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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________TO _______________.
COMMISSION FILE NUMBER 0-23317
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GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 06-1411336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(Address of principal executive offices)
(301) 987-1700
(Registrant's phone number, including area code)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: : YES [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 25,773,746 as of July 31, 2000.
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GENE LOGIC INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999..............................3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2000 and 1999.................................................................4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999.................................................................5
Notes to Consolidated Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition..................................................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................12
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...................................13
Item 6. Exhibits and Reports on Form 8-K......................................................14
Signatures.....................................................................................15
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENE LOGIC INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................. $ 242,773 $ 5,294
Marketable securities available-for-sale .................................. - 7,152
Due from collaborators .................................................... 3,115 3,549
Inventory ................................................................. 1,753 1,735
Prepaid expenses .......................................................... 1,618 822
Other current assets ...................................................... 3,415 1,335
---------- -----------
Total Current Assets .................................................. 252,674 19,887
Property and Equipment, net .................................................... 13,004 10,527
Long-term Investments .......................................................... 9,004 1,000
Notes Receivable from Employee ................................................. 75 735
Goodwill, net .................................................................. 4,963 5,725
Intangible and Other Assets, net ............................................... 5,197 3,292
---------- -----------
Total Assets .......................................................... $ 284,917 $ 41,166
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................................... $ 6,165 $ 4,506
Accrued expenses ......................................................... 3,855 2,759
Current portion of capital lease obligation .............................. 34 192
Current portion of long-term debt ........................................ 1,433 1,335
Deferred revenue ......................................................... 4,894 5,672
---------- -----------
Total Current Liabilities ............................................ 16,381 14,464
Capital Lease Obligation ....................................................... - 201
Deferred Revenue ............................................................... 970 -
Long-Term Debt ................................................................. 2,205 2,862
Other Noncurrent Liabilities ................................................... 597 571
---------- -----------
Total Liabilities .................................................... 20,153 18,098
---------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value; 10,000,000 shares authorized; no shares
issued and outstanding as of June 30, 2000 and December 31, 1999 ........ - -
Common Stock, $.01 par value; 60,000,000 shares authorized; 25,636,225 and
20,005,688 shares issued and outstanding as of
June 30, 2000 and December 31, 1999, respectively ....................... 256 200
Additional paid-in capital ............................................... 354,043 103,497
Deferred compensation on stock options, net .............................. (1,356) (2,488)
Accumulated other comprehensive loss ..................................... - (3)
Accumulated deficit ...................................................... (88,179) (78,138)
---------- -----------
Total Stockholders' Equity ............................................ 264,764 23,068
---------- -----------
Total Liabilities and Stockholders' Equity ............................ $ 284,917 $ 41,166
========== ===========
</TABLE>
See accompanying notes.
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GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues .......................................... $ 6,544 $ 5,212 $ 11,542 $ 9,279
Expenses:
Research and development ........................ 10,615 7,454 19,094 14,486
Selling, general and administrative ............. 4,551 1,986 7,930 3,759
Amortization of goodwill ........................ 381 381 762 762
---------- ----------- ---------- -----------
Total expenses ............................. 15,547 9,821 27,786 19,007
---------- ----------- ---------- -----------
Loss from operations ....................... (9,003) (4,609) (16,244) (9,728)
Interest income, net .............................. 3,772 224 6,129 463
Other income ...................................... 234 - 234 30
---------- ----------- ---------- -----------
Loss Before Income Tax Expense ............. (4,997) (4,385) (9,881) (9,235)
Income tax expense ................................ 60 - 160 100
---------- ----------- ---------- -----------
Net Loss ................................... $ (5,057) $ (4,385) $(10,041) $ (9,335)
