic the right
to continue using such Probe Arrays, modify them to become
noninfringing, or grant Gene Logic a credit for the cost of unused
Probe Arrays, and accept the return of unused Probe Arrays. This
paragraph states the entire liability for infringement of intellectual
property rights and is in lieu of all other warranties, express or
implied except as stated in Section 9.
11. TERM AND TERMINATION
11.1 This Agreement shall extend until the end of the Term unless terminated
pursuant to Section 11.2 or 11.3 or 11.4.
11.2 Gene Logic may terminate this Agreement at its sole option if the
termination takes place on or after [...***...]. If Gene Logic wishes
to terminate pursuant to this Section 11.2, it must a) provide written
notice at least 30 days before the intended date of termination, and b)
make the following payment to Affymetrix at the time such notice is
provided: [...***...]. Termination fees will be waived if [...***...].
In the event of termination pursuant to this Section 11.2, Gene Logic
agrees to negotiate in good faith for a worldwide, sublicensable, right
to use, copy, distribute, and make derivative works of data previously
obtained from Probe Arrays under reasonable terms and conditions.
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 17
Gene Logic agrees to take delivery of all orders of Probe Arrays which
are to be delivered within 1 month of termination.
11.3 If a Trigger Event occurs before [...***...], Gene Logic may, at its
option, within 90 days from the date notice of such Trigger Event is
provided to Gene Logic, elect to terminate this Agreement. In the event
Gene Logic elects to terminate pursuant to this Section 11.3,
Affymetrix will pay to Gene Logic a sum equal to the lesser of i)
[...***...]; or ii) [...***...].[...***...] days from the date notice
of such Trigger Event is provided to Gene Logic, elect to terminate
this Agreement. In the event of any termination pursuant to this
Section 11.3, Gene Logic may continue to obtain a supply of Probe
Arrays under the financial terms set forth in this Agreement for up to
[...***...] from the date of termination; provided, that Gene Logic
pays a proportionate share of any fees due pursuant to Section 5.1
during the period of such supply.
11.4 In the event that Affymetrix [...***...], Gene Logic may, at its
option, within 90 days from the date notice of such supply is provided
to Gene Logic, elect to terminate this Agreement. In the event Gene
Logic elects to terminate pursuant to this Section 11.4, Affymetrix
will pay to Gene Logic a sum equal to the lesser of i) [...***...]; or
ii) [...***...]. [...***...], Gene Logic may, at its option, within 90
days from the date notice of such supply is provided to Gene Logic,
elect to terminate this Agreement. In the event of termination pursuant
to this Section 11.4, Gene Logic may continue to obtain a supply of
Probe Arrays under the financial terms set forth in this Agreement for
up to [...***...] from the date of termination; provided that Gene
Logic pays a proportionate share of any fees due pursuant to Section
5.1 during the period of such supply.
11.5 Upon termination of this Agreement due to expiration of the Term or
termination by Gene Logic pursuant to Sections 11.2, 11.3, or 11.4,
Gene Logic may continue to use the Probe Arrays previously purchased by
Gene Logic within their specified shelf life and subject to the
warranty and return provisions provided in this Agreement. Gene Logic
understands that no license is conveyed implied for use of the Systems
herein for Probe Arrays other than those manufactured or licensed by
Affymetrix.
11.6 Upon termination of this Agreement, the following provisions will
survive: 3.8, 3.9, 3.10, 5.4, 5.6, 5.7, 6, 8, 9, 11.6, 11.7, and 12.1
to12.15.
11.7 Upon execution of this Agreement, the agreement effective March 30,
1998 and entitled "Database and Service Agreement" between Affymetrix,
Inc. and Oncormed, Inc. shall be terminated.
12. MISCELLANEOUS
12.1 Gene Logic shall keep, and shall cause its Affiliates to keep, for a
period of at least two (2) years full, accurate, and true books of
accounts and other records containing all information and data which
may be necessary to ascertain and verify the fees and royalties payable
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 18
hereunder. During the Term of this Agreement and for a period of two
(2) years following the time at which the relevant fee or payment is
due, Affymetrix shall have the right from time to time (not to exceed
once during a calendar year) to inspect in confidence, or have an
agent, accountant, or representative inspect in confidence such books,
records, and supporting data. In the event an audit reveals a
discrepancy greater than 10% in the relevant period, Gene Logic will
pay any audit fees.
