<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NO. 0-23317
GENE LOGIC INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1411336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(Address of principal executive offices)
Registrant's telephone number, including area code: (301) 987-1700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
______
The aggregate market value of the voting stock (which consists
solely of shares of Common Stock) held by non-affiliates of the Registrant as of
March 1, 1999 was approximately $101,501,387, based on the closing price on that
date of Common Stock on the Nasdaq National Stock Market.*
The number of shares outstanding of the Registrant's Common
Stock, $.01 par value, was 19,727,375 as of March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A in connection
with the 1999 Annual Meeting of Stockholders to be held on June 8, 1999 is
incorporated by reference into Part III of this Annual Report on Form 10-K to
the extent stated herein.
- ----------------------
* Excludes 4,111,777 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding on
March 1, 1999. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.
<PAGE> 2
PART I
ITEM 1. BUSINESS
This Report 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, as well as other risks and uncertainties set forth
below and in the sections entitled "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
READS(TM), GeneExpress(TM), GeneExpress Normal(TM),
ToxExpress(TM), PharmExpress(TM), and Flow-thru Chip(TM) are trademarks of the
Company. GeneChip(R) is a registered trademark of Affymetrix Inc. Trade names
and trademarks of other companies appearing in this Annual Report on Form 10-K
are the property of their respective holders.
SUMMARY
GENE LOGIC INC.(1) ("Gene Logic" or the "Company") develops
proprietary genomic information products, software, and research services and
markets them to the global pharmaceutical and life science industries. The
Company's information products combine software tools with large-scale gene
expression information, which specifies the degree to which genes are active in
a broad range of normal, diseased, and treated conditions. This combination
enables scientists to produce new biological knowledge by integrating this
proprietary expression information with a growing array of biological
information available on the Internet. The Company's broad range of information
products, software, and research services enable collaborators to accelerate the
discovery and development of new drugs, diagnostics, and agricultural products.
Certain of the Company's information products are in development
and are subject to risks and uncertainties regarding the timing of development
and the Company's ability to commercialize such products successfully.
Gene Logic has collaborative agreements with eight major
pharmaceutical companies and one major agricultural company. Four of these
agreements are target discovery collaborations that provide the Company with
various technology and database access fees, research funding and upfront
payments. In addition, these four agreements provide certain additional payments
upon attainment of research and product development milestones and royalty
payments based on sales of any products that result from use of the Company's
technology or proprietary database information. The Company also has a
collaborative agreement with a pharmaceutical company for the development of a
database for predicting drug toxicity. Under that collaboration, the Company may
license the database and other products developed under the
- -------------
(1) This Annual Report on Form 10-K covers both Gene Logic Inc. and its wholly
owned subsidiary, Gene Logic Acquisition Corp.
2.
<PAGE> 3
collaboration to third party customers. In addition, the Company has a
collaboration with a pharmaceutical company for bioinformatics software,
database development, and data integration. Under that collaboration the Company
receives software license fees and development fees. The Company has three
agreements with pharmaceutical companies in which the Company receives fees for
analyzing gene mutations for clinical trials.
BACKGROUND
Diseases are the result of disturbances of, or abnormalities in,
the physiological pathways that regulate the functioning of cells in the human
body. The main components of these pathways are proteins--such as enzymes,
receptors, or ion channels--encoded by genes expressed within the cells affected
by the disease. Drugs generally exert their therapeutic effects by interacting
with certain of these proteins, referred to as drug targets, in such a way as to
restore the normal functioning of the disease-affected pathways or compensate
for the abnormalities. The process of drug discovery involves the screening of
collections of compounds against a drug target to identify those compounds that
interact with the target to produce the desired effect. Compounds that show
promise, known as drug leads, must be subjected to toxicological and clinical
testing.
While each cell of the body contains all of the roughly 100,000
human genes, only about 10 percent of those genes are simultaneously active in
any cell. The particular genes that are active, or expressed, determine which
proteins will be made. The degree to which a gene is expressed determines the
quantity of the corresponding protein. These proteins in turn determine a cell's
structure and function--whether, for instance, it will be a brain cell, a lung
cell, or a blood cell. Gene expression also reflects how the cell is functioning
and how it is responding to its environment. For example, certain genes will be
more or less active in a diseased cell than in a healthy cell of the same type.
These differences provide valuable clues about which genes, and therefore which
proteins, are involved in a disease pathway. By finding compounds that affect
these over- or under-expressed genes and proteins, researchers can develop
innovative drugs that prevent or treat the disease.
The Company believes that pharmaceutical companies could reduce
the time, risk, and cost associated with drug discovery if they could determine
the expression levels of genes that play roles in the physiological pathways of
disease. Such knowledge may help them to discover drug targets, screen drug
leads, predict toxic and pharmacological responses to drug leads, and tailor
clinical trials to the specific needs of genetic subgroups within the
population.
PRODUCTS AND SERVICES
The Company provides a variety of products and services in the
areas of gene expression information, data management and bioinformatic
software, and pharmacogenomics. These products and services are all designed to
improve the efficiency and effectiveness of the drug discovery and development
process. They may also be applied to research and development in other sectors,
such as diagnostics, animal health, and agriculture.
Gene Expression Information
READS Technology
When a gene is expressed to a high degree, it produces more of
its own unique type of a molecule called messenger RNA (mRNA), which in turn
guides the production of more of the unique protein that the gene encodes. Gene
Logic's molecular biologists can measure each type of mRNA in a tissue or cell
sample--thus revealing the degree to which each gene is expressed--by using a
patented technology
3.
<PAGE> 4
called READS (Restriction Enzyme Analysis of Differentially expressed
Sequences). One of the strengths of READS is its ability to disclose the
expression of unknown genes--that is, genes not yet represented in the public
gene sequence databases being generated through the government-funded Human
Genome Project. This capability broadens the Company's ability to use READS to
discover new drug targets.
The Company's primary source of revenue is from collaborative
programs with pharmaceutical companies for discovery of drug targets. For these
partners, the Company uses READS to generate custom databases of gene expression
in normal and diseased tissues of selected organ systems. Using its proprietary
data management and bioinformatic software, the Company helps each partner
search its database for targets it can use to discover new drugs. The partners
pay the Company technology and database access fees, research funding and
upfront fees. The Company is also entitled to milestone payments for drug
targets and leads, discovered using information the Company provided, that
proceed through the partner's research and development pipeline. If any of these
compounds become marketed drugs, the Company is entitled to receive royalties on
sales.
GeneExpress Databases
While READS can be used to discover unknown genes, pharmaceutical
companies can also benefit from databases of gene expression information about
the genes and gene fragments already in the public domain. For such databases to
have broad appeal, they need to contain expression information from a wide
variety of tissues from healthy, diseased, and drug-treated patients and from
experimental animals. Researchers could mine these databases for new drug
targets, use them as reference standards for comparison to gene expression
experiments, and glean insights from them concerning the likely toxic and
pharmacological effects of new compounds.
Gene Logic is addressing this need by building its GeneExpress
databases. The initial GeneExpress database is being assembled using GeneChip
probe arrays, developed by Affymetrix Inc. ("Affymetrix"), to which are attached
small pieces of DNA from 6,800 genes and 35,000 gene fragments.
Fluorescent-labeled DNA sequences from a tissue sample will bind to their
complements on the array. By detecting the positions of the fluorescent spots on
the chip, researchers can determine which genes were expressed in the sample.
The brightness of the spot indicates the level of expression.
Gene Logic is building the GeneExpress databases using its large
proprietary human tissue repository, representing a wide range of tissues and
diseases. The Company has substantial expertise in the preparation and analysis
of these samples and in the management and integration of genomic databases. In
1999, the Company plans to collect data on the expression of the 42,000 genes
and gene fragments represented on the GeneChip array in 1,500 tissues, although
there can be no assurance that the Company will be able to complete the
collection of such data on this schedule. Expression data from normal tissues in
this database will constitute the GeneExpress Normal database.
Gene Logic intends to continue to expand this effort with more
genes and more tissues, both in humans and in experimental animals, such as rats
and mice. The Company expects that the GeneExpress databases ultimately will
contain billions of gene expression measurements, as well as clinical
information on the tissue samples included in the databases.
Gene Logic expects another GeneExpress database, called
ToxExpress, to contain gene expression data from tissues treated with a variety
of known toxic compounds. This database is intended for use in predicting toxic
responses to new drug leads, thereby eliminating unpromising leads before they
undergo extensive animal testing. The Company also intends to develop an
expression database, called PharmExpress, for use in predicting pharmacological
responses to compounds.
4.
<PAGE> 5
Gene Logic plans to market the GeneExpress databases to pharmaceutical and
biotechnology companies. The Company generally expects to receive subscription
fees from database users.
There can be no assurance that development of any of the
GeneExpress databases will be successful or that the Company will be successful
in marketing the GeneExpress databases.
Flow-thru Chip Probe Arrays
Once a promising new drug target is identified, researchers must
determine which compounds show the greatest promise in affecting the target.
Due to advances in chemistry and robotics, the typical pharmaceutical company
has hundreds of thousands of compounds on hand to test. But these companies are
trying to find more efficient ways to test these compounds quickly against
numerous drug targets to determine which compounds will become new drug leads.
To help solve this problem, Gene Logic is developing the patented
Flow-thru Chip probe array. Unlike other probe arrays, the Flow-thru Chip has
hundreds of thousands of discrete microscopic channels that pass completely
through it. Probe molecules are attached to the inner surfaces of these
channels, and molecules from the samples to be tested flow through the channels,
coming into close proximity with the probes. This closeness facilitates the
intended reaction between the probe and the test molecule.
The Flow-thru Chip appears to offer several advantages over other
probe arrays:
- Speed. Due to the small size of the channels, molecules
from the samples bind to their complementary probes four
times faster.
- Sensitivity. The Flow-thru Chip has greater surface area
for attachment of probes than conventional chips. This
feature results in a stronger signal and thus allows
detection of smaller quantities of molecules.
- Versatility. The close proximity of probes and sample
molecules may facilitate, in addition to the binding of
DNA to DNA, a wide range of other reactions. For
example, the Flow-thru Chip may be useful in analyzing
interactions between two proteins, between proteins and
DNA, or between proteins and small molecules.
The Company intends to use the Flow-thru Chip in screening for
drug leads and in preclinical toxicology. In screening, the Flow-thru Chip would
be used to identify compounds that cause diseased cells to display expression
patterns similar to those of normal cells. In toxicology, new drug leads that
cause expression patterns similar to those seen in response to known toxic
compounds would be eliminated from further testing.
There can be no assurance that further development and scale-up
of the Flow-thru Chip will be successful or that the Company will be successful
in marketing the Flow-thru Chip to collaborators or others.
Data Management and Bioinformatic Software
To make gene expression data useful, it must be managed
effectively and integrated with data from the collaborator's other databases and
from a growing number of public domain genomic and medical databases available
on the Internet. For this reason, Gene Logic licensed the Object Protocol
5.
<PAGE> 6
Model (OPM) data management software from Lawrence Berkeley National Laboratory
and developed it into a package of commercial software tools that allow the
Company to build databases rapidly, manage them efficiently, and integrate them
with other databases and applications. These various databases often have
different, incompatible structures, but OPM allows Gene Logic and its
collaborators to manage, integrate, and query them as if they were part of a
single database.
A major advantage of OPM is that it is easier to use for genomic
applications than conventional database management software. Using OPM, a
specialist in the management and analysis of genomic data--called a
bioinformatic research analyst--can view the structure of the underlying
database on a computer screen and interact with it by pointing and clicking.
To perform a comparable feat with conventional software, a programmer would have
to write hundreds of lines of computer code.
Gene Logic not only uses OPM software internally for developing
data management and bioinformatic systems, the Company also markets it to
pharmaceutical and biotechnology companies.
In addition to providing systems that support interactions with
databases, Gene Logic is developing systems to relieve bioinformatic research
analysts of performing time-consuming, repetitive tasks. These advanced systems
are being designed to integrate large volumes of genomic data, search for
biomedical information related to these data, and filter the data and
information to highlight material of interest to the user. These systems are
intended to enable bioinformatic research analysts to discover drug
targets more quickly.
There can be no assurance that further development of any of the
Company's data management and bioinformatic software products will be successful
or that the Company will be successful in marketing such products.
Pharmacogenomics
Pharmacogenomics is the application of genomic information to
clinical trials to determine which patients, based on their genetic make-up, are
most likely to benefit from a certain drug or which are likely to suffer adverse
effects. This new field may enable pharmaceutical companies and physicians to
tailor drug therapy to meet the specific needs of various subgroups of patients
within the group with a certain disease. Gene Logic analyzes genetic mutations
for clinical trials sponsored by pharmaceutical companies. These analyses help
the trial sponsors correlate the various outcomes of therapy with the various
mutations that patients have. The Company believes that its gene expression
technologies may also prove useful in pharmacogenomics.
The statements made in this Annual Report on Form 10-K regarding
anticipated dates for commercial availability and expected characteristics of
certain products are forward-looking statements, and the actual dates of
commercialization and actual characteristics could differ materially from those
projected as a result of a variety of factors, including progress of the
Company's technologies and changes in the Company's business priorities. In
addition, the Company's ability to build and successfully market the GeneExpress
databases will depend in part on the ability of Affymetrix to supply adequate
quantities of high quality GeneChip probe arrays. These and other applicable
factors are discussed in "Risk Factors." There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development and commercialization of products or that the Company's
products will address the requirements of the market or achieve market
acceptance.
6.
<PAGE> 7
COLLABORATORS AND CUSTOMERS
To date, Gene Logic has developed collaborative and customer
relationships with eight major pharmaceutical companies and one major
agricultural products company, each listed in the table and described in more
depth below.
<TABLE>
<S> <C>
American Home Products Corp.'s Wyeth-Ayerst Laboratories Construction of ToxExpress gene expression database for predicting
toxic responses
Hoechst Schering AgrEvo GmbH Construction of a gene expression database for discovery of genes to
develop improved agricultural products
Japan Tobacco Inc. Construction of gene expression databases for discovery of new
drug targets and drug leads for renal and another disease
Merck & Company Inc. Pharmacogenomics
NV Organon, a unit of Akzo Nobel NV Construction of gene expression databases for discovery of
new drug targets for contraception and psychiatric
and other diseases
Procter & Gamble Pharmaceuticals Construction of gene expression databases for discovery of new drug
targets for heart failure and osteoporosis
Rhone-Poulenc Rorer Inc. Pharmacogenomics
Schering-Plough Corp. Pharmacogenomics
SmithKline Beecham PLC Software license and development of application software to
integrate a wide range of public and proprietary genomic databases
</TABLE>
American Home Products Corp.'s Wyeth-Ayerst Laboratories
In June 1998, Gene Logic and Wyeth-Ayerst entered into a
pharmacogenomics collaboration in the field of preclinical toxicology. The
collaboration agreement is renewable each year. Gene Logic and Wyeth-Ayerst will
collaborate, using Gene Logic's proprietary gene expression and bioinformatic
technologies and Wyeth-Ayerst's expertise in toxicology, to develop a database
of gene expression profiles predictive of different classes of drug toxicity.
Wyeth-Ayerst will have the right to use profiles resulting from the
collaboration to perform toxicology studies in connection with its internal
research and drug discovery and development activities. Gene Logic may
non-exclusively license the database, Flow-thru Chips and other products
developed under the collaboration to third party customers.
7.
<PAGE> 8
There can be no assurance that Gene Logic and Wyeth-Ayerst will
be successful in research conducted pursuant to the agreement or in the
development or commercialization of any products based upon such discoveries.