---------- ----------- ---------- -----------
Basic and Diluted Net Loss Per Common Share ....... $ (0.20) $ (0.22) $ (0.41) $ (0.47)
========== =========== ========== ===========
Shares Used In Computing Basic and Diluted Net Loss
Per Common Share ........................... 25,511 19,797 24,505 19,754
---------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
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GENE LOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss....................................................... $ (10,041) $ (9,335)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization ............................. 2,368 1,495
Amortization of goodwill................................... 762 762
Amortization of deferred compensation ..................... 616 749
Loss on disposal of property and equipment................. 44 -
Other non-cash expense..................................... 99 -
Changes in operating assets and liabilities:
Due from collaborators..................................... 434 5
Inventory.................................................. (18) -
Prepaid expenses........................................... (796) (149)
Other current assets....................................... (2,080) (338)
Intangible and other assets................................ (307) (303)
Accounts payable .......................................... 1,659 (83)
Accrued expenses........................................... 1,096 (1,619)
Accrued restructuring ..................................... - (132)
Deferred revenue .......................................... 192 824
Other noncurrent liabilities............................... 26 43
-------------- -------------
Net Cash Flows From Operating Activities ............ (5,946) (8,081)
-------------- -------------
Cash Flows From Investing Activities:
Purchases of property and equipment ....................... (4,849) (1,496)
Purchase of equity investment ............................. (8,004) -
Software development costs................................. (1,925) -
Decrease (increase) in notes receivables from employees.... 660 (759)
Proceeds from sale and maturity of marketable securities
available-for-sale....................................... 7,155 1,646
-------------- -------------
Net Cash Flows From Investing Activities............. (6,963) (609)
-------------- -------------
Cash Flows From Financing Activities:
Proceeds from public offering.............................. 262,080 -
Issuance costs of public offering.......................... (14,624) -
Proceeds from issuance of common stock..................... 3,562 202
Proceeds from notes payable................................ - 425
Repayments of financing agreement.......................... - (98)
Repayments of capital lease obligations and
equipment loans......................................... (630) (645)
-------------- -------------
Net Cash Flows From Financing Activities............. 250,388 (116)
-------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents........... 237,479 (8,806)
Cash and Cash Equivalents, beginning of period................. 5,294 16,191
-------------- -------------
Cash and Cash Equivalents, end of period....................... $ 242,773 $ 7,385
============== =============
Supplemental Disclosure:
Interest paid............................................. $ 174 $ 211
============== =============
Non-Cash Transactions:
Capital lease termination................................. $ 288 $ -
============== =============
</TABLE>
See accompanying notes.
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GENE LOGIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements include the accounts of
Gene Logic Inc. and its wholly owned subsidiary (the "Company"). The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The consolidated balance sheet as of June 30, 2000, consolidated statements
of operations for the three and six months ended June 30, 2000 and 1999 and the
consolidated statements of cash flows for the six months ended June 30, 2000 and
1999 are unaudited, but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position, operating results and cash flows for the periods
presented. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of
results for any future interim period or for the entire year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Comprehensive Loss
Total comprehensive loss was $5.06 million and $10.04 million for the
three and six months ended June 30, 2000, respectively, and $4.42 million and
$9.39 million for the three and six months ended June 30, 1999, respectively.
Marketable Securities Available-for-Sale
All marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value with accumulated
unrealized gains and losses reported as a separate component of stockholders'
equity in the accompanying consolidated balance sheets. Realized gains and
losses and declines in value judged to be other than temporary for
available-for-sale securities are included in other income.
Goodwill
Goodwill, from the acquisition of Oncormed, Inc. ("Oncormed") in
September 1998, represents the excess of the purchase price over the fair market
value of the net assets acquired. Goodwill is being amortized over five years at
a rate of approximately $1.5 million per year. Amortization expense was $0.4
million and $0.8 million for the three and six months ended June 30, 2000 and
1999, respectively. Accumulated amortization of goodwill was $2.7 million and
$1.9 million as of June 30, 2000 and December 31, 1999, respectively.
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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. Subscription fees to the GeneExpress(TM) Suite of
databases ("GeneExpress Suite") are recognized evenly over the term of the
subscription. Revenues for such amounts are deferred until earned.