12.2 Affymetrix shall keep, and shall cause its Affiliates to keep, for a
period of at least two (2) years full, accurate, and true books of
accounts and other records containing all information and data which
may be necessary to ascertain and verify the fees and royalties payable
hereunder. During the Term of this Agreement and for a period of two
(2) years following the time at which the relevant fee or payment is
due, Gene Logic shall have the right from time to time (not to exceed
once during a calendar year) to inspect in confidence, or have an
agent, accountant, or representative inspect in confidence such books,
records, and supporting data. In the event an audit reveals a
discrepancy greater than 10% in the relevant period, Affymetrix will
pay any audit fees.
12.3 GENE LOGIC UNDERSTANDS THAT THE PROBE ARRAYS DELIVERED HEREUNDER ARE
NOT FDA APPROVED. GENE LOGIC AGREES NOT TO USE THE PROBE ARRAYS
DELIVERED HEREUNDER IN ANY CLINICAL OR OTHER SETTING REQUIRING FDA
REVIEW OR APPROVAL EXCEPT THAT GENE LOGIC MAY USE THE PROBE ARRAYS IN
CLINICAL TRIALS WHEN IT OBTAINS ALL REQUIRED FDA OR OTHER REGULATORY
APPROVALS REQUIRED FOR USE IN SUCH TRIALS. GENE LOGIC WILL INDEMNIFY
AFFYMETRIX FOR ANY CLAIMS MADE BY A PATIENT ARISING FROM THE USE OF THE
PROBE ARRAYS. THE PROBE ARRAYS AND SYSTEMS ARE NOT LICENSED EXCEPT AS
SPECIFICALLY RECITED HEREIN UNDER ANY INTELLECTUAL PROPERTY RIGHTS OF
AFFYEMTRIX.
12.4 Neither Party nor any of its Affiliates shall originate any news
relating to this Agreement without the prior written approval of the
other Party, which approval shall not be unreasonably withheld, or
except as otherwise required by law.
12.5 Either Party may assign any rights or obligations of this Agreement to
a party who acquires all or substantially all of the relevant assets of
the assigning Party by merger or sale of assets or otherwise. In the
case where the Agreement is to be transferred by merger or sale of
assets or otherwise of Gene Logic to a third party or its Affiliates
listed in Exhibit B, the written consent of Affymetrix must be
obtained.
12.6 This Agreement shall be construed according to the laws of California
without regard to conflict of law provisions.
12.7 In the event of any controversy or claim relating to, arising out of or
in any way connected to any provision of this Agreement ("Dispute"),
the Parties shall seek to settle their differences amicably between
themselves. Any unresolved Dispute shall be finally resolved by final
and binding arbitration. Whenever a Party shall decide to institute
arbitration proceedings, it shall give written notice to that effect to
the other Party. The Party giving such notice shall refrain from
instituting the arbitration proceedings for a period of ten (10)
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<PAGE> 19
days following such notice to allow the Parties to attempt to resolve
the Dispute between themselves. If the Parties are still unable to
resolve the dispute, the Party giving notice may institute the
arbitration proceeding under the rules of the American Arbitration
Association ("AAA Rules"). Arbitration shall be held in Palo Alto,
California. The arbitration shall be conducted before a single
arbitrator mutually chosen by the Parties, but if the parties have not
agreed upon a single arbitrator within fifteen (15) days after notice
of the institution of the arbitration proceeding, then the arbitration
will be conducted by a panel of three arbitrators. In such case, each
Party shall within thirty (30) days after notice of the institution of
the arbitration proceedings appoint one arbitrator. The presiding
arbitrator shall then be appointed in accordance with AAA Rules. All
arbitrator(s) eligible to conduct the arbitration must undertake in
writing as a condition of service to render their opinion(s) promptly
after the final arbitration hearing. No arbitrator (nor the panel of
arbitrators) shall have the power to award punitive damages or any
award of multiple damages under this Agreement and such awards are
expressly prohibited. Decisions of the arbitrator(s) shall be final and
binding on the Parties. Judgment on the award of the arbitrator(s) may
be entered in any court having jurisdiction thereof. Except to the
extent entry of judgment and any subsequent enforcement may require
disclosure, all matters relating to the arbitration, including the
award, shall be held in confidence by the Parties.
12.8 The waiver by either Party of a breach or a default of any provision of
this Agreement by the other Party shall not be construed as a waiver of
any succeeding breach of the same or any other provision, nor shall any
delay or omission on the part of either Party to exercise or avail
itself of any right power or privilege that it has or may have
hereunder operate as a waiver of any right, power or privilege by such
Party.
12.9 This Agreement and the documents referred to herein are the full
understanding of the Parties with respect to the subject matter hereof
and supersede all prior understandings and writings relating to the
subject matter herein. No waiver alteration or modification of any of
the provisions herein shall be binding unless in writing and signed by
the Parties by their
12.10 The headings in this Agreement are for convenience only and shall not
be considered in construing this Agreement.