Hoechst Schering AgrEvo GmbH
In June 1998, Gene Logic and AgrEvo entered into a 3-year
collaboration for discovery of genes for the development of novel crop
protection and crop improvement products. The initial research term may be
extended for up to five additional years. Payments by AgrEvo to and Gene Logic
in the form of committed database access fees, research funding and upfront fees
total a minimum of $45 million if the research program continues for its full
term and Gene Logic performs its research obligations under the agreement. As
part of the collaboration, AgrEvo will also receive access to Gene Logic's
Flow-thru Chip technology for further analysis of genes identified in the
research program. AgrEvo will be obligated to make additional payments to Gene
Logic for the achievement of specified target discovery and related agricultural
product development milestones. AgrEvo will also pay Gene Logic royalties on
worldwide net sales of all agricultural products that may result from targets
discovered pursuant to the collaboration. AgrEvo may terminate the collaboration
agreement for any reason by providing six months' notice to Gene Logic at any
time following the 18-month anniversary of the date the agreement was effective.
There can be no assurance that Gene Logic's research pursuant to
the agreement will be successful in discovering genetic targets or that AgrEvo
will be successful in developing or commercializing any agricultural products
based upon such discoveries made by Gene Logic. As a result, there can be no
assurance that Gene Logic will receive any milestone payments, royalties or
other payments contemplated by the agreement, nor can there be any assurance
that the collaboration will not be terminated prior to the natural expiration of
its term.
Japan Tobacco Inc.
In September 1997, the Company and Japan Tobacco entered into a
5-year collaboration for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to the Company in the form of committed technology and
database access fees and research funding total a minimum of $15.0 million if
the research program continues for its full term and the Company performs its
research obligations under the agreement. In December 1998, Japan Tobacco
expanded the collaboration to identify novel drug targets in an additional
therapeutic area. The new collaboration is for a term of 44 months. Payments to
the Company in the form of committed technology and database access fees and
research funding for the additional therapeutic area total a minimum of $12.0
million if the research term continues for the full term and the Company
performs its research obligations under the agreement. Japan Tobacco may extend
the research program for one additional year. At any time during the first two
years of the collaboration, Japan Tobacco has the right to expand the
collaboration to include another drug target and drug lead discovery program in
an additional disease indication upon terms, including technology and database
access fees and committed research funding, identical to those covering the
initial program in renal disease. Japan Tobacco will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Pursuant to the terms of the agreement, Japan Tobacco would pay a minimum of
$12.5 million for each therapeutic product if all milestones are achieved. Japan
Tobacco will also pay the Company royalties on worldwide net sales of all
products that may result from targets discovered pursuant to the collaboration.
As part of the collaboration and during the research term of the
collaboration agreement, the Company granted Japan Tobacco a non-exclusive
license to the GeneExpress Normal database, and Gene Logic intends to use its
Flow-thru Chip technology for screening for drug leads.
8.
<PAGE> 9
Under the terms of the agreement, Japan Tobacco will pay Gene Logic Flow-thru
Chip design fees, screening fees and a minimum of $17.5 million for each
therapeutic product based on a lead compound identified through such assays if
all milestones are achieved. The agreement also entitles the Company to
royalties on net sales of therapeutic products based on lead compounds
identified through such assays. Japan Tobacco may terminate the agreement for
any reason by providing six months' notice to Gene Logic at any time following
the first anniversary of the date the research field was established.
There can be no assurance that the Company's research pursuant to
the agreement will be successful in discovering drug targets or drug leads
related to renal disease, the additional therapeutic area included in the
collaboration or the option disease field or that Japan Tobacco will be
successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the
collaboration will not be terminated prior to the natural expiration of its
term.
Merck & Company Inc.
In March 1998, Oncormed Inc. ("Oncormed") entered a
pharmacogenomics agreement with Merck & Company Inc. Under the terms of the
agreement, Oncormed was paid a fee for analyzing gene mutations for clinical
trials sponsored by Merck. After acquiring Oncormed in September 1998, Gene
Logic continued this relationship. The relationship was expanded in October 1998
and February 1999 to include additional clinical trials, under terms similar to
the original agreement. Merck may terminate the agreement for any reason by
providing a one month notice. There can be no assurance that Gene Logic's
agreement with Merck will be continued, expanded, or renewed.
NV Organon
In December 1997, Gene Logic and Organon entered into a 3-year
collaboration for drug target discovery. Payments by Organon to Gene Logic in
the form of committed database access fees and research funding total a minimum
of $12.5 million if the research program continues for its full term and Gene
Logic performs its research obligations under the agreement. As part of the
collaboration and during the research term of the collaboration agreement, Gene
Logic granted Organon a non-exclusive license to the GeneExpress Normal
database. Organon will be obligated to make additional payments to Gene Logic
for the achievement of specified target discovery and related product
development milestones. Organon will also pay Gene Logic royalties on worldwide
net sales of all products that may result from targets discovered pursuant to
the collaboration. Organon may terminate the collaboration for any reason by
providing six months' notice to Gene Logic at any time following the second
anniversary of the date the collaboration was effective.
There can be no assurance that Gene Logic's research pursuant to
the agreement will be successful in discovering drug targets or that Organon
will be successful in developing or commercializing any products based upon such
discoveries made by Gene Logic. As a result, there can be no assurance that Gene
Logic will receive any milestone payments, royalties or other payments
9.
<PAGE> 10
contemplated by the agreement, nor can there be any assurance that the
collaboration will not be terminated prior to the natural expiration of its
term.
Procter & Gamble Pharmaceuticals
In May 1997, the Company and Procter & Gamble entered into a 4
1/2-year collaboration for drug target discovery in heart failure. In December
1998, the collaboration was expanded to include additional therapeutic areas,
beginning with osteoporosis. Payments by Procter & Gamble to the Company in the
form of committed technology access fees, research funding and upfront fees
will total a minimum of $17.5 million if the research program continues for its
full term and the Company performs its research obligations under the agreement.
Procter & Gamble will be obligated to make additional payments to the Company
for the achievement of specified target discovery, product development and
associated regulatory milestones. Procter & Gamble will also pay the Company
royalties on worldwide net sales of all products that may result from the
collaboration. Procter & Gamble may terminate the collaboration agreement for
any reason by providing six months' notice to Gene Logic.
There can be no assurance that the Company's research pursuant to
the agreement will be successful in discovering drug targets related to heart
failure, osteoporosis or any other disease area or that Procter & Gamble will be
successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the
collaboration will not be terminated prior to the natural expiration of its
term.
Rhone-Poulenc Rorer Inc.
In September 1997, Oncormed entered into a pharmacogenomics
agreement with Rhone-Poulenc Rorer Inc. Under the terms of the agreement,
Oncormed was paid a fee for analyzing gene mutations for clinical trials
sponsored by Rhone-Poulenc Rorer. After acquiring Oncormed in September 1998,
Gene Logic continued this relationship. In November 1998, the relationship was
expanded to include additional clinical trials, under terms similar to the
original agreement. Rhone-Poulenc Rorer may terminate the agreement for any
reason by providing a one month notice. There can be no assurance that Gene
Logic's agreement with Rhone-Poulenc Rorer will be continued, expanded, or
renewed.
Schering-Plough Corp.
In December 1997, Oncormed entered a pharmacogenomics agreement
with Schering-Plough Corp. Under the terms of the agreement, Oncormed was paid a
fee for analyzing gene mutations for clinical trials sponsored by
Schering-Plough. After acquiring Oncormed in September 1998, Gene Logic
continued this relationship. The term of the agreement has expired, but Gene
Logic continues to perform the services under the provisions of the original
agreement. The Company and Schering-Plough are discussing entering into a new
agreement that would expand the relationship to include additional clinical
trials.
10.
<PAGE> 11
There can be no assurance that Gene Logic will enter into a new
agreement with Schering-Plough or that such a new agreement will be continued,
expanded, or renewed.
SmithKline Beecham PLC
In May 1998, Gene Logic granted to SmithKline a license to Gene
Logic's OPM-based bioinformatic system and software tools. In September 1998,
Gene Logic and SmithKline entered into a collaboration regarding the use of OPM
to develop a series of customized databases and servers to integrate a range of
public and proprietary data sources into SmithKline's data mining process. Gene
Logic retains the right to license software and products developed under the
agreement to third party customers. Under the agreement, Gene Logic will receive
software license fees and funding for its portion of the collaborative
development program. SmithKline may terminate the license agreement at any time.
There can be no assurance that Gene Logic will be successful in the work to be
performed under the agreement or that the agreement will be continued.
INTELLECTUAL PROPERTY
Gene Logic seeks United States and international patent
protection for major components of its technology platform, including elements
of its READS, Flow-thru Chip and bioinformatic technologies. It also relies on
trade secret protection for certain of its confidential and proprietary
information, and it uses license agreements both to access external technologies
and assets and to convey certain intellectual property rights to others. The
Company's commercial success will be dependent in part on its ability to obtain
commercially valuable patent claims and to protect its intellectual property
portfolio.
As of March 1, 1999, Gene Logic had exclusive rights to 10
issued United States patents and 85 patent applications relating to its
technologies. The Company has exclusive rights to United States patents covering
key aspects of READS gene expression analysis, gene expression analysis using
restriction enzymes, and the Flow-thru Chip technology.
The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies, including Gene Logic, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that any
of the pending patent applications to which the Company has exclusive rights
will result in issued patents, that the claims of any patents which are issued
will provide meaningful protection, that the Company will develop additional
proprietary technologies that are patentable, that any patents licensed or
issued to the Company or its collaborative partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the ability of the Company to do
business. In addition, patent law relating to the scope of claims in the
technology field in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights, therefore, is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar or alternative technologies, duplicate any of the Company's
technologies, or, if patents are licensed or issued to the Company, design
around the patented technologies licensed to or developed by the Company. In
addition, the Company could incur substantial costs in litigation if it is
required to defend itself in patent suits brought by third parties or if it
initiates such suits.
The Company is aware of a number of United States patents and
patent applications and corresponding foreign patents and patent applications
owned by third parties relating to the analysis of gene expression or the
manufacture and use of DNA probe arrays. There can be no assurance that these or
11.
<PAGE> 12
other technologies will not provide third parties with competitive advantages
over the Company and will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, certain
third party patent applications contain broad claims, and it is not possible to
determine whether or not such claims will be narrowed during prosecution and/or
will be allowed and issued as patents, even if such claims appear to cover the
prior art or have other defects. There can be no assurance that an owner or
licensee of a patent in the field will not threaten or file an infringement
action or that the Company would prevail in any such action. There can be no
assurance that the cost of defending an infringement action would not be
substantial and would not have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, there can
be no assurance that any required licenses would be made available on
commercially viable terms, if at all. Failure to obtain any required license
could prevent the Company from utilizing or commercializing one or more of its
technologies and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has applied, and intends to make additional
applications, for patent protection for methods relating to gene expression, for
the disease-specific patterns of gene expression it identifies and for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through the Company's discovery programs.
There can be no assurance that the Company will be able to obtain meaningful
patent protection for its discoveries; even if patents are issued, the scope of
the coverage or protection afforded thereby is uncertain. Failure to secure such
meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several groups are attempting to identify and patent gene
fragments and full-length genes, the functions of which have not been
characterized, as well as fully characterized genes. There is substantial
uncertainty regarding the possible patent protection for gene fragments or genes
without known function or correlation with specific diseases. To the extent any
patents issue to other parties on such partial or full-length genes, the risk
increases that the potential products and processes of the Company or its
partners may give rise to claims of patent infringement. The public availability
of partial or full sequence information or the existence of patent applications
related thereto, even if not accompanied by relevant function or disease
association, prior to the time the Company applies for patent protection on a
corresponding gene could adversely affect the Company's ability to obtain patent
protection with respect to such gene or to the related expression patterns.
Furthermore, others may have filed, and in the future are likely to file, patent
applications covering genes or gene products that are similar, or identical to,
any for which the Company may seek patent protection. No assurance can be given
that any such patent application will not have priority over patent applications
filed by the Company. Any legal action against the Company or its partners
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting the Company to
potential liability for damages, require the Company or its partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its partners would
prevail in any such action or that any license required under any such patent
would be made available on commercially acceptable terms, if at all. The Company
believes that there is likely to be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources and have a material adverse effect
on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on
Tariffs and Trade has resulted in certain changes to United States patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of 17 years from the date of grant. The new term of United States patents
will commence on the date of
12.
<PAGE> 13
issuance and terminate 20 years from the earliest effective filing date of the
application. Because the time from filing to issuance of biotechnology patent
applications is often more than three years, a 20-year term from the effective
date of filing may result in a substantially shortened period of patent
protection which may adversely affect the Company's patent position. If this
change results in a shorter period of patent coverage, the Company's business
could be adversely affected to the extent that the duration and level of the
royalties it is entitled to receive from its partners are based on the existence
of a valid patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and
for processes for which patents are difficult to enforce, the Company has chosen
to rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its drug discovery
system involve proprietary know-how, technology or data that are not covered by
patents or patent applications. In addition, the Company has developed a
proprietary index of gene and gene fragment sequences which it updates on an
ongoing basis. Some of these data will be the subject of patent applications,
whereas other data will be maintained as proprietary trade secret information.
The Company has taken security measures to protect its proprietary know-how and
technologies and confidential data and continues to explore further methods of
protection. While Gene Logic requires all employees, consultants and
collaborators to enter into confidentiality agreements, there can be no
assurance that proprietary information will not be disclosed, that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, or that the
Company can meaningfully protect its trade secrets. In the case of a
collaborative partnership or other collaborative arrangement that requires the
sharing of data, the Company's policy is to make available to its partner only
such data as are relevant to the partnership or arrangement, under controlled
circumstances, and only during the contractual term of the partnership or
collaborative arrangement, and subject to a duty of confidentiality on the part
of its partner or collaborator. There can be no assurance, however, that such
measures will adequately protect the Company's data. Any material leak of
confidential data into the public domain or to third parties may have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is a party to various license agreements that give it
rights to use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
Competition among entities attempting to identify the genes
associated with specific diseases and to develop products based on such
discoveries is intense. Gene Logic faces, and will continue to face, competition
from pharmaceutical, biotechnology and diagnostic companies, academic and
research institutions, and government agencies, both in the United States and
abroad. Several entities are attempting to identify and patent randomly
sequenced genes and gene fragments, while others are pursuing a gene
identification, characterization and product development strategy based on
positional cloning. The Company is aware that certain entities are using a
variety of gene expression analysis methodologies, including the use of
chip-based systems, to attempt to identify disease-related genes. In addition,
numerous pharmaceutical companies are developing genomic research programs,
either alone or in partnership with the Company's competitors. Competition among
such entities is intense and is expected to increase. In order to compete
against existing and future technologies, the Company will need to demonstrate
to potential customers that its technologies and capabilities are superior to
competing technologies.
13.
<PAGE> 14
Many of the Company's competitors have substantially greater
capital resources, research and development staffs, facilities, manufacturing
and marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its partners, or may obtain regulatory approvals of their drugs more
rapidly than the Company and its partners, any of which could have a material
adverse effect on any similar Gene Logic program. Moreover, there can be no
assurance that the Company's competitors will not obtain patent protection or
other intellectual property rights that would limit the Company's or its
partners' ability to use the Company's technologies or commercialize
therapeutic, diagnostic or agricultural products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also faces competition from these and other
entities in gaining access to cells, tissues and nucleic acid samples used in
its discovery programs.
The Company will rely on its collaborative partners for support
of certain of its discovery programs and intends to rely on its collaborative
partners for preclinical and clinical development of related potential products
and the manufacturing and marketing of such products. Each of the Company's
partners is conducting multiple product development efforts within each disease
area that is the subject of its collaboration with Gene Logic. Generally, the
Company's collaboration agreements do not preclude the partner from pursuing
development efforts utilizing approaches distinct from that which is the subject
of the collaboration. Any product candidate of the Company, therefore, may be
subject to competition with a potential product under development by a partner.
Future competition will come from existing competitors as well as
other companies seeking to develop new technologies for drug discovery based on
gene sequencing, target gene identification, bioinformatics and related
technologies. In addition, certain pharmaceutical and biotechnology companies
have significant needs for genomic information and may choose to develop or
acquire competing technologies to meet such needs. Genomic technologies have
undergone and are expected to continue to undergo rapid and significant change.