Nonrefundable upfront payments received for the value of data
purchased, transferred technology or other contractual rights that are not
contingent upon future performance under the terms of the collaboration
agreements are recognized as revenue when earned. Under collaboration agreements
in which the Company creates a research database in exchange for a fixed fee,
revenues from such collaborations are recognized on the percentage-of-completion
method.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 is based upon existing accounting rules and provides guidance on
how those rules should be applied. SAB 101 specifically addresses revenue
recognition for nonrefundable upfront fees in the biotechnology industry. Should
a change in accounting policy be necessary, the change would be reported as a
cumulative effect adjustment with resulting deferred revenue being recognized in
future periods over the remaining terms of the applicable agreements. The
Company will adopt SAB 101 for the fourth quarter of fiscal 2000 and is
currently evaluating the effect the implementation of SAB 101 will have on its
results of operations and financial position.
NOTE 2. LONG-TERM INVESTMENTS
Since April 2000, the Company has held an interest in NeuralStem
Biopharmaceuticals, Ltd. ("NeuralStem"), a company commercializing proprietary,
patented central nervous system stem cell technology as new therapeutics and
research tools for drug discovery. The carrying value of the investment in
NeuralStem is approximately $8.0 million and consists of Series A Convertible
Preferred Stock. The Company's voting stock interest in NeuralStem constituted
26.7% of the outstanding voting securities at the time of the investment. The
Company accounts for this investment under the equity method of accounting. The
Company holds no common stock interest in NeuralStem. Therefore, in accordance
with APB Opinion No. 18, no portion of the earnings or losses of NeuralStem are
reflected in the Company's statements of operations.
NOTE 3. STOCKHOLDERS' EQUITY
On February 1, 2000, the Company completed a public offering of its
common stock at $56.00 per share. The Company sold 4,680,000 shares, including
the underwriters' over-allotment option. Net proceeds to the Company, after
deducting the underwriting discounts and commissions and offering expenses, were
approximately $247.5 million.
NOTE 4. LITIGATION
On October 19, 1999, a lawsuit was filed in the Circuit Court of Cook
County, Illinois against Oncormed, Inc. and Gene Logic Inc. alleging that
Oncormed was negligent in determining and reporting laboratory test results of a
genetic test conducted by Oncormed. Oncormed sold its testing business to a
third-party company prior to the Company's acquisition of Oncormed. The Company
is not engaged in any type of genetic testing, nor does the Company have plans
to enter such markets. The Company maintains insurance coverage against such
claims, and does not believe this action will have a material adverse impact
on the Company's business, financial condition or results of operations.
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In December 1999, Incyte Genomics, Inc., formerly Incyte
Pharmaceuticals, Inc., ("Incyte") filed an action against the Company in the
United States District Court for the Northern District of California, Case No.
C99-5180 MJJ. In the action, Incyte asserts claims against the Company for
infringement of certain patent rights held by Incyte. The alleged infringement
involves the Company's use of a process that Affymetrix, Inc. recommends be used
in the preparation of samples for use with the Affymetrix GeneChip(R) platform.
The Company intends to defend its position vigorously. There can be no guarantee
that such defense will be successful and neither the ultimate outcome nor the
range of any losses resulting from this action can be made at this time. This
action will continue to require significant management time and expense for the
foreseeable future.
NOTE 5. 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 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.