12.11 In the event that any provision of this Agreement is held by a court of
competent jurisdiction to be unenforceable because it is invalid or in
conflict with any law of any relevant jurisdiction, the validity of the
remaining provisions shall not be affected, and the rights and
obligations of the Parties shall be construed and enforced as if the
Agreement did not contain the particular provision(s) held to be
unenforceable.
12.12 This Agreement shall be binding on and inure to the benefit of the
Parties and their successors and permitted assigns.
12.13 None of the provisions of this Agreement shall be for the benefit of or
enforceable by any third party.
12.14 Any notice required under this Agreement shall be made by overnight
mail or courier to the addresses below.
If to Gene Logic:
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<PAGE> 20
Gene Logic, Inc.
708 Quince Orchard Road
Gaithersberg, MD 20878
Attn: President
cc: Fred Muto Esq.
Cooley Godward LLP
4365 Executive Dr. #1100
San Diego, CA 92121-2128
If to Affymetrix:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, California 95051
Attn: President
12.15 The Parties shall not be liable for delay or nonperformance if
performance is rendered impracticable by the occurrence of any
condition beyond the reasonable control of a Party, if such Party has
used reasonable efforts to avoid such occurrence. Such Party shall give
notice to the other Party in writing promptly, and thereupon the
affected Party's performance shall be excused and the time for
performance shall be extended for the period of delay or inability to
perform due to the occurrence.
12.16 From and after the Effective Date of this Agreement and until this
Agreement has expired or been terminated, Affymetrix shall not, and
shall cause its Affiliates not to, in any manner, singly or as part of
a partnership, limited partnership, syndicate or other "Group" (within
the meaning of Section 13(d)(3) of the Securities and Exchange Act of
1934, as amended), directly or indirectly, acquire, or offer or agree
to acquire, record ownership or beneficial ownership of more than 5% of
the outstanding shares of Common Stock of Gene Logic, any securities
convertible into or exchangeable for Common Stock or any other right to
acquire Common Stock from Gene Logic or any other person, without the
prior written consent of Gene Logic. In the event that Affymetrix
inadvertently acquires shares of Gene Logic in excess of the amounts
set forth in this Section as part of a larger transaction, Affymetrix
will divest such shares in a reasonable time frame.
12.17 From and after the Effective Date of this Agreement and until this
Agreement has expired or been terminated, Gene Logic shall not, and
shall cause its Affiliates not to, in any manner, singly or as part of
a partnership, limited partnership, syndicate or other "Group" (within
the meaning of Section 13(d)(3) of the Securities and Exchange Act of
1934, as amended), directly or indirectly, acquire, or offer or agree
to acquire, record ownership or beneficial ownership of more than 5% of
the outstanding shares of Common Stock of Affymetrix, any securities
convertible into or exchangeable for Common Stock or any other right to
acquire Common Stock from Affymetrix or any other person, without the
prior written consent of Affymetrix. In the event that Gene Logic
inadvertently acquires shares of Affymetrix in
-20-
<PAGE> 21
excess of the amounts set forth in this Section as part of a larger
transaction, Gene Logic will divest such shares in a reasonable time
frame.
12.18 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
by their properly and duly authorized officers or representatives as set forth
below.
Affymetrix, Inc.
/s/ VERN NORVIEL
- ------------------------------
By: Vern Norviel
------------------------
Date: 1/10/99
------------------------
Gene Logic , Inc.
/s/ MARK D. GESSLER
- ------------------------------
By: Mark D. Gessler
------------------------
Date: 1/10/99
------------------------
-21-
<PAGE> 22
EXHIBIT A
SERVICE RECIPIENT TERMS
-22-
<PAGE> 23
EXPRESSION SERVICE ADDENDUM
This Addendum contains terms and conditions in addition to the general Terms and
Conditions of Affymetrix, Inc. ("AFX") relevant to Buyer.
"Expression Probe Array Data" shall mean data from expression probe arrays.
"Genetic Inventions" shall mean all genetic sequence (including related protein)
and function inventions discovered by Buyer through the use of an Expression
Probe Array Data including, without limitation, any invention which is covered
by an issued patent that contains data from the Expression Probe Array Data or
was supported during patent prosecution by data obtained from the Expression
Probe Array Data.