The Company's future success will depend in large part on maintaining a
competitive position in the genomics field. Rapid technological development by
the Company or others may result in products or technologies becoming obsolete
before the Company recovers the expenses it incurs in connection with their
development. Products offered by the Company could be made obsolete by less
expensive or more effective drug discovery technologies, including technologies
that may be unrelated to genomics. There can be no assurance that the Company
will be able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
GOVERNMENT REGULATION
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its gene, drug
target and drug lead discovery programs but intends to rely on its partners to
conduct such activities. Prior to marketing, any new drug developed by the
Company's partners must undergo an extensive regulatory approval process in the
United States and other countries. This regulatory process, which includes
preclinical studies and clinical trials, and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and require the expenditure of substantial resources. Data obtained
from preclinical studies and clinical trials are subject to varying
interpretations that could delay, limit or prevent regulatory approval. Delays
or rejections may also be encountered based on changes in United States Food and
Drug Administration ("FDA") policies for drug approval during the period of
product development and FDA regulatory review of each submitted new drug
application ("NDA") in the case of new pharmaceutical agents, or product license
application ("PLA") or biologics license application ("BLA") in the case of
biological
14.
<PAGE> 15
therapeutics. Delays may also be encountered in the regulatory approval of any
diagnostic or agricultural product, where such approval is required, and in
obtaining regulatory approval in foreign countries. Delays in obtaining
regulatory approvals could adversely affect the marketing of any drugs or
diagnostic or agricultural products developed by the Company or its partners,
impose costly procedures on the Company's and its partners' activities, diminish
any competitive advantages that the Company or its partners may attain and
adversely affect the Company's receipt of royalties. There can be no assurance
that regulatory approval will be obtained for any drugs or diagnostic or
agricultural products developed by the Company or its partners. Furthermore,
regulatory approval may entail limitations on the indicated uses of a drug.
Because certain of the products likely to result from the Company's disease
research programs involve the application of new technologies and may be based
on a new therapeutic approach, such products may be subject to substantial
additional review by various government regulatory authorities and, as a result,
regulatory approvals may be obtained more slowly than for products based on more
conventional technologies.
Even if regulatory approval is obtained, a marketed product and
its manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from the
market, and could have a material adverse effect on the Company's business,
financial condition and results of operations. Violations of regulatory
requirements at any stage during the process, including preclinical studies and
clinical trials, the approval process, post-approval or in good manufacturing
practices manufacturing requirements, may result in various adverse consequences
to the Company, including the FDA's delay in approval or refusal to approve a
product, withdrawal of an approved product from the market or the imposition of
criminal penalties against the manufacturer and NDA, PLA or BLA holder.
No investigational new drug application ("IND") has been
submitted for any product candidate resulting from the Company's discovery
programs, and no product candidate has been approved for commercialization in
the United States or elsewhere. The Company intends to rely on its collaborative
partners to file INDs and generally direct the regulatory approval process.
There can be no assurance that the Company's collaborative partners will be able
to conduct clinical testing or obtain necessary approvals from the FDA or other
regulatory authorities for any products. Failure to obtain required governmental
approvals will delay or preclude the Company's collaborative partners from
marketing drugs or diagnostic or agricultural products developed through the
Company's research or limit the commercial use of such products and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's research and development activities involve the
controlled use of certain biological and other hazardous materials, chemicals
and various radioactive materials. The Company is subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by federal, state and local laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally.
15.
<PAGE> 16
EMPLOYEES
As of March 1, 1999, the Company had 157 full-time employees, 50
of whom hold doctoral degrees and 26 of whom hold other advanced degrees. Of
these, 122 were engaged in research and development, including bioinformatics,
and 35 were engaged in business development, finance, and general
administration. None of the Company's employees is represented by a labor union
or covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
The Company's future success depends in significant part on the continued
service of its key scientific, technical and senior management personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. There is intense competition for such qualified personnel
in the areas of the Company's activities and there can be no assurance that the
Company will continue to attract and retain the personnel necessary for the
development of its business. Failure to attract and retain key personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of
the executive officers of the Company as of March 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Michael J. Brennan, M.D., Ph.D..... 41 Chief Executive Officer and Director
Mark D. Gessler.................... 37 President, Chief Operating Officer and Chief Financial Officer
Douglas Dolginow, M.D. ............ 45 Senior Vice President, Pharmacogenomics
Gregory G. Lennon, Ph.D. .......... 42 Senior Vice President, Research and Development and Chief Scientific Officer
Victor M. Markowitz, D.Sc. ........ 46 Senior Vice President, Data Management Systems
Daniel R. Passeri.................. 38 Senior Vice President, Technology and Program Management
</TABLE>
- -----------
MICHAEL J. BRENNAN, M.D., PH.D., has served as Chief Executive
Officer and a director of the Company since December 1995. From December 1995
through January 1999, Dr. Brennan also served as President of the Company. From
October 1993 to November 1995, he was Vice President, Business Development for
Corange International Limited's worldwide therapeutics business, Boehringer
Mannheim Therapeutics. From June 1990 to October 1993, Dr. Brennan was a
director and the general manager of Boehringer Mannheim, South Africa. Dr.
Brennan received a Ph.D. in neurobiology and a M.D. from the University of the
Witwatersrand, Johannesburg, South Africa. In 1985, he completed his residency
in neurology at Boston City Hospital.
MARK D. GESSLER has served as President and Chief Operating
Officer of the Company since January 1999 and as Chief Financial Officer since
June 1996. From June 1996 to January 1999, Mr. Gessler was also Gene Logic's
Senior Vice President, Corporate Development. From February 1993 to
16.
<PAGE> 17
June 1996, he was with GeneMedicine Inc., a gene therapy company, most recently
as Vice President, Corporate Development. From 1988 until January 1993, he was
Director of Business Development at BCM Technologies Inc., the venture and
technology subsidiary of Baylor College of Medicine. While in that position, Mr.
Gessler co-founded three biotechnology companies and a software company. Mr.
Gessler holds an MBA from the University of Tennessee and was an Adjunct
Professor of Business Administration at Rice University from 1991 to 1996.
DOUGLAS DOLGINOW, M.D., joined Gene Logic as Senior Vice
President, Pharmacogenomics in September 1998. Dr. Dolginow served as President
and Chief Operating Officer of Oncormed Inc. from October 1993 and as a director
of Oncormed from May 1994 until joining Gene Logic. Dr. Dolginow was Vice
President of Regional Operations for Nichols Institute, a clinical laboratory
company, from May 1991 to October 1993. From 1983 to 1991, he served as medical
director for multiple clinical laboratories including Highland General Hospital,
Oakland, California and Mt. Zion Hospital, San Francisco, California. Since
1984, he has been an active member of the Clinical Faculty at the University of
California, San Francisco. Dr. Dolginow received a M.D. from the University of
Kansas.
GREGORY G. LENNON, PH.D., has served as Gene Logic's Senior Vice
President, Research and Development and Chief Scientific Officer since June
1998. From September 1997 to June 1998, he was Gene Logic's Vice President,
Genomics Research. Prior to joining Gene Logic, Dr. Lennon was a senior
scientist of the Human Genome Center at Lawrence Livermore National Laboratory
from October 1991 to August 1997 and manager of the functional genomics research
portfolio for the Department of Energy's Joint Genome Institute from January
1997 to August 1997. Dr. Lennon is a founder and the director of the I.M.A.G.E.
(Integrated Molecular Analysis of Gene Expression) Consortium funded by the
Department of Energy. He was a participant in both the Merck Gene Index project
and the National Cancer Institute's Cancer Genome Anatomy Project. Dr. Lennon
holds a Ph.D. in genetics from the University of Pennsylvania. He is an adviser
to the National Cancer Institute of the National Institutes of Health.
VICTOR M. MARKOWITZ, D.SC., has served as Senior Vice President,
Data Management Systems, since September 1998. He joined Gene Logic in September
1997 as Vice President, Data Management Systems. Prior to joining Gene Logic,
Dr. Markowitz was a staff scientist at Lawrence Berkeley National Laboratory and
project leader in the laboratory's Data Management Research and Development
Group. He is the principal architect of the Object Protocol Model software. Dr.
Markowitz received his M.Sc. and D.Sc. degrees in computer science from
Technion, the Israel Institute of Technology.
DANIEL R. PASSERI has served as Senior Vice President, Technology
and Program Management of the Company since January 1998. From March 1997 to
December 1997, he was the Company's Vice President, Business Development and
Intellectual Property. From March 1995 to March 1997, Mr. Passeri was Director
of Technology Management for the Boehringer Mannheim Group, responsible for the
assessment and acquisition or licensing of new biomedical technologies. From
January 1992 to February 1995 he was Acting Chief, Cellular Growth and
Regulation Branch of the Office of Technology Transfer of the National
Institutes of Health and its Senior Licensing Specialist. He served as a Patent
Examiner in the biotechnology section of the USPTO. Mr. Passeri holds a M.Sc. in
biotechnology from the Imperial College of Science, Technology and Medicine,
University of London. He holds a J.D. from George Washington University. He is
registered to practice before the USPTO and in the State of Maryland and has
been an adjunct professor at George Washington University since 1995.
17.
<PAGE> 18
RISK FACTORS
The following factors, among others, could cause actual results
to differ materially from those contained in the forward-looking statements made
in this Annual Report on Form 10-K and presented elsewhere by management.
Uncertainty of Gene Logic's Technologies and Product Development Risk
Gene Logic's technologies involve new and unproven approaches.
They are based on the assumption that information about gene expression and gene
sequences may help scientists better understand complex disease processes.
Generally, there is limited understanding of the roles of genes in these
diseases. Relatively few therapeutic products based on gene discoveries have
been developed and commercialized. Gene Logic cannot assure investors that its
technologies will enable the Company or its partners or customers to identify
genes, drug targets and drug leads. Even if Gene Logic is successful in
identifying genes, drug targets and drug leads associated with specific
diseases, it cannot assure that the Company, or its partners, will be able to
discover or develop products based on these discoveries. To date, no one has
developed or commercialized any therapeutic, diagnostic or agricultural products
based on Gene Logic's technologies. If the Company fails to identify genes
useful for the discovery and development of such products, it will have a
material adverse effect on Gene Logic's business.
Development of therapeutic, diagnostic and other life science
products based on Gene Logic's discoveries will also be subject to other risks
of failure inherent in their development. These risks include the possibility
that any such products will:
- be found to be ineffective;
- be found to be toxic;
- fail to receive necessary regulatory approvals;
- be difficult or impossible to manufacture on a large
scale;
- be uneconomical to market;
- be impossible to market because they infringe on the
proprietary rights of third parties; and
- compete with products marketed by third parties that are
similar or superior.
As a result, the Company cannot assure that either Gene Logic or
its partners will develop any products that will be commercially viable.
Gene Logic created a prototype of the Flow-thru Chip and is
conducting in-house testing. The Company has not produced the Flow-thru Chip on
a commercial scale. It is also developing several genomic database products. The
Company cannot assure that the development or commercialization of the Flow-thru
Chip or the genomic database products will be successful or that the Company
will be successful in marketing such products.
Gene Logic will need to generate information about gene
expression and regulation to include in its genomic database products. Gene
Logic will also need to analyze that information using its software tools. The
development and commercialization of Gene Logic's genomic database products will
be materially adversely affected if the Company's technologies fail to generate
the necessary genetic information. Gene Logic's database products are complex
and sophisticated and could contain erroneous data, design defects or software
errors that could be difficult to detect and correct. Bugs and viruses may be
found in current products or future products, if the Company develops any. If
Gene Logic fails to maintain and further develop the necessary data to support
its drug discovery efforts and the efforts of its partners, it could result in
loss of or delay in its revenues and market acceptance.
18.
<PAGE> 19
Gene Logic's pharmacogenomic technologies are designed to help
use genetic discoveries to develop therapeutic products that are clinically
useful. Very few companies have used these technologies for this purpose. The
market for these technologies is in an early stage of development. Gene Logic's
ability to successfully develop this business is unproven. Gene Logic cannot
assure that the market for these technologies and products will continue to
evolve. The discoveries and technologies that form the basis for these products
have not been widely adopted by pharmaceutical companies. Gene Logic cannot
assure that such companies will adopt these technologies or products.
Reliance on Collaborators and Licensees
Gene Logic's strategy for developing and commercializing
therapeutic, diagnostic and other life science products depends, in large part,
on collaboration and licensing arrangements. Gene Logic has established
collaborations with American Home Products Corp.'s Wyeth-Ayerst Laboratories;
SmithKline Beecham PLC; NV Organon, a unit of Akzo Nobel NV; Japan Tobacco
Inc.; Procter & Gamble Pharmaceuticals; Rhone-Poulenc Rorer Inc.;
Schering-Plough Corp.; and Merck & Company Inc. Gene Logic also has a
collaboration with Hoechst Schering AgrEvo GmbH for discovery of genes to
develop improved agricultural products. These collaborations have only been
formed within the past two years. Gene Logic cannot assure that it will maintain
these collaborations or establish additional collaborations or that any of these
collaborations will be successful.
Since Gene Logic's inception, the Company has received a
substantial portion of its revenues from collaborations, and the Company expects
to continue to do so. Gene Logic's failure to maintain its existing
collaborations or to enter into additional collaborations would have a material
adverse effect on its business. In particular, if funding from partners was not
available or was reduced, Gene Logic would need to devote additional internal
resources to its programs or possibly scale back or terminate some programs.
Gene Logic's strategy includes entering into multiple, concurrent
collaborations. Gene Logic cannot assure that it will be able to manage multiple
collaborations successfully. The risks the Company faces in managing multiple
collaborations include:
- maintaining confidentiality among partners;
- avoiding conflicts between partners; and
- avoiding conflicts between the Company and its partners.
If Gene Logic fails to manage its collaborations effectively, or
if any of the problems described above arise, one or more of the following may
occur which could have a material adverse effect on Gene Logic's business:
- use of significant management resources to resolve
conflicts;
- delay in research efforts;
- legal claims involving significant time, expense and
loss of reputation;
- loss of capital; and
- loss of revenues.
If Gene Logic's partners discover therapeutic, diagnostic or
other life science products from the Company's research programs with them, Gene
Logic will rely on them for product development, regulatory approval,
manufacturing and marketing of those products. Gene Logic's agreements with its
partners typically allow the partners significant discretion in electing whether
to pursue any of these activities. Gene Logic cannot control the amount and
timing of resources its partners may devote to its programs or potential
products. As a result, Gene Logic cannot assure that its partners will perform
their
19.
<PAGE> 20
obligations as expected or that the partners will continue the collaborations.
In addition, if a partner is involved in a business combination, such as a
merger or acquisition or changes its business focus, its performance in Gene
Logic's collaboration may suffer. Certain of Gene Logic's current collaborations
provide the partner with rights to terminate the collaboration prior to the
natural expiration of its term. If any of Gene Logic's partners decide to
terminate their collaboration with us early, the Company's business could be
materially and adversely affected.
Uncertainty Relating to Integrating Oncormed
On September 28, 1998, Gene Logic acquired Oncormed Inc., and
Oncormed is now Gene Logic's subsidiary. As a result, two companies that had
previously operated independently must now work together. The integration will
require significant effort from Gene Logic's personnel and the personnel of
Oncormed who are now Gene Logic employees. Gene Logic cannot assure that the
companies will be able to integrate and consolidate their efforts without
problems. The following risks are common to the integration of two companies and
may limit or disrupt Gene Logic's ability to realize the benefits it anticipated
when it decided to acquire Oncormed:
- diversion of Gene Logic's management's attention from
other important issues;
- difficulties integrating the research and development
activities of the two companies;
- loss of momentum in research and development activities;
- difficulties integrating the systems which help to run
the two companies;
- delays in completing the integration; and
- loss of key personnel from Oncormed.
If these problems occur and Gene Logic is not successful in
resolving them, the Company's business would be materially and adversely
affected, and it might be unable to realize its long-term goals.
Limited Operating History
Gene Logic has a limited operating history, and it is at an early
stage of development. Substantially all of Gene Logic's resources have been
dedicated to developing its proprietary technologies and using them to identify
genes. All of the Company's discovery programs and collaborations are at an
early stage. Continuing to develop its technologies and using them to identify
genes will require Gene Logic to do significant additional research and
development and make a significant additional investment. Gene Logic expects
that it will be a number of years, if ever, before the Company will recognize
revenue from royalties.
History of Operating Losses
Gene Logic has incurred operating losses in each year since its
inception, including net losses of approximately:
- $2.9 million during the year ended December 31, 1996;
- $7.2 million during the year ended December 31, 1997;
and
- $44.9 million during the year ended December 31,
1998.
At December 31, 1998, excluding the $35.2 million non-recurring charge
incurred in connection with its acquisition of Oncormed, the Company had
accumulated operating losses of approximately $22.3 million. Gene Logic
expects to incur additional losses at least through 1999. Gene Logic also
expects that such losses may increase as the Company expands its research and
development activities. Gene Logic's losses to date have resulted principally
from costs incurred in
20.
<PAGE> 21
research and development and general and administrative costs associated with
operations, in addition to the charge incurred in connection with the merger
with Oncomed. As mentioned above, the Company expects that its revenues for the
foreseeable future will result from payments under collaborations, as well as
interest income. Gene Logic cannot assure that it will receive additional
revenues under existing collaborations or that it will be able to enter into new
collaborations. The Company cannot assure that it will operate profitably.
Dependence on Access to Certain Materials, Information, and Licensed
Technologies
To be able to use its technologies to discover genes, Gene Logic
needs access to normal and diseased human tissue samples, related clinical and
other biological information and animal disease models. Gene Logic competes with
many other companies for these materials and information. The Company cannot
assure that it will be able to obtain and maintain access to these materials and
information on acceptable terms, if at all. If these materials are not
available, it would have a material adverse effect on Gene Logic's business.
Certain of Gene Logic's genomics and bioinformatics technologies
have been acquired or licensed from third parties. Gene Logic expects to acquire
or license additional technologies from third parties. The Company's research
and development activities could be adversely affected if these licenses are
changed or terminated or if Gene Logic is not able to establish access to
additional technologies that it believes are important to its business.
The Company's ability to build and successfully market the
GeneExpress databases will depend in part on the ability of Affymetrix to supply
adequate quantities of high quality GeneChip probe arrays. If such probe arrays
are not available, it would have a material adverse effect on Gene Logic's
business.
Fluctuations in Operating Results
Gene Logic's revenues and results of operations may fluctuate
significantly, depending on a variety of factors, including the following:
- changes in the demand for Gene Logic's technologies and
products;
- variations in the timing of payments under
collaborations;
- the timing of Gene Logic's new product introductions, if
any;
- changes in the research and development budgets of Gene
Logic's partners and potential partners;
- the introduction of new products and services by Gene
Logic's competitors;
- regulatory actions;
- Gene Logic's adoption of new technologies; and
- the cost, quality and availability of cell and tissue
samples, reagents and related components and
technologies.
Gene Logic will not be able to control many of these factors. In
addition, if the Company's revenues in a particular period do not meet
expectations, Gene Logic may not be able to adjust its expenditures in that
period, which could have a material adverse effect on operating results.
Uncertainties Relating to Patents and Proprietary Rights
Gene Logic's success will depend in part on its ability to obtain
commercially valuable patent claims and to protect its intellectual property.
The Company's patent position is generally uncertain and involves complex legal
and factual questions. Legal standards relating to the validity and scope of
claims in the Company's technology field are still evolving. Therefore, the
degree of future protection for Gene
21.
<PAGE> 22
Logic's proprietary rights is uncertain. The risks and uncertainties that Gene
Logic faces with respect to its patents and other proprietary rights include the
following:
- the pending patent applications Gene Logic has filed or
to which it has exclusive rights may not result in
issued patents;
- the claims of any patents which are issued may not
provide meaningful protection;
- Gene Logic may not be able to develop additional
proprietary technologies that are patentable;
- the Company, or its partners, may not be able to develop
commercially viable products or services from patents
licensed or issued to the Company or its partners;
- the patents licensed or issued to the Company or its
partners may not provide a competitive advantage;
- other companies may challenge patents licensed or issued
to Gene Logic or its partners; and
- patents issued to other companies may have an adverse
effect on Gene Logic's ability to do business.
Others may independently develop similar or alternative
technologies or duplicate Gene Logic's technologies. Others may also unfairly
design around technologies Gene Logic has licensed or developed. The Company
could incur substantial litigation costs to defend itself in patent suits
brought by other companies or to initiate such suits. In particular, Gene Logic
is aware of a number of patents and patent applications owned by others relating
to the analysis of gene expression or the manufacture and use of DNA chips. Gene
Logic cannot assure that these or other technologies will not provide others
with competitive advantages over Gene Logic's technologies and will not have a
material adverse effect on the Company's business.
Gene Logic applies for patent protection for methods relating to
gene expression, disease-specific patterns of gene expression the Company
identifies and individual disease genes and targets the Company discovers. These
patent applications may include claims relating to novel genes and gene
fragments and to novel uses for known genes or gene fragments identified through
Gene Logic's discovery programs. Gene Logic cannot assure that it will be able
to obtain meaningful patent protection for its discoveries. Even if patents are
issued, their scope of coverage or protection is uncertain.
Several groups are attempting to identify and patent gene
fragments and full-length genes, the functions of which have not been
characterized, as well as fully characterized genes. There is substantial
uncertainty regarding the possible patent protection for gene fragments or genes
without known function or correlation with specific diseases. To the extent any
patents are issued to others on partial or full-length genes, the risk increases
that potential products and processes of the Company or its partners may give
rise to claims of patent infringement. The public availability of partial or
full sequence information or patent applications claiming those sequences, even
if not accompanied by relevant function or disease association, prior to the
time Gene Logic applies for patent protection on a corresponding gene could
adversely affect the Company's ability to obtain patent protection with respect
to the gene or to the related expression patterns. Furthermore, others may file
patent applications covering genes or gene products that are similar or
identical to any for which Gene Logic may seek patent protection. Gene Logic
cannot assure that any such patent application will not have priority over
patent applications that the Company files. Gene Logic believes that there is
likely to be significant litigation in the industry regarding patent and other
intellectual property rights. If Gene Logic becomes involved in such litigation,
it could have a material adverse effect on the Company's business.
Gene Logic also relies on trade secret protection and
confidentiality agreements to protect its interests in proprietary know-how that
is not patentable and for processes for which patents are difficult to
22.
<PAGE> 23
enforce. The Company has taken security measures to protect its proprietary
know-how and confidential data and continues to explore further methods of
protection. While Gene Logic requires all employees, consultants and
collaborators to enter into confidentiality agreements, it can not be certain
that it will be able to meaningfully protect its trade secrets. Any material
leak of confidential data into the public domain or to third parties could have
a material adverse effect on Gene Logic's business, financial condition and
results of operations.
Intense Competition
There is intense competition among entities attempting to
identify genes associated with specific diseases and to develop products and
services based on these discoveries. Gene Logic faces competition from
pharmaceutical, biotechnology and diagnostic companies, academic and research
institutions and government agencies. Many of Gene Logic's competitors have
substantially greater capital resources, research and development staffs,
facilities, manufacturing and marketing experience, distribution channels and
human resources than Gene Logic does. The Company's competitors may discover or
develop important genes before the Company does, develop genes that are more
effective than those Gene Logic develops or obtain regulatory approvals of
products more rapidly than Gene Logic or its partners do.
Future Capital Requirements and the Uncertainty of Access to Additional Funding
Gene Logic believes that existing cash and marketable securities
and anticipated cash flow from its current collaborations and licensing
arrangements will be sufficient to support its operations until the end of the
year 2000. Gene Logic may choose to raise additional capital due to market
conditions or strategic considerations even if it has sufficient funds for its
operating plan. The Company expects that it will require significant additional
funding in the future. It may seek funding through public or private equity
offerings, debt financings or additional collaborations. If Gene Logic raises
additional capital by issuing equity or convertible debt securities, the
issuances may dilute share ownership and future investors may be granted rights
superior to those of current shareholders. Gene Logic cannot assure that
additional financing will be available when needed, or that, if available,
financing will be obtained on favorable terms.
Impact of Government Regulation
Any new drug developed by Gene Logic's efforts and the efforts of
its collaborative partners must undergo an extensive regulatory approval process
in the United States and other countries before it can be marketed. This
regulatory process can take many years and require substantial expense. Changes
in FDA policies can increase the delay for each new drug, product license and
biological license application. Gene Logic expects similar delays in the
regulatory approval of any diagnostic or agricultural product, where such
approval is required, and in obtaining regulatory approval in foreign countries.
Even if regulatory approval is obtained, a marketed product and its manufacturer
are subject to continuing review. Discovery of previously unknown problems with
a product may result in withdrawal of the product from the market. Gene Logic
cannot be certain if and when the Company or its partners will submit any
applications for regulatory approval. Gene Logic cannot assure that the
Company or its partners will obtain regulatory approval for any products on a
timely basis, if at all.
No investigational new drug application has been submitted for
any product candidate resulting from Gene Logic's discovery programs. In
addition, no product candidate has been approved for commercialization in the
United States or elsewhere. Gene Logic expects to rely on its partners to file
such applications and generally direct the regulatory approval process. If Gene
Logic's partners fail to obtain required governmental approvals, it will delay
or prevent them from marketing drugs or diagnostic
23.
<PAGE> 24
products, or limit the commercial use of such products. The occurrence of any of
these events would have a material adverse effect on Gene Logic's business,
financial condition and results of operations.
Limited Clinical Development, Manufacturing, Marketing, and Sales Experience
Gene Logic has made no investment in therapeutic, diagnostic or
other life science product manufacturing, marketing or sales resources and does
not expect to enter such fields. Instead, the Company expects its partners to
pursue the commercialization of products based on or discovered using its
technologies. Gene Logic can provide no assurance that it will be able to enter
into such arrangements on acceptable terms, if at all. The Company will depend
on partners, licensees or other entities for such services. This dependence may
adversely affect Gene Logic's ability to develop and deliver such products on a
timely and competitive basis. To the extent Gene Logic directly engages in
development, manufacturing and marketing of products, it will require
substantial additional funds, personnel and production facilities.
Risk of Liability
Gene Logic may be exposed to claims of liability from use of
products either the Company or its partners provide. In addition, genetic
testing and information services that Gene Logic provides, or that were provided
by Oncormed prior to the merger, could expose the Company to the risk of certain
types of litigation, including medical malpractice claims, negligence claims or
contract disputes. Gene Logic currently maintains product liability and medical
malpractice insurance. Gene Logic cannot assure that its insurance coverage will
be adequate to protect it against future claims. A product liability claim,
product recall or a medical malpractice claim could have a material adverse
effect on Gene Logic's business, financial condition and results of operations.
Possible Volatility of Gene Logic's Stock Price
The market price of Gene Logic's common stock, which is quoted on
the Nasdaq National Market System, has been and is likely to continue to be
highly volatile due to a variety of factors, including the following:
- developments concerning Gene Logic's proprietary rights,
including patents and litigation matters;
- developments concerning Gene Logic's collaboration
agreements or licensing arrangements;
- publicity regarding actual or potential results from the
Company's products or technology;
- sales of substantial amounts of Gene Logic's stock by
existing stockholders;
- announcements of technological innovations and new
commercial products by the Company or its competitors;
- fluctuations in Gene Logic's operating results;
- price and volume fluctuations in the stock market at
large which do not relate to Gene Logic's operating
performance; and
- comments by securities analysts.
ITEM 2. PROPERTIES
Gene Logic's headquarters consists of approximately 50,000 square
feet of office and research laboratory space located in Gaithersburg, Maryland
pursuant to a lease which expires in 2007. Gene Logic also leases approximately
19,000 square
24.
<PAGE> 25
feet of additional office and research laboratory space in Gaithersburg,
Maryland, 8,000 square feet of office space in Berkeley, California, and 3,000
square feet of office space in Omaha, Nebraska with terms expiring in 2000, 2004
and 2001, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Gene Logic Inc. has been traded on the Nasdaq
National Market under the symbol GLGC since November 21, 1997. Prior to November
21, 1997, the Company's Common Stock was not publicly traded. The following
table sets forth for the periods indicated the high and low closing prices per
share of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1998 HIGH LOW
--------- ---------
<S> <C> <C>
First Quarter $ 9.250 $7.625
Second Quarter 8.500 6.000
Third Quarter 10.125 3.688
Fourth Quarter 6.969 3.000
1997
Fourth Quarter (commencing November 21, 1997) $ 8.375 $7.625
</TABLE>
On March 1, 1999, the last sales price of the Common Stock as
reported on the Nasdaq National Market was $6.50 per share. As of March 1,
1999, there were approximately 234 holders of record of the Company's Common
Stock.
The Company has not paid any cash dividends since inception and
does not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Since January 1, 1998, the Company has sold and issued the
following securities which were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):
During the period, 100 shares of Common Stock were issued
pursuant to the exercise of stock options granted under the 1997 Equity
Incentive Plan and 278,313 shares of Common Stock were issued pursuant to the
exercise of stock options granted under the 1996 Stock Plan (such plan was
amended and restated in September 1997 as Equity Incentive Plan).
The issuances of Common Stock described above were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were
25.
<PAGE> 26
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by
Rule 701.
26.
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the
Company's consolidated statements of operations for the years ended December 31,
1998, 1997 and 1996 and with respect to the consolidated balance sheets at
December 31, 1998 and 1997 have been derived from audited consolidated financial
statements included as part of this Annual Report on Form 10-K. The statement of
operations data for the year ended December 31, 1995 and the period from
September 22, 1994 (inception) through December 31, 1994 and the balance sheet
data at December 31, 1995 and 1994 are derived from audited financial statements
not included in this Annual Report on Form 10-K. The following selected
financial data should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
YEARS ENDED DECEMBER 31, (INCEPTION)
-------------------------------------------------------- THROUGH
1998 1997 1996 1995 DECEMBER 31, 1994
-------- -------- -------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ 13,197 $ 2,047 $ -- $ -- $ --
Operating expenses:
Research and development ................. 16,605 6,061 1,741 486 44
General and administrative ............... 7,552 3,825 1,345 258 46
Acquired in-process research and
development .......................... 35,196 -- -- -- --
Ammortization of goodwill................. 381 -- -- -- --
-------- -------- -------- --------- ---------
Total operating expenses ..................... 59,734 9,886 3,086 744 90
Interest income, net ......................... 1,844 745 221 -- --
Other expense ................................ (80) -- -- -- --
Income tax expense ........................... (100) (100) -- -- --
-------- -------- -------- --------- ---------
Net loss ..................................... $ (44,873) $ (7,194) $ (2,865) $ (744) $ (90)
======= ======== ======== ======== =========
Basic and diluted net loss per common share .. $ (2.86) $ (3.97) $ (5.87) $ (3.48)
-------- -------- -------- ---------
Shares used in computing basic and diluted net
loss per common share .................... 15,681 2,138 572 214
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 30,982 $ 46,621 $ 5,671 $ 348 $ 298
Working capital ................................. 26,573 42,455 4,581 246 311
Total assets .................................... 55,566 53,972 7,819 424 311
Total long-term debt and capital lease obligation 5,305 1,551 446 -- --
Total mandatorily redeemable convertible
preferred stock ............................. -- -- 10,471 1,153 400
Total stockholders' equity ...................... 41,288 46,067 (4,187) (833) (89)
</TABLE>
27.