Restricted Use Rights. Buyer may only use the Expression Probe Array Data
provided hereunder to investigate the presence and/or levels of expressed
nucleic acid sequences in the ordinary course of Buyer's normal internal
pharmaceutical and diagnostic research and development activities including
clinical trials. In addition, Buyer agrees not to (a) transfer an Expression
Probe Array Data to any third party; or (b) provide services to or on behalf of
any third party that relate to an Expression Probe Array Data; or (c)
distribute, transfer, license or otherwise make available to a third party any
data or database that is obtained from the use of an Expression Probe Array
Data, except i) Buyer may license data obtained from the Expression Probe Array
Data to a third party licensee specifically related to a particular drug or
target that has been discovered through use of the Expression Probe Array Data
when such third party licensee will distribute such drug or target, ii) Buyer
may transfer data within a bona fide collaboration in which Buyer's collaborator
has provided substantial scientific input to experimental design and such
relationship is set forth in an agreement signed by all parties prior to the use
of any Expression Probe Array Data to generate such data (bona fide
collaborations do not include arrangements whose primary purpose is to give a
third party access to data or databases or provide nucleic acid hybridization
services), iii) Buyer may transfer data to a third party so long as Buyer
receives no consideration or other quid-pro-quo for such transfer (e.g. such
transfer cannot be contingent on the third party and Buyer exchanging other
goods, services or intellectual property), or iv) Buyer may publish data as part
of a normal, peer reviewed scientific publication or public scientific
presentation; or (d) use an Expression Probe Array Data or data therefrom in a
clinical diagnostic setting. Buyer agrees that third parties may only receive
data from Expression Probe Array Data under (c)(i)-(iii) hereof pursuant to
written agreements containing obligations explicitly benefitting AFX that are no
less restrictive than those in this Agreement and which require such third party
recipients not to sublicense or further distribute or transfer such data.
Intellectual Property. If Buyer elects, at its sole discretion, to commercialize
a Genetic Invention, then Buyer agrees to negotiate in good faith with AFX for
at least a non-exclusive license, but only in the field of probe arrays. Such
license will be negotiated to include commercially reasonable royalty payments,
and need only be provided if a third party has not already been granted a
conflicting license (or an option to obtain such a license) at the time the
Genetic Invention is made. Buyer need not disclose Genetic Inventions to AFX
until such time as corresponding patents are published disclosing such
Inventions.
Confidentiality. Buyer agrees not to disclose any or all of the contents of this
Agreement to any third party except: with the prior written consent of AFX; if
required to do so by a final order of a court of competent jurisdiction; or, as
is otherwise required by applicable law following notice of not less than thirty
(30) days to the other parties hereto.
INSTITUTION NAME (Please print):
- --------------------------------
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
Date:
--------------------------
Signature of Buyer Officer or Designee. By signing the above, the signatory is
representing and warranting that they are authorized to enter into this
Agreement on behalf of Buyer.
-23-
<PAGE> 24
EXHIBIT B
THIRD PARTY LIST
[...***...]
* CONFIDENTIAL TREATMENT REQUESTED
-24-
<PAGE> 25
EXHIBIT C
INITIAL FORECAST
-25-
<PAGE> 26
[...***...]
* CONFIDENTIAL TREATMENT REQUESTED
-26-
<PAGE> 27
EXHIBIT D
EXEMPLARY SIGNIFICANT PHYSICAL DEFECTS(1)
I. EXAMPLES OF ITEMS THAT ARE SIGNIFICANT PHYSICAL DEFECTS
[...***...]
II. EXAMPLES OF ITEMS THAT ARE NOT SIGNIFICANT PHYSICAL DEFECTS
[...***...]
- --------
(1} The Parties agree that these examples are not meant to be exclusive of
other Significant Physical Defects.
* CONFIDENTIAL TREATMENT REQUESTED
-27-
<PAGE> 1
EXHIBIT 11.1
Statement Re: Computation of Per Share Earnings
(In thousands, except per share amounts)
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
Basic and Diluted:
Weighted average common shares outstanding 19,710 13,900
Net loss $(4,949) $(2,111)
======== ========
Net loss per common share $ (0.25) $ (0.15)
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,936
<SECURITIES> 14,774
<RECEIVABLES> 3,028
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,740
<PP&E> 13,387
<DEPRECIATION> 2,993
<TOTAL-ASSETS> 50,841
<CURRENT-LIABILITIES> 9,908
<BONDS> 3,541
0
0
<COMMON> 198
<OTHER-SE> 36,688
<TOTAL-LIABILITY-AND-EQUITY> 50,841
<SALES> 0
<TOTAL-REVENUES> 4,067
<CGS> 0
<TOTAL-COSTS> 8,804
<OTHER-EXPENSES> 112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,849)
<INCOME-TAX> 100
<INCOME-CONTINUING> (4,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,949)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