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION 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, as well as other risks and
uncertainties set forth below and in the section entitled "Risk Factors."
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 target discovery collaboration agreement, if
terminated, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has also entered into several research and license
agreements with academic and research institutions and companies. These
agreements provide for the funding of research activities by the Company and the
possible payment of milestones, license fees, and, in some cases, royalties by
the Company to the research partner. The Company's commitments under any one of
these agreements do not represent a significant expenditure in relation to the
Company's total research and development expense.
28.
<PAGE> 29
Gene Logic's future profitability will depend in part on the
successful establishment of collaborations which include various combinations of
genomic databases, bioinformatics software and genomics technology. Payments
through collaborations and interest income are expected to be the Company's only
sources of revenue for the foreseeable future. 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. During 1998, 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 entering into additional collaborations. There can be no
assurance that the Company will enter into additional collaborations on
acceptable terms, if at all, or that current or future collaborations will be
successful.
The Company has incurred operating losses in each year since its
inception. At December 31, 1998, excluding the $35.2 million non-recurring
charge incurred in connection with the merger with Oncormed, the Company had
accumulated operating losses of approximately $22.3 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 merger
with 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 as a result of increases
in its expenses for research and development capabilities.
The Company's quarterly operating results may fluctuate
significantly as a result of a variety of factors, including changes in the
demand for the Company's technologies and products, variations in revenues under
collaborations, including milestone payments, royalties, license fees and other
contract revenues, and the timing of new product introductions, if any, by the
Company. The Company's quarterly operating results may also fluctuate
significantly depending on changes in the research and development budgets of
the Company's collaborative partners, the introduction of new products by the
Company's competitors and other competitive factors, adoption of new
technologies, and the cost, quality and availability of cell and tissue samples
and related reagents.
ACQUISITION OF ONCORMED
In September 1998, the Company completed the acquisition of
Oncormed, a genomics company that provided pharmacogenomic screening services
and developed databases for use primarily in pharmaceutical research and
development. The transaction was accounted for as a purchase transaction and,
accordingly, the purchase price of approximately $39.2 million was allocated to
certain assets and liabilities based on their respective fair market values. The
excess of the purchase price over the estimated fair market value of the net
assets acquired was accounted for as goodwill. The amount allocated to goodwill,
approximately $7.6 million, will be amortized on a straight-line basis over five
years at a rate of approximately $1.5 million per year.
In connection with the acquisition of Oncormed, the Company
incurred a non-recurring charge to operating results of $35.2 million (or 90% of
the purchase price), representing the values determined by management to be
attributable to the in-process research and development costs. This amount
relates to four technologies. Of the technologies, $12 million related to the
Gene Chip / Gene Expression Database Development Project, $14.5 million related
to the Biorepository Project, $3.5 million related to the Recognizer Analysis
Project, and $5.2 million related to the SNP Analysis Project, based on the
discounted cash flows management expects from these technologies. The value
assigned to the in-process
29.
<PAGE> 30
technologies was determined by estimating the costs to develop such technologies
into commercially viable products, estimating the resulting net cash flows from
such projects and discounting the net cash flows back to their present value.
A discount rate of 30% was used for valuing the in-process research and
development. The discount rate includes a factor that takes into account the
uncertainty surrounding the successful development of the acquired in-process
technologies. Management believes that the allocation of the majority of the
purchase price to these technologies was appropriate because of the considerable
future potential of these programs to contribute to the operations of Gene
Logic.
Each ongoing project involves either the development of
technologies for genomic databases or for pharmacogenomics. The Gene Chip /
Gene Expression Database Development Project is designed to generate extensive
and quantitative gene expression data on a broad range of normal, diseased and
treated tissues. The Biorepository Project is intended to create novel
protocols for the collection, handling and storage of normal and diseased human
tissues, new methods for the extraction of genetic materials and new methods for
the microdissection of tissue. The goal of the Recognizer Analysis Project is
to develop novel algorithms and software tools for data mining of biological,
genetic and clinical data. The SNP Analysis Project is intended to provide a
method to detect single nucleotide polymorphisms for genes of interest. At the
time of the acquisition of Oncormed, management estimated the following
percentages of completion for each project at that time: 65% complete for the
Gene Chip / Gene Expression Database Development Project, 65% complete for the
Biorepository Project, 80% complete for the Recognizer Analysis Project, and 80%
complete for the SNP Analysis Project.
Management believes there is no persuasive evidence that the
technologies will not reach commercial status within the time frame included in
the discounted cash flow analysis, which anticipates revenue beginning in late
1999. Management believes that material cash inflows are expected to be
received through the year 2010. Management has reviewed with its independent
accountants all of the factors and the related future cash flows which it
considered in arriving at the amounts attributed to these technologies.
At December 31, 1998, additional progress had been achieved on
each of the four technology projects that were underway as of the acquisition
date (September 28, 1998). In general, the Company believes that these research
and development projects are on track with management's plans at the time the
acquisition occurred. Through December 31, 1998, 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 is substantially
completed and the Gene Chip/Gene Expression Database Development Project,
Biorepository Project and Recognizer 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 significant economic benefits 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 internally
generated sources. The Company now estimates the costs to complete the
remaining projects at approximately $1.9 million in fiscal year 1999. Total
costs to complete the projects from the date of acquisition are now estimated to
be approximately $3.3 million.
Although the Company has substantially completed one of the
projects and intends to complete the development of the remaining in-process
technologies and although management believes in the
30.
<PAGE> 31
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 it has been postponed (and when
research is expected to resume) and how much of the purchase price the
technologies (or programs) are represented. 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 merger
and would likely discontinue its operations with respect to such technologies.
Additionally, even if successfully completed, these projects will require
maintenance research and development after they have reached a state of
technological and commercial feasibility.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and December 31, 1997
Revenue increased to $13.2 million in 1998 from $2.0 million in
1997. The increase in revenues resulted primarily from a full-year of research
activities under existing collaborations in addition to new and expanded
collaborations in 1998. Of the 1998 revenues, thirty-four percent (34%) were
received from Japan Tobacco; twenty-four percent (24%) were received from
Organon; twenty-two percent (22%) were received from Procter & Gamble, including
an upfront payment of $1.0 million relating to the transfer of certain data and
biomaterials; and eighteen percent (18%) were received from AgrEvo, including an
upfront payment of $1.5 million relating to certain rights granted under the
collaboration agreement. The Company recognized revenues on upfront payments
equal to the value of consideration transferred to the collaborator under the
agreement. In addition, no future performance obligations are required as it
relates to these upfront payments under the agreements. Revenues received from
other sources, including those received from the subsidiary subsequent to the
merger with Oncormed in September 1998, were not material.
Research and development expenses increased to $16.6 million in
1998 from $6.1 million in 1997. Excluding the increase in research and
development costs of approximately ten percent (10%) as a result of the merger
with Oncormed, the remaining increase in research and development expenses was
primarily attributable to approximate increases of: (i) fifty percent (50%) in
personnel expenses, (ii) ten percent (10%) in research agreement expenses, and
(iii) ten percent (10%) in facility costs. The Company had other general
increases in laboratory supplies and depreciation expense. During 1998, the
Company further expanded its target discovery and bioinformatics businesses and
its Flow-thru Chip development program. The Company expects research and
development expenses to continue to increase as personnel
31.
<PAGE> 32
and research and development activities, including in-process technologies
acquired in the merger with Oncormed, are expanded to accommodate new and
existing collaborations.
General and administrative expenses increased to $7.6 million in
1998 from $3.8 million in 1997. Excluding the increase in general and
administrative expenses of approximately fifteen percent (15%) as a result of
the merger with Oncormed, the remaining increase in general and administrative
expenses was primarily attributable to approximate increases of: (i) forty
percent (40%) in personnel expenses, (ii) fifteen percent (15%) in facility
costs, and (iii) fifteen percent (15%) in amortization of deferred compensation
on stock options. The Company had other general increases in costs due to
becoming a public company and depreciation expense. In 1998, the Company
continued to expand its operations and business development efforts. The Company
expects that general and administrative expenses will continue to increase as
the Company continues to expand its operations.
Amortization of goodwill was $381,000 in 1998 as a result of the
merger with Oncormed.
Net interest income increased to $1.8 million in 1998 from
$745,000 in 1997 due to a full-year of investment income in 1998 relating to the
investment of proceeds from the Company's 1997 private placement of equity
securities and initial public offering.
Years Ended December 31, 1997 and December 31, 1996
Revenue under collaboration agreements was approximately $2.0
million in 1997. No revenues were received by the Company in 1996. Of the 1997
revenues, fifty-seven percent (57%) were received from Procter & Gamble and
forty-two percent (42%) were received from Japan Tobacco. Revenues from other
sources were not material.
Research and development expenses increased to $6.1 million in
1997 from $1.7 million in 1996. The increase in research and development
expenses was primarily attributable to approximate increases of: (i) forty
percent (40%) in personnel expenses, (ii) twenty percent (20%) in laboratory
supplies, and (iii) ten percent (10%) in depreciation expense as a result of the
Company expanding its target discovery and bioinformatics businesses and its
Flow-thru Chip development program.
General and administrative expenses increased to $3.8 million in
1997 from $1.3 million in 1996. The increase in general and administrative
expenses was primarily attributable to approximate increases of: (i) twenty-five
percent (25%) in personnel expenses, (ii) fifteen percent (15%) in legal costs,
(iii) ten percent (10%) in facility costs, and (iv) ten percent (10%) in
amortization of deferred compensation on stock options in connection with the
overall scale up of the Company's operations and business development efforts.
Net interest income increased to $745,000 in 1997 from $221,000
in 1996. The increase was primarily due to the larger cash and investment
balance on hand during 1997 as a result of private placements of equity
securities and the completion of the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, the Company financed
its operations through the sale of equity securities, payments from
collaborative agreements and equipment financing. In November 1997, the Company
completed an initial public offering of 3,347,000 shares of its Common Stock
(including exercise of the underwriters' over-allotment option), generating net
proceeds of approximately $23.9 million. The private placements of equity
securities have provided the Company with aggregate gross proceeds of
approximately $33.2 million. The Company has received, as of December 31, 1998,
$14.6 million under its collaborations in the form of technology and database
access fees, research funding and upfront payments. In connection with its
collaboration with AgrEvo, the Company held a promissory note of $1.0 million
which AgrEvo paid in full in January 1999. In addition, the Company
32.
<PAGE> 33
holds a promissory note of $500,000 in connection with its collaboration with
Procter & Gamble that is due in December of 1999. The Company has also
obtained $471,000 of capital lease financing and $5.8 million under equipment
loans. As of December 31, 1998, the Company had approximately $31.0 million in
cash and marketable securities, compared to $46.6 million as of December 31,
1997.
Prior to the consummation of the merger with Oncormed, the
Company advanced $1.5 million under a loan agreement with Oncormed for working
capital purposes. In addition, the Company paid certain amounts on behalf of
Oncormed in the amount of $323,000. Following the merger with Oncormed, these
and other intercompany transactions have been eliminated in consolidation in
the accompanying consolidated financial statements at December 31, 1998. The
Company expects to continue to pay certain amounts on behalf of its wholly owned
subsidiary, Gene Logic Acquisition Corp., and does not expect repayment of the
amounts advanced until such subsidiary generates working capital sufficient to
support its operations.
In connection with the merger with Oncormed, the Company acquired
in-process research and development, which is comprised of several individual
on-going technologies. Development efforts for the remaining projects are highly
complex and include the development and validation of the necessary
biochemistry, molecular biology and bioinformatic tools and information, as well
as small-scale deployment and commercial introduction. The Company now expects
to spend approximately $3.3 million in order to develop commercially viable
products using such technologies and to begin to generate revenues from such
technologies. Costs to complete development of these remaining technologies are
now estimated to be $1.9 million in fiscal year 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. Descriptions of costs, timing and anticipated benefits
of completing the development of such technologies are forward-looking
statements that involve risks and uncertainties. The Company's actual costs and
timing to complete development of the 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. There
can be no assurance that the Company will be successful in developing and
commercializing such technologies. If the Company is unsuccessful in developing
or commercializing such technologies, the Company will not achieve the benefits
expected from acquiring such technologies or obtain a return on its investment
in connection with the merger with Oncormed and would likely discontinue its
operations with respect to such technologies.
In connection with the merger with Oncormed, the Company recorded
a restructuring liability of approximately $1.6 million to integrate Oncormed
into the Company following the acquisition. The objective of the restructuring
plan was to eliminate redundant general and administrative employees of Oncormed
and terminate contracts that the Company deemed to have no 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, including the
termination of a certain agreement with Incyte Pharmaceuticals, Inc. ("Incyte")
in which the Company repaid $924,000 that had been prepaid by Incyte. The
Company has terminated additional agreements that it has deemed to have no
on-going economic value to the Company and will continue to evaluate remaining
contracts in the future. The estimated costs to terminate such agreements are
included in the restructuring liability. This liability has been included in the
purchase price allocation performed in connection with the merger with Oncormed.
The Company believes the termination of additional agreements will not adversely
affect the Company's operations. There can be no assurance, however, that the
termination of such agreements will not have an adverse effect on the Company's
operations. At
33.
<PAGE> 34
December 31, 1998, approximately $134,000 and $50,000 of the
restructuring charge remain unpaid relating to involuntary employment and
contract terminations, respectively. Management anticipates the restructuring
activities as a result of the merger with Oncormed will be substantially
completed in 1999.
Net cash used in operating activities was $10.2 million in 1998,
$3.4 million in 1997 and $2.0 million in 1996. The Company has primarily used
cash during 1998, 1997 and 1996 to fund the Company's operating losses in
addition to expenditures relating to intangibles and other assets. In fiscal
year 1997, cash used to fund the Company's operating loss was offset by the
timing of payments from collaborative partners and revenue recognized under
collaborations.
During 1998, 1997 and 1996, the Company had expenditures relating
to intangibles and other assets of approximately $971,000, $642,000 and
$126,000, 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 five 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, sales
and maturities of available-for-sale securities, primarily consisted of capital
expenditures, which totaled $6.9 million in 1998, $3.1 million in 1997 and $1.3
million in 1996. The increases from year to year were primarily due to the
increasing purchases of laboratory and computer equipment and furniture to
support the Company's expanding business and funding of tenant improvements in
1998 relating to the completion of the Company's new office and research
laboratory facility. In addition, the Company had cash outlays of approximately
$2.6 million as a result of the acquisition of Oncormed in 1998. The Company
expects its capital requirements to increase as it expands its facility
requirements and acquires equipment to support expanding research and
development activities.
Net cash provided by financing activities was $4.1 million in
1998, $47.4 million in 1997 and $8.8 million in 1996, primarily from the initial
public offering in 1997 and private placements in 1997 and 1996 and equipment
financing in 1998 and 1997, net of payments of capital lease and loan
obligations.
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
December 31, 1998, the Company has borrowed approximately $4.8 million.
As of December 31, 1998, the Company had net operating loss
("NOL") carryforwards of approximately $46.9 million to offset federal and state
income taxes which includes Oncormed's NOL of approximately $30.0 million
assumed as a result of the merger. The Company's research and development tax
credit carryforwards were approximately $600,000 as of December 31, 1998 for
federal income tax purposes. If not utilized, the federal and state net
operating loss carryforwards will expire through 2013, but begin to expire in
2008.
To date, all revenue received by the Company has been generated
principally from its collaborations. The Company expects that substantially all
revenue for the foreseeable future will come from collaborative partners and
interest income. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
collaborations. There can be no assurance that the Company will be able to
negotiate additional collaborations in the
34.
<PAGE> 35
future on acceptable terms, if at all, or that current or future collaborations
will be successful and provide the Company with expected benefits.
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 merger with 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 financings 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, in less than one 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
35.
<PAGE> 36
efforts will not adequately address such Year 2000 problems and that, as a
result, the Company's business will be adversely affected. The Company is
currently assessing software and systems that were acquired from Oncormed in
connection with the merger with its review of existing software and systems.
External and internal costs specifically associated with
modifying internal software for Year 2000 compliance are expensed as incurred.
To date, costs have not been material and are not expected to be in the future.
Such costs do not include normal system upgrades and replacements. Based on the
Company's current plans and efforts to date, the Company believes that changes
mandated by the Year 2000 issue will not cause any material adverse effects on
the Company's business, financial condition and results of operations. There is
no guarantee, however, that all problems will be foreseen and corrected, or that
no material disruption of the Company's business will occur.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold any financial instruments subject to
significant market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes
thereto, together with the Report of Independent Public Accountants thereon,
appear at pages F-1 through F-22 of this Annual Report on Form 10-K and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by
reference to the information set forth in the section captioned "Election of
Directors," contained in the Company's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year ended
December 31, 1998 (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by
reference to the information set forth in the section entitled "Executive
Officers of the Company" in Part I, Item 1 of this Annual Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item is incorporated by
reference to the information set forth in the section entitled "Compliance with
the Reporting Requirements of Section 16(a) of the Securities Exchange Act of
1934" contained in the Proxy Statement.
36.
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the information set forth in the section captioned "Executive
Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the information set forth in the section captioned "Certain
Transactions" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
FINANCIAL STATEMENTS OF GENE LOGIC INC. PAGE
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............... F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996 ............................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
(a)2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
(a)3. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 By-Laws, as amended and restated.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate.(1)
*10.1 Form of Indemnity Agreement entered into between Registrant and
its directors and officers.(1)
*10.2 Registrant's 1997 Equity Incentive Plan (the "Stock Plan").(1)
*10.3 Form of Stock Option Agreement under the Stock Plan.(1)
</TABLE>
37.
<PAGE> 38
'
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
* 10.4 Form of Stock Option Grant Notice.(1)
* 10.5 Registrant's Employee Stock Purchase Plan and related offering
document.(1)
* 10.6 Registrant's 1997 Non-Employee Directors' Stock Option Plan, as
corrected.(4)
* 10.7 Form of Nonstatutory Stock Option under the Non-Employee
Directors' Stock Option Plan.(1)
* 10.8 Stock Restriction Agreement, dated July 31, 1996, between the
Registrant and Mark D. Gessler.(1)
* 10.9 Stock Restriction Agreement, dated December 20, 1996, between the
Registrant and Michael J. Brennan.(1)
*10.10 Stock Restriction Agreement, dated July 31, 1996, between the
Registrant and Michael J. Brennan.(1)
10.11 Amended and Restated Investor Rights Agreement, dated July 15,
1997, between the Registrant and certain investors.(1)
*10.12 Employment Agreement, dated October 31, 1995, between the
Registrant and Michael J. Brennan.(1)
*10.13 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
*10.14 Employment Agreement, dated May 16, 1996, between the Registrant
and Mark D. Gessler.(1)
*10.15 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
10.16 Series A-1 Convertible Preferred Stock Purchase Warrant, dated
August 1, 1995, issued to Oxford Bioscience Partners L.P.(1)
10.17 Series A-1 Convertible Preferred Stock Purchase Warrant, dated
August 1, 1995, issued to Oxford Bioscience Partners (Bermuda)
Limited Partnership.(1)
10.18 Warrant for the purchase of shares of Common Stock dated August
29, 1997, between Registrant and ARE-708 Quince Orchard, LLC.(1)
10.19 Warrant, dated April 24, 1997, issued to Venture Lending &
Leasing, Inc.(1)
10.20 Warrant issued to Hambrecht & Quist LLC.(1)
10.21 Lease Agreement, dated May 7, 1997, between Registrant and M.O.R.
XVIII Associates Limited Partnership.(1)
</TABLE>
38.
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
10.22 Lease Agreement, dated August 22, 1997, between Registrant and
ARE-708 Quince Orchard, LLC, as amended.(1)
10.23 Warrant, dated April 15, 1997, between Registrant and Comdisco,
Inc.(1)
+10.24 Target Discovery Collaboration and License Agreement, dated May
27, 1997, between Registrant and Procter & Gamble
Pharmaceuticals, Inc. ("Procter & Gamble").(1)
+10.25 Promissory Note, dated May 27, 1997, between Registrant and
Procter & Gamble.(1)
+10.26 Drug Target and Drug Lead Discovery Collaboration Agreement,
dated September 9, 1997, between Registrant and Japan Tobacco
Inc.(1)
10.27 Share Purchase Agreement, dated September 9, 1997, between
Registrant and Japan Tobacco Inc.(1)
+10.28 License Agreement, dated May 22, 1996, between Registrant and
Yale University.(1)
+10.29 Amendment, dated October 1, 1997, to the License Agreement
between Registrant and Yale University.(1)
+10.30 Sole Commercial Patent License Agreement, dated June 15, 1997,
between Registrant and Lockheed Martin Energy Research Company.
(1)
+10.31 License Agreement, dated May 30, 1997, between Registrant and Dr.
Kenneth L. Beattie.(1)
10.32 Warrant, dated September 30, 1997, issued to Venture Lending &
Leasing, Inc.(1)
++10.33 Genomic Database Collaboration and License Agreement between
Registrant and N.V. Organon dated as of December 31, 1997.(2)
*10.36 Employment Agreement, dated September 7, 1996, between the
Registrant and Eric M. Eastman.(2)
*10.37 Amendment to Employment Agreement, dated July 9, 1997, between
the Registrant and Eric M. Eastman.(2)
*10.38 Employment Agreement, dated February 17, 1997, between the
Registrant and Daniel R. Passeri.(2)
*10.39 Amendment to Employment Agreement, dated July 9, 1997, between
the Registrant and Daniel R. Passeri.(2)
10.44 Form of Affiliate Agreement.(3)
</TABLE>
39.
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
10.45 Employment Agreement, dated July 1, 1998, between Registrant and
Douglas Dolginow, M.D.(3)
10.46 Loan Agreement, dated July 6, 1998, between Registrant and
Oncormed, Inc.(3)
+++10.47 Collaboration Agreement, dated June 30, 1998, between Registrant
and Hoechst Schering AgrEvo GmbH.(3)
++++10.48 Letter Agreement, dated December 29, 1998, between Registrant and
Japan Tobacco Inc.(5)
++++10.49 Genomic Database Collaboration and License Agreement, dated
December 30, 1998, between Registrant and Procter & Gamble,
replacing that certain Target Discovery Collaboration and License
Agreement, dated May 27, 1997 between Registrant and Procter &
Gamble.(5)
11.1 Statement re: computation of per share earnings.(5)
21.1 List of Subsidiaries.(5)
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1 Power of Attorney. Reference is made to the signature page of
this Annual Report on Form 10-K.
27.1 Financial Data Schedule.(5)
</TABLE>
- ------------
* Indicates management compensatory plan, contract or arrangement.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1,
filed October 7, 1997, as amended, (No. 333-37317) and incorporated
herein by reference
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed on March 31, 1998, and
incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-60135), filed on July 29, 1998, as amended, and incorporated
herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, filed on November 16, 1998, and
incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, filed on March 31, 1999, and
incorporated by reference.
+ Confidential treatment has been granted with respect to certain portions
of this exhibit pursuant to an Order Granting Application Under the
Securities Act of 1933 and Rule 406 Thereunder Respecting Confidential
Treatment dated November 20, 1997.
++ Confidential treatment has been granted with respect to certain portions
of this exhibit pursuant to an Order Granting Application Under the
Securities Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting
Confidential Treatment dated May 8, 1998.
40.
<PAGE> 41
+++ Confidential treatment has been granted with respect to certain portions
of this exhibit pursuant to an Order Granting Application Under the
Securities Act of 1933 and Rule 406 Thereunder Respecting Confidential
Treatment dated August 21, 1998.
++++ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Commission.
(b) REPORTS ON FORM 8-K
The Company filed a report on From 8-K on October 8, 1999 related to the
consummation of the merger between Gene Logic Acquisition Corp. and
Oncormed.
41.
<PAGE> 42
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Gaithersburg, County of Montgomery, State of Maryland, on the 20th day
of April, 1999.
GENE LOGIC INC.
By: *
------------------------------------
Michael J. Brennan, M.D., Ph.D.
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME POSITION DATE
- --------------------------------- ----------------------------------------------------------- --------------
<S> <C> <C>
* Chief Executive Officer and Director April 20, 1999
- -------------------------------- (Principal Executive Officer)
Michael J. Brennan, M.D, Ph.D.
/S/ MARK D. GESSLER President, Chief Operating Officer, Chief Financial Officer April 20, 1999
- -------------------------------- and Secretary(Principal Financial and Accounting Officer)
Mark D. Gessler
* Chairman of the Board April 20, 1999
- --------------------------------
Alan G. Walton, Ph.D., D.Sc.
* Director April 20, 1999
- --------------------------------
Jules Blake, Ph.D.
* Director April 20, 1999
- --------------------------------
Charles L. Dimmler III
* Director April 20, 1999
- --------------------------------
G. Anthony Gorry, Ph.D.
* Director April 20, 1999
- --------------------------------
Jeffrey D. Sollender
* /S/ MARK D. GESSLER
- --------------------------------
Mark D. Gessler
Attorney-in-fact
</TABLE>
42.
<PAGE> 43
GENE LOGIC INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Gene Logic Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Gene Logic
Inc. (a Delaware corporation) and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purposes of forming an opinion on the basic
consolidated financial statements and schedule taken as a whole. Schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 26, 1999
F-2
<PAGE> 45
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 16,191 $ 46,522
Marketable securities available-for-sale.................. 14,791 99
Due from collaborators.................................... 3,779 1,000
Prepaid expenses.......................................... 842 481
Other current assets...................................... 875 890
-------- --------
Total Current Assets.............................. 36,478 48,992
Property and Equipment, net................................. 10,189 4,211
Goodwill, net............................................... 7,249 --
Intangibles and Other Assets, net........................... 1,650 769
-------- --------
Total Assets...................................... $ 55,566 $ 53,972
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,123 $ 181
Accrued expenses.......................................... 2,963 1,371
Accrued restructuring..................................... 184 --
Current portion of capital lease obligation............... 124 115
Current portion of long-term debt......................... 1,292 434
Deferred revenue.......................................... 3,219 4,436
-------- --------
Total Current Liabilities......................... 9,905 6,537
Capital Lease Obligation.................................... 100 225
Long-Term Debt.............................................. 3,789 777
Other Noncurrent Liabilities................................ 484 366
-------- --------
Total Liabilities................................. 14,278 7,905
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 60,000,000 shares
authorized; and 19,651,756 and 13,899,250 shares issued
and outstanding as of December 31, 1998 and 1997,
respectively........................................... 197 139
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding as of
December 31, 1998 and 1997............................. -- --
Additional paid-in capital................................ 102,670 64,882
Deferred compensation on stock options, net............... (3,986) (6,278)
Accumulated other comprehensive loss...................... (46) (2)
Accumulated deficit....................................... (57,547) (12,674)
-------- --------
Total Stockholders' Equity........................ 41,288 46,067
-------- --------
Total Liabilities and Stockholders' Equity........ $ 55,566 $ 53,972
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 46
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $ 13,197 $ 2,047 $ --
Expenses:
Research and development.................................. 16,605 6,061 1,741
General and administrative................................ 7,552 3,825 1,345
Acquired in-process research and development.............. 35,196 -- --
Amortization of goodwill.................................. 381 -- --
-------- ------- -------
Total expenses.................................... 59,734 9,886 3,086
-------- ------- -------
Loss from operations.............................. (46,537) (7,839) (3,086)
Interest Income, net........................................ 1,844 745 221
Other Expense............................................... (80) -- --
-------- ------- -------
Loss before income tax expense.................... (44,773) (7,094) (2,865)
Income Tax Expense.......................................... 100 100 --
-------- ------- -------
Net loss.......................................... (44,873) (7,194) (2,865)
Accretion of Mandatory Redemption Value of Preferred
Stock..................................................... -- 1,286 494
-------- ------- -------
Net loss attributable to common stockholders...... $(44,873) $(8,480) $(3,359)
======== ======= =======
Basic and Diluted Net Loss Per Common Share................. $ (2.86) $ (3.97) $ (5.87)
======== ======= =======
Shares Used in Computing Basic and Diluted Net Loss Per
Common Share.............................................. 15,681 2,138 572
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 47
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
PREFERRED STOCK ----------------------------------------------
--------------------- COMMON STOCK
NUMBER ------------------ ADDITIONAL
OF NUMBER PAR PAID-IN DEFERRED
SHARES AMOUNT OF SHARES VALUE CAPITAL COMPENSATION
---------- -------- ---------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 745,833 $ 1,153 280,000 $ 3 $ -- $ --
Issuance of common stock.......... -- -- 412,733 4 13 --
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs........................... 4,090,909 8,825 -- -- -- --
Accretion of mandatory redemption
value of preferred stock........ -- 494 -- -- -- --
Net change in unrealized losses
from marketable securities...... -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- --
---------- -------- ---------- ---- -------- -------
Balance at December 31, 1996....... 4,836,742 10,472 692,733 7 13 --
Comprehensive loss................
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs........................... 4,444,443 19,117 -- -- -- --
Cancellation of common stock...... -- -- (55,000) (1) (8) --
Issuance of common stock in
connection with exercise of
stock options................... -- -- 152,943 2 22 --
Issuance of common stock.......... -- -- 425,000 4 3,003 --
Issuance of warrants.............. -- -- -- -- 43 --
Accretion of mandatory redemption
value of preferred stock........ -- 1,286 -- -- -- --
Conversion of preferred stock to
common stock in connection with
initial public offering......... (9,281,185) (30,875) 9,281,185 93 30,782 --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs........................... -- -- 3,347,000 33 23,911 --
Issuance of common stock in
connection with exercise of
warrants........................ -- -- 55,389 1 219 --
Net change in unrealized losses
from marketable securities...... -- -- -- -- -- --
Deferred compensation from stock
options......................... -- -- -- -- 6,897 (6,897)
Amortization of deferred
compensation.................... -- -- -- -- -- 619
Net loss.......................... -- -- -- -- -- --
---------- -------- ---------- ---- -------- -------
Balance at December 31, 1997....... -- -- 13,899,250 139 64,882 (6,278)
Comprehensive loss................
Issuance of common stock in
connection with exercise of
stock options................... -- -- 875,636 9 197 --
Issuance of common stock in
connection with Employee Stock
Purchase Plan................... -- -- 27,290 -- 140 --
Issuance of common stock in
connection with acquisition of
Oncormed, Inc................... -- -- 4,849,580 49 38,166 --
Net change in unrealized losses
from marketable securities...... -- -- -- -- -- --
Write-off of cancelled stock
options......................... -- -- -- -- (715) 715
Amortization of deferred
compensation.................... -- -- -- -- -- 1,577
Net loss.......................... -- -- -- -- -- --
Comprehensive loss................ -- -- -- -- -- --
---------- -------- ---------- ---- -------- -------
Balance at December 31, 1998....... -- $ -- 19,651,756 $197 $102,670 $(3,986)
========== ======== ========== ==== ======== =======
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED COMPREHENSIVE
LOSS DEFICIT LOSS
------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995....... $ -- $ (835)
Issuance of common stock.......... -- --
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs........................... -- --
Accretion of mandatory redemption
value of preferred stock........ -- (494)
Net change in unrealized losses
from marketable securities...... (13) -- $ (13)
Net loss.......................... -- (2,865) (2,865)
----- -------- --------
Balance at December 31, 1996....... (13) (4,194)
Comprehensive loss................ $ (2,878)
========
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs........................... -- --
Cancellation of common stock...... -- --
Issuance of common stock in
connection with exercise of
stock options................... -- --
Issuance of common stock.......... -- --
Issuance of warrants.............. -- --
Accretion of mandatory redemption
value of preferred stock........ -- (1,286)
Conversion of preferred stock to
common stock in connection with
initial public offering......... -- --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs........................... -- --
Issuance of common stock in
connection with exercise of
warrants........................ -- --
Net change in unrealized losses
from marketable securities...... 11 -- $ 11
Deferred compensation from stock
options......................... -- --
Amortization of deferred
compensation.................... -- --
Net loss.......................... -- (7,194) (7,194)
----- -------- --------
Balance at December 31, 1997....... (2) (12,674)
Comprehensive loss................ $ (7,183)
========
Issuance of common stock in
connection with exercise of
stock options................... -- --
Issuance of common stock in
connection with Employee Stock
Purchase Plan................... -- --
Issuance of common stock in
connection with acquisition of
Oncormed, Inc................... -- --
Net change in unrealized losses
from marketable securities...... (44) -- $ (44)
Write-off of cancelled stock
options......................... -- --
Amortization of deferred
compensation.................... -- --
Net loss.......................... -- (44,873) (44,873)
--------
Comprehensive loss................ -- -- $(44,917)
----- -------- ========
Balance at December 31, 1998....... $ (46) $(57,547)
===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 48
GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(44,873) $(7,194) $(2,865)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Acquired in-process research and development............ 35,196 -- --
Amortization of goodwill................................ 381 -- --
Depreciation and amortization........................... 1,760 632 68
Amortization of deferred compensation................... 1,577 619 --
Cancellation of notes receivable........................ -- 95 --
Loss on disposal of property and equipment.............. 80 -- --
Amount due under research agreement..................... -- 48 --
Write-off of deferred financing fee..................... -- -- 2
Changes in operating assets and liabilities (net of
effects of acquisition):
Due from collaborators.................................. (2,706) (1,000) --
Prepaid expenses........................................ (294) (444) (37)
Other current assets.................................... 67 (823) (66)
Intangibles and other assets............................ (971) (642) (126)
Accounts payable........................................ 1,401 90 74
Accrued expenses........................................ 450 373 911
Accrued restructuring................................... (1,163) -- --
Deferred revenue........................................ (1,247) 4,436 --
Other noncurrent liabilities............................ 118 408 --
-------- ------- -------
Net Cash Flows From Operating Activities........... (10,224) (3,402) (2,039)
-------- ------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (6,873) (3,069) (1,339)
Increase in notes receivable from employees............... -- -- (103)
Payment of acquisition costs, net of cash acquired........ (755) -- --
Pre-acquisition advances to Oncormed, Inc................. (1,843) -- --
Purchase of marketable securities available-for-sale...... (14,737) -- (4,547)
Proceeds from sale and maturity of marketable securities
available-for-sale...................................... -- 4,447 --
-------- ------- -------
Net Cash Flows From Investing Activities........... (24,208) 1,378 (5,989)
-------- ------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................... 346 30,019 17
Proceeds from issuance of preferred stock................. -- 20,000 9,000
Payments for stock issuance costs......................... -- (3,714) (175)
Proceeds from equipment loans............................. 4,765 1,084 --
Proceeds from financing agreement......................... -- 281 --
Repayments of financing agreement......................... (183) -- --
Repayments of capital lease obligation and equipment
loans................................................... (827) (261) (25)
-------- ------- -------
Net Cash Flows From Financing Activities........... 4,101 47,409 8,817
-------- ------- -------
Net (Decrease) Increase in Cash and Cash Equivalents........ (30,331) 45,385 789
Cash and Cash Equivalents, beginning of period.............. 46,522 1,137 348
-------- ------- -------
Cash and Cash Equivalents, end of period.................... $ 16,191 $46,522 $ 1,137
======== ======= =======
Supplemental Disclosure:
Interest expense paid..................................... $ 271 $ 97 $ 9
======== ======= =======
Non-Cash Transactions:
Issuance of common stock in acquisition................... $ 38,215 $ -- $ --
======== ======= =======
Equipment acquired under capital leases................... $ -- $ -- $ 471
======== ======= =======
Issuance of warrants to lessor............................ $ -- $ 43 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 49
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Gene Logic Inc. (the "Company") was incorporated in Delaware on September
22, 1994. The Company develops proprietary genomic information products,
software and research services and markets them to the global pharmaceutical and
life science industries. The Company's information products combine software
tools with large-scale gene expression information, which specifies the degree
to which genes are active in a broad range of normal, diseased and treated
conditions. This combination enables scientists to produce new biological
knowledge by integrating this proprietary expression information with a growing
array of biological information available on the Internet. The Company's broad
range of information products, software and research services enable
collaborators to accelerate the discovery and development process of new drugs,
diagnostics and agricultural products.
Principles of Consolidation
The consolidated financial statements include the accounts of Gene Logic
Inc. and its wholly owned subsidiary. All material intercompany accounts and
transactions have been eliminated in consolidation.
In September 1998, the Company's wholly owned subsidiary, Gene Logic
Acquisition Corp., merged with Oncormed, Inc. ("Oncormed"), a publicly-traded
genomics company, for 4,849,580 (reduced for fractional shares) shares of the
Company's Common Stock. The acquisition of Oncormed has been accounted for as a
purchase, and the consolidated financial statements herein reflect the inclusion
of the operating results of Gene Logic Acquisition Corp. since the acquisition
date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
Comprehensive Loss
The Company accounts for comprehensive loss as prescribed by Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("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
F-7
<PAGE> 50
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
comprehensive loss includes unrealized holding losses from marketable securities
available-for-sale for the years ended December 31, 1998, 1997 and 1996, as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss................................................ $(44,873) $(7,194) $(2,865)
Other comprehensive (loss) income, net of tax:
Unrealized losses on marketable securities............ (46) (4) (13)
Less -- Reclassification adjustment for losses........ 2 15 --
-------- ------- -------
Total other comprehensive (loss) income............ (44) 11 (13)
-------- ------- -------
Comprehensive loss...................................... $(44,917) $(7,183) $(2,878)
======== ======= =======
</TABLE>
Concentration of Credit Risk
Cash, cash equivalents and marketable securities available-for-sale are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in corporate debt securities, commercial
paper and bonds, and notes and bonds issued by the U.S. government and its
agencies and, by policy, seeks to ensure both liquidity and safety of principal.
The policy also limits investments to certain types of instruments issued by
institutions with strong investment grade credit ratings and places restrictions
on their terms, geographic origin and concentrations by type and issuer.
Cash and Cash Equivalents
Cash and cash equivalents are defined as liquid investments with original
maturities of 90 days or less that are readily convertible into cash. All other
investments are reported as marketable securities available-for-sale. Cash and
cash equivalents as of December 31, 1998 and 1997, are comprised of:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash.................................................. $ 1,077 $ 149
Corporate commercial paper............................ 15,114 46,373
------- -------
Total....................................... $16,191 $46,522
======= =======
</TABLE>
Marketable Securities Available-for-Sale
All marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. Realized
gains and losses and declines in value judged to be other than temporary for
available-for-sale securities are included in other income.
F-8
<PAGE> 51
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 10 years
Computers and office equipment.............................. 5 years
Lab equipment............................................... 5 years
</TABLE>
Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.
Goodwill
Goodwill, from the acquisition of Oncormed, represents the excess of the
purchase price over the fair market value of the net assets acquired. Goodwill
is being amortized over five years at a rate of approximately $1.5 million per
year. Amortization expense was $381,000 for the year ended December 31, 1998.
Accumulated amortization of goodwill was $381,000 at December 31, 1998.
Intangibles and Other Assets
Intangibles and other assets consist primarily of organization costs,
patent costs, trademarks and licenses. These amounts are being amortized over
periods of approximately five to seventeen years. Accumulated amortization
relating to other assets was $115,000 and $20,000 as of December 31, 1998 and
1997, respectively. The Company's success is heavily dependent upon its
proprietary technologies. The Company depends upon a combination of patents,
trade secrets, copyright and trademark laws, license agreements, nondisclosure
and other contractual provisions and various other security measures to protect
its technology rights.
Research and Development
Research and development costs are charged to operations when incurred or
acquired (See Note 6).
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
F-9
<PAGE> 52
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
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.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
Basic and Diluted Net Loss Per Common Share
Net loss per common share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from all
outstanding stock options and warrants are excluded from the computation, as
their effect is antidilutive.
Stock Option Plans
Prior to January 1, 1996, the Company's policy was to account for its stock
option plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.
F-10
<PAGE> 53
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- MARKETABLE SECURITIES
The following is a summary of the Company's investment portfolio as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED FAIR
COST LOSSES VALUE
--------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1998
Corporate commercial bonds....................... $13,324 $(46) $13,278
Government securities............................ 1,513 -- 1,513
------- ---- -------
Total.................................... $14,837 $(46) $14,791
======= ==== =======
December 31, 1997
Unit investment trust............................ $ 101 $ (2) $ 99
------- ---- -------
Total.................................... $ 101 $ (2) $ 99
======= ==== =======
</TABLE>
At December 31, 1998, all marketable securities had maturities greater than
one year, but less than eighteen months. As of December 31, 1998 and 1997, all
of the Company's investments were classified as current as the Company may not
hold its investments until maturity in order to take advantage of market
conditions. During the years ended December 31, 1998 and 1997, portions of the
Unit Investment Trust were sold for total proceeds of $99,000 and $2,407,000,
resulting in realized losses of $1,000 and $12,000, respectively. No marketable
securities were sold in 1996.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures...................................... $ 969 $ 191
Computers and office equipment.............................. 4,055 2,096
Lab equipment............................................... 4,403 1,766
Lab equipment under capital lease........................... 471 471
Leasehold improvements...................................... 2,571 368
------- ------
12,469 4,892
Less -- Accumulated depreciation............................ (2,280) (681)
------- ------
Property and Equipment, net................................. $10,189 $4,211
======= ======
</TABLE>
Depreciation expense was $1,664,000, $616,000 and $65,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
F-11
<PAGE> 54
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property additions.......................................... $1,036 $ 783
Professional fees........................................... 757 418
Payroll, taxes and benefits................................. 1,128 134
Consulting.................................................. 42 36
------ ------
Total............................................. $2,963 $1,371
====== ======
</TABLE>
NOTE 5 -- LICENSE ARRANGEMENTS
The proprietary rights and technical information covered by various patent
and patent applications have been licensed by the Company from third parties.
These licenses will continue for the life of the respective patent or until
terminated by either party. The license costs are being amortized over the
useful life of the related patents. The agreements call for the payment of
royalties over the life of the patents or a shorter life if no patents are
issued.
NOTE 6 -- ACQUISITION
On September 28, 1998, the merger (the "Merger") of Gene Logic Acquisition
Corp., a wholly owned subsidiary of the Company, and Oncormed, a publicly-held
genomics company providing pharmacogenomic services and developing databases for
use primarily in pharmaceutical research and development, was completed. As a
result of the Merger, Gene Logic Acquisition Corp. is the surviving corporation
and Oncormed has ceased to exist. In connection with the Merger, the Company
issued 4,849,580 (reduced for fractional shares) shares of its Common Stock in
exchange for all of the capital stock of Oncormed. In addition, outstanding
warrants for shares of Oncormed were converted into warrants for the Company's
Common Stock at exercise prices ranging from $14.77 to $28.89 per share. No
value has been included in the purchase price allocation for the warrants
assumed because their value, calculated using the Black-Scholes model, is
immaterial. All outstanding Oncormed preferred stock was converted into Common
Stock of the Company upon the consummation of the Merger, and no stock options
were assumed by the Company in the Merger.
The Merger has been accounted for as a purchase transaction and,
accordingly, the purchase price of approximately $39.2 million was allocated to
certain assets and liabilities based on their respective fair market values. The
excess of the purchase price over the estimated fair market value of the net
assets acquired was accounted for as goodwill. The amount allocated to goodwill,
approximately $7.6 million, will be amortized on a straight-line basis over five
years. Allocations were made to certain intangible assets, including work force,
and to "in-process research and development" consisting of technologies which
had not reached technological feasibility and had no alternative future use,
including in-process technologies relating to genomic databases and
pharmacogenomics. The write-off of in-process research and development resulted
in a non-recurring charge to the Company's operating results of $35.2 million,
or $2.24 per share basic and diluted for the year ended December 31, 1998. The
amount charged to earnings was determined by estimating the costs to
F-12
<PAGE> 55
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- ACQUISITION -- (CONTINUED)
develop the in-process technologies into commercially viable products,
estimating the resulting net cash flows from such projects and discounting the
net cash flows back to their present value. The discount rate includes a factor
that takes into account the uncertainty surrounding the successful development
of the acquired in-process technologies. If these projects are not successfully
developed, future results of operations of the Company may be adversely
affected. Additionally, the value of other intangible assets acquired may become
impaired.
Had the Merger been completed at the beginning of each period presented for
the Company, unaudited pro forma results would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................. $ 14,483 $ 3,007
Expenses................................................. 34,417 21,820
Amortization of goodwill................................. 1,526 1,526
Interest income, net and other........................... 2,365 (413)
-------- --------
Net loss................................................. $(19,095) $(20,752)
======== ========
Basic and diluted net loss per share..................... $ (0.99) $ (2.97)
======== ========
</TABLE>
Such unaudited pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations might have been had the Merger been
effective at the beginning of each period presented.
NOTE 7 -- ACCRUED RESTRUCTURING
In connection with the Merger, the Company recorded a restructuring
liability of approximately $1.6 million to integrate Oncormed into the Company
following the acquisition. The objective of the restructuring plan was to
eliminate redundant general and administrative employees of Oncormed and
terminate contracts that the Company deemed to have no 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, including the
termination of a certain agreement with Incyte Pharmaceuticals, Inc. ("Incyte")
in which the Company repaid $924,000 that had been prepaid by Incyte. This
liability has been included in the purchase price allocation performed in
connection with the Merger. Management anticipates the restructuring activities
as a result of the Merger will be substantially completed in 1999.
F-13
<PAGE> 56
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- ACCRUED RESTRUCTURING -- (CONTINUED)
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
==== ====== ======
</TABLE>
NOTE 8 -- COLLABORATION AGREEMENTS
As of December 31, 1998, the Company had nine collaboration agreements with
pharmaceutical and agricultural companies. The Company's four target discovery
collaborations provide the Company with various technology and database access
fees, research funding and upfront payments. In addition, these agreements
provide certain additional payments upon attainment of research and product
development milestones and royalty payments based on sales of any products that
result from use of the Company's technology or proprietary database information.
The Company also has a collaboration agreement with a pharmaceutical company for
the development of a database for predicting drug toxicity. Under the
collaboration, the Company may license the database and other products developed
under the collaboration to third party customers. In addition, the Company has a
collaboration agreement with a pharmaceutical company for its bioinformatic
software, database development and data integration. Under this collaboration,
the Company receives software license and development fees. In connection with
the Merger, the Company obtained three collaboration agreements with
pharmaceutical companies in which the Company receives fees for analyzing gene
mutations for clinical trials.
Pursuant to a certain target discovery collaboration agreement, the Company
is creating a research database in exchange for a fixed fee. Revenues from this
collaboration are recognized on a percentage-of-completion basis primarily based
on man-months incurred to date compared with total estimated man-months for
development of such database. At December 31, 1998, the Company had recognized
unbilled fees in the amount of approximately $1.4 million relating to this
collaborator.
The Company's multi-year target discovery collaborations provide the right
for the collaborators to terminate for any reason within six months' notice. All
other collaborations provide the right for the collaborator to terminate with a
one month notice. The loss of revenues from any individual target discovery
collaboration, if terminated, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's strategy for developing and commercializing pharmaceutical
and agricultural products based on its target discoveries depends on the
formation of collaboration agreements with pharmaceutical and agricultural
companies. The Company has established several such collaborations during the
last two years. There can be no assurance that the Company will be able to
establish additional collaboration agreements or that any collaborations
established will be successful.
F-14
<PAGE> 57
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES
The actual income tax expense for the years ended December 31, 1998, 1997
and 1996, is different from the amount computed by applying the statutory
federal income tax rates to losses before income tax expense. The reconciliation
of these differences is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at federal statutory rate................ $(15,223) $(2,412) $ (977)
State income taxes, net of federal income tax
effect............................................. (2,069) (326) (133)
Acquired in-process research and development......... 13,593 -- --
Other................................................ 566 2 (50)
Increase in valuation allowance...................... 3,233 2,836 1,160
-------- ------- ------
Income tax expense................................... $ 100 $ 100 $ --
======== ======= ======
</TABLE>
The tax effect of cumulative temporary differences at December 31, 1998,
1997 and 1996, follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets:
Japanese withholding.............................. $ 200 $ 100 $ --
Tax carryforwards................................. 18,668 4,066 1,129
Start-up costs.................................... 221 312 404
Accrued vacation.................................. 117 39 7
Other............................................. 830 -- --
-------- ------- -------
20,036 4,517 1,540
Less -- Valuation allowance....................... (19,611) (4,313) (1,477)
-------- ------- -------
Net deferred tax assets........................ $ 425 $ 204 $ 63
======== ======= =======
Deferred Tax Liabilities:
Depreciation...................................... $ 186 $ 118 $ 51
Prepaid expenses.................................. 10 45 2
Capital lease..................................... 95 41 10
Other............................................. 134 -- --
-------- ------- -------
Net deferred tax liabilities................... $ 425 $ 204 $ 63
======== ======= =======
</TABLE>
Net operating loss carryforwards for income tax purposes are approximately
$46.9 million, including approximately $30.0 million assumed in the Merger, as
of December 31, 1998. The Company also has research and development tax credit
carryforwards of approximately $600,000 as of December 31, 1998. The
carryforwards, if not utilized, will expire in increments through 2013, but
begin to expire in 2008. Utilization of the net operating losses and credits may
be subject to an annual limitation, due to the ownership change limitations
provided by the Internal Revenue Code of 1986.
F-15
<PAGE> 58
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Equipment loans:
Variable rate equipment loan.............................. $4,304 $ --
9.0% equipment loan....................................... 679 930
Note payable................................................ 98 281
------ ------
5,081 1,211
Less -- Current portion..................................... (1,292) (434)
------ ------
Total long-term debt.............................. $3,789 $ 777
====== ======
</TABLE>
As of December 31, 1998, principal payments on long-term debt for the next
four years are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1999............................... $1,292
2000.............................................. 1,301
2001.............................................. 1,195
2002.............................................. 1,293
------
$5,081
======
</TABLE>
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 December 31, 1998,
the Company has borrowed approximately $4.8 million, bearing interest ranging
from 7.6% to 8.8%. The loan agreement will be repaid in 48 equal monthly
installments including a 15.0% balloon payment at the end of the term. The
Company granted the lender a security interest, collateralized by all the
equipment and fixtures acquired under the loan.
In March 1997, the Company entered into a loan agreement for the purchase
of laboratory and computer equipment. The Company borrowed approximately $1.1
million under this agreement, bearing interest at 9.0%. The loan will be repaid
in 48 equal monthly installments. The Company has granted the lender a security
interest, collateralized by all of the equipment and fixtures acquired under the
loan. In conjunction with the agreement, the Company granted warrants to the
lender to purchase 30,051 shares of the Company's Series B Convertible Preferred
Stock at an exercise price of $2.20 per share. Such warrant expires in December
2002.
In December 1997, the Company entered into a note payable to finance the
purchase of directors' and officers' insurance. The note bears interest at 8.0%
and is due in regular monthly installments through June 1999.
Interest expense was $271,000, $97,000 and $9,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-16
<PAGE> 59
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- STOCKHOLDERS' EQUITY
During November 1997, the Company completed an initial public offering
("IPO") of 3,000,000 shares of common stock at a price of $8 per share. In
December 1997, the underwriters exercised their over-allotment option on an
additional 347,000 shares. Net proceeds of the IPO (not including the concurrent
Japan Tobacco Inc. investment of $3.0 million), after underwriting commissions
and expenses, were approximately $23.9 million. Concurrent with the IPO, a note
receivable of $50,000 plus interest from an officer of the Company was forgiven,
the vesting of certain options was accelerated and the authorized capital stock
of the Company was increased to 60,000,000 shares of common stock and 10,000,000
shares of preferred stock.
In October 1996, an officer of the Company resigned. In January 1997, in
connection with the resignation, the 55,000 shares of the Company's common stock
held by the officer were cancelled in satisfaction of the $50,000 note
receivable and accrued interest obligation from the officer to the Company (see
Note 15).
Four series of mandatory redeemable preferred stock have been issued:
Series A Convertible Preferred Stock ("Series A"), Series A-1 Convertible
Preferred Stock ("Series A-1"), Series B Convertible Preferred Stock ("Series
B") and Series C Convertible Preferred Stock ("Series C").
During 1996, the Company sold 4,090,909 shares of Series B stock for $9.0
million.
During July 1997, the Company sold 4,444,443 shares of Series C stock for
net proceeds of approximately $19.1 million. The Company also issued a warrant
for an additional 48,889 shares of Series C stock at an exercise price of $4.50.
At the time of issuance, the fair value of this warrant, approximately $118,000,
was recorded as Series C stock on the Company's balance sheet. The fair value of
this warrant was calculated using the Black-Scholes option pricing model using
the same assumptions used for options granted during the period (see Note 14).
This warrant was exercised by the warrantholder concurrent with the Company's
IPO.
All outstanding shares of preferred stock were converted to common stock in
conjunction with the Company's IPO on a one-to-one basis.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Operating Lease
During 1997, the Company entered into an operating lease for a new
laboratory and corporate headquarters facility with a lease term of ten years.
In addition, the Company issued a warrant to purchase 20,000 shares of common
stock at an exercise price of $5.40 per share in connection with the lease. The
fair value of the warrant, approximately $43,000, is being recorded as rent
expense over the term of the lease. The fair value of the warrant was calculated
using the Black-Scholes option pricing model using the same assumptions used for
options granted during the period (see Note 14). This warrant was exercised by
the lessor concurrent with the Company's IPO.
The Company has also entered into additional operating leases in
Gaithersburg, Maryland, Berkeley, California and Omaha, Nebraska with varying
terms expiring through 2004.
F-17
<PAGE> 60
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Certain leases obligate the Company to pay building operating costs and
also contain renewal provisions.
Future minimum lease payments on these operating leases as of December 31,
1998, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999.............................................. $ 1,556
2000.............................................. 1,334
2001.............................................. 1,330
2002.............................................. 1,369
2003.............................................. 1,411
2004 and thereafter............................... 5,942
-------
$12,942
=======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996, was
$1,544,000, $493,000 and $239,000, respectively.
Capital Lease
During 1996, the Company entered into a capital lease to purchase equipment
for $471,000. Accumulated amortization for this equipment was $269,000 and
$147,000 at December 31, 1998 and 1997, respectively. Payments during the years
ended December 31, 1998 and 1997, totaled $115,000 and $106,000, respectively.
Future minimum lease payments as of December 31, 1998, are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999.............................................. $ 137
2000.............................................. 103
-----
Total minimum lease payments...................... 240
Less -- Amounts representing imputed interest............... (16)
-----
Present value of net minimum payments..................... 224
Less -- Current portion..................................... (124)
-----
Noncurrent portion of capital lease obligation.............. $ 100
=====
</TABLE>
In conjunction with this lease agreement, the Company granted a warrant to
the lessor to purchase 13,636 shares of the Company's Series B Convertible
Preferred Stock at an exercise price of $2.20 per share. Such warrant expires
five years from the date of the Company's IPO (see Note 11).
Contingencies
Clinical trials, manufacturing, marketing and sale of any of the Company's
collaborators' potential therapeutic, diagnostic or agricultural products may
expose the Company to liability claims
F-18
<PAGE> 61
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
from the use of such products. The Company currently maintains product liability
and medical malpractice insurance.
NOTE 13 -- 401(K) RETIREMENT PLAN
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the "401(k) Plan") for its employees under Section 401(k) of the Internal
Revenue Code. Under this plan, all employees over 21 years of age and with at
least 90 days of service with the Company are eligible, starting on the calendar
quarter, to contribute from 2% to 15% of their salary. Employee contributions
are 100% vested. The Company is not required to make any contributions to the
401(k) Plan and has not made any contributions through December 31, 1998.
NOTE 14 -- STOCK BASED COMPENSATION
During 1996, the Company instituted a stock plan (the "Stock Plan"), which
was amended and restated in 1997, whereby the Company's compensation committee
(the "Committee"), at its discretion, can grant options, award stock or provide
opportunities to make direct purchase of stock to employees, officers, directors
and consultants of the Company and related corporations. The Stock Plan is
authorized to grant options of up to 6,100,000 shares of common stock. At
December 31, 1998, there were 2,023,785 shares reserved for issuance under the
Stock Plan. During 1997, the Company adopted a Directors' Stock Plan (the
"Directors' Plan") to provide for granting of options to non-employee directors
of the Company. The Directors' Plan is administered by the Committee and is
authorized to grant options of up to 125,000 shares of common stock. At December
31, 1998, there were 87,500 shares reserved for issuance under the Directors'
Plan. Options are to be granted at the fair market value of the common stock at
the grant date. The options, awards and opportunities to purchase stock expire
at the earlier of termination or the date specified by the Committee at the date
of grant, but not more than ten years. During 1997, the Company adopted an
Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of
250,000 shares of common stock. The Purchase Plan allows employees to purchase
common stock of the Company, through payroll deductions of up to a maximum of
15% of their salary, at 85% of the closing price of the shares at the time of
purchase. At December 31, 1998, there were 222,710 shares reserved for issuance
under the Purchase Plan.
F-19
<PAGE> 62
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK BASED COMPENSATION -- (CONTINUED)
The following is a rollforward of option activity for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OUTSTANDING OPTIONS
--------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
---------- --------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..................... -- -- $ --
Authorization.................................. 2,000,000 -- --
Restricted stock award......................... (100,000) -- --
Options granted................................ (524,000) 524,000 $0.12
Options exercised.............................. -- (100,000) $0.01
Options cancelled.............................. -- -- --
---------- --------- -----
BALANCE AT DECEMBER 31, 1996..................... 1,376,000 424,000 $0.15
Additional authorization....................... 4,225,000 -- --
Options granted................................ (2,281,881) 2,281,881 $1.31
Options exercised.............................. -- (152,943) $0.15
Options cancelled.............................. 55,578 (55,578) $0.15
---------- --------- -----
BALANCE AT DECEMBER 31, 1997..................... 3,374,697 2,497,360 $1.21
Options granted................................ (1,556,000) 1,556,000 $5.52
Options exercised.............................. -- (875,636) $0.23
Options cancelled.............................. 292,588 (292,588) $3.78
---------- --------- -----
BALANCE AT DECEMBER 31, 1998..................... 2,111,285 2,885,136 $3.57
========== ========= =====
</TABLE>
During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Stock Plan.
Options to purchase a total of 722,345, 859,315 and 77,710 at December 31,
1998, 1997, and 1996, respectively, were exercisable. The weighted-average
grant-date fair value of options granted during the years ended December 31,
1998, 1997 and 1996 were $3.19, $3.22 and $0.05, respectively.
During the year ended December 31, 1997, the Company granted options with
exercise prices below fair value. The Company has recorded deferred compensation
of $6,897,000 at December 31, 1997, and compensation expense of $1,577,000 and
$619,000 for the years ended December 31, 1998 and 1997, respectively, related
to these options.
The following table provides further information on options granted with
exercise prices below fair value, compared to options granted with exercise
prices equal to fair value for the year ended
F-20
<PAGE> 63
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK BASED COMPENSATION -- (CONTINUED)
December 31, 1997. Options granted in the years ended December 31, 1996 and 1998
were granted with exercise prices equal to fair value.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED FAIR VALUE OF
AVERAGE AVERAGE COMMON
EXERCISE OPTION FAIR STOCK ON
SHARES PRICE VALUE GRANT DATE
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Options whose exercise price equals the fair
value of the stock on the grant date........ 53,000 $5.27 $2.36 $5.27
Options whose exercise price is less than the
fair value of the stock on the grant date... 2,228,881 1.22 3.24 4.31
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1998 LIFE PRICE 1998 PRICE
-------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.15-$0.99............ 352,682 8.2 Years $0.19 165,299 $0.17
$1.00-$2.50............ 987,484 8.7 Years $1.86 355,851 $1.70
$2.51-$4.99............ 849,790 9.6 Years $4.10 83,368 $4.02
$5.00-$8.50............ 695,180 9.3 Years $7.06 117,827 $7.36
--------- --------- ----- ------- -----
$0.15-$8.50............ 2,885,136 9.0 Years $3.57 722,345 $2.54
========= ========= ===== ======= =====
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the Stock
Plan, consistent with the method of SFAS No. 123, the Company's net loss and
loss per common share would have been changed to the pro forma amounts for the
years ended December 31, 1998, 1997 and 1996 as indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net loss (in thousands):
As reported........................................... $(44,873) $(7,194) $(2,865)
Pro forma............................................. (45,853) (7,243) (2,874)
Net loss per common share:
As reported........................................... $ (2.86) $ (3.97) $ (5.87)
Pro forma............................................. (2.92) (3.99) (5.88)
</TABLE>
F-21
<PAGE> 64
GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK BASED COMPENSATION -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model for the years ended December 31, 1998,
1997 and 1996, with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Expected volatility.................... 86.0% 60.0% 60.0%
Risk-free interest rate................ 4.18% to 5.61% 5.72% to 5.86% 5.72% to 5.86%
Expected lives......................... 1 - 3 years 1 - 3 years 1 - 3 years
Dividend rate.......................... 0% 0% 0%
</TABLE>
NOTE 15 -- RELATED PARTY TRANSACTIONS
During 1996, the Company made loans to two officers of the Company of
$50,000 each to offset relocation costs. These notes receivable were secured by
common stock previously issued to the officers. In January 1997, one of these
notes was cancelled (see Note 11). The remaining note was forgiven concurrent
with the Company's IPO (see Note 11).
NOTE 16 -- SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting
information about operating segments in annual and interim financial statements
and related disclosures about its products, services, geographic areas and major
customers. The Company's operations are treated as one operating segment,
genomic information products, software and research services, as it only reports
loss information on an aggregate basis to chief operating decision makers of the
Company. Approximately 98% of the revenues in 1998 were derived from four
collaborators with each of them contributing approximately 34%, 24%, 22% and
18%. In 1997, two collaborators contributed over 95% of the revenues with each
contributing approximately 57% and 42%. No revenues were received by the Company
in 1996. Although the Company operates exclusively in the United States, the
Company recorded revenue in 1998 from major customers in the United States,
Europe and Japan of 24%, 40% and 34%, respectively, and in 1997 from the United
States and Japan of 57% and 42%, respectively.
F-22
<PAGE> 65
GENE LOGIC INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCRUED RESTRUCTURING CHARGES:
<TABLE>
<CAPTION>
AMOUNTS ADJUSTMENTS
BALANCE AT NEW AMOUNTS CHARGED TO BALANCE
BEGINNING RESTRUCTURING DUE TO AGAINST ACCRUED AT END OF
DESCRIPTION OF YEAR CHARGES ACQUISITIONS(1) ACCRUAL AMOUNTS YEAR
----------- ---------- ------------- --------------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998.............. $ -- $ -- $1,597 $(1,163) $(250) $184
======= ======= ====== ======= ===== ====
</TABLE>
- ---------------
Notes:
(1) Restructuring liability recorded in connection with the merger with
Oncormed, Inc. The liability has been included in the purchase price
allocation performed in connection with the merger.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements (File No. 333-53083 and File No. 333-60135).
/s/ Arthur Anderson LLP
Baltimore, Maryland,
April 20, 1999