The following is a breakdown of revenue by major collaborators
exceeding ten percent (10%) of such revenues and by geographic areas:
<TABLE>
<CAPTION>
MAJOR COLLABORATORS GEOGRAPHIC AREA
------------------------------ -------------------------
A B C D JAPAN EUROPE US
--- --- --- --- ----- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
For the three months ended:
June 30, 2000........................ 38% 23% - 19% 38% 19% 23%
June 30, 1999........................ 38% 21% 12% 11% 38% 23% 21%
For the six months ended:
June 30, 2000........................ 38% 23% - 16% 38% 16% 23%
June 30, 1999........................ 38% 23% 14% 12% 38% 26% 23%
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Report contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "anticipate," "estimate," "plan,"
"project," "continuing," "ongoing," "expect," "management believes," "we
believe," "we intend" and similar expressions to indicate when we are making
forward-looking statements. You should not place undue reliance on these
forward-looking statements. The forward-looking statements speak only as of the
date on which they are made, and we undertake no obligation to update any
forward-looking statement. Forward-looking statements include statements about
the performance and utility of our products, the timing and availability of
products under development, the ability of our customers to develop products
identified using our products, the adequacy of capital resources and other
expectations, plans, objectives, assumptions or future events. These statements
involve estimates, assumptions and uncertainties that could cause actual results
to differ materially from those expressed in this Report. These risks and
uncertainties include, but are not limited to, the extent of utilization of
genomic information by the pharmaceutical and biotechnology industries in both
research and development, our ability to retain existing and obtain additional
database customers, risks relating to the development of genomic database
products and their use by existing and potential customers, the impact of
technological advances and competition, our ability to enforce our intellectual
property rights, and the impact of the intellectual property rights of others,
as well as other risks and uncertainties identified in our filings with the
Securities and Exchange Commission including our Annual Report on Form 10-K for
the year ended December 31, 1999.
GeneExpress(TM) and Flow-thru Chip(TM) are our trademarks. GeneChip(R)
is a registered trademark of Affymetrix, Inc.
OVERVIEW
We were incorporated in September 1994 and have devoted substantially
all of our resources to the development of our genomics technologies,
bioinformatics systems and database products for use in pharmaceutical,
diagnostic and agricultural product research and development.
Since 1997, we have developed custom gene expression databases designed
for each of our customers' internal programs and needs and targeted to specific
therapeutic areas of interest, including heart failure, kidney disease,
osteoporosis, psychiatric disorders and other major illnesses. Building on this
know-how, in March 1999, we began developing the GeneExpress Suite, our
large-scale reference database of gene expression information. The GeneExpress
Suite contains information from a broad range of normal and diseased human
tissues, tissues from experimental animals, human and animal cell lines and
tissues that have been treated with many different drugs. We completed
development of the first commercial version of the GeneExpress Suite in November
1999. We currently market the GeneExpress Suite through nonexclusive
subscriptions to customers in the pharmaceutical, biotechnology and diagnostic
industries, and are developing versions of the database suite to market to the
academic and government life science research community and to physicians and
patients. We sold our first subscription to the GeneExpress Suite in
December 1999.
Customers for our custom database and related software products can
provide us with various combinations of recurring technology and database access
fees, research fees, certain additional payments upon the attainment of research
and product development milestones, royalty payments based on sales of any
products resulting from their use of our products, and nonrefundable upfront
payments all of which are recognized as revenue in accordance with relevant
generally accepted accounting principles. Subscribers to our GeneExpress Suite
pay us varying database subscription fees depending upon the level and type of
information they obtain.
Technology and database access fees are recognized evenly over the term
of each customer agreement. We recognize revenues from research and development
support when they are earned, which is ordinarily when the work is performed or
costs are incurred. Milestone payments and royalties are
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recognized when they are earned in accordance with the applicable performance
requirements and contractual terms. Subscription fees to the GeneExpress Suite
are recognized evenly over the term of the subscription. Revenues for such
amounts are deferred until earned. Nonrefundable upfront payments received for
the value of data purchased, transferred technology or other contractual rights
that are not contingent upon future performance under the terms of the
agreements are recognized as revenue when earned. Under collaboration agreements
in which we create research databases in exchange for fixed fees, revenues from
such collaborations are recognized on the percentage-of-completion method.
Our future profitability will depend in part on the successful
establishment of agreements with additional customers which include various
combinations of genomic databases, bioinformatics software and genomics
technology and the successful commercialization of the GeneExpress Suite.
Payments for access to custom databases and the GeneExpress Suite are expected
to be our primary source of revenue for the foreseeable future. We have not
received, and do not expect to receive, significant royalty or other revenues
from development and commercialization of products by our customers using our
databases and other technology for several years, if at all. Revenues from our
customers may be subject to significant fluctuation in both timing and amount,
and, therefore, our results of operations for any period may not be comparable
to the results of operations for any other period.
We have incurred operating losses in each year since our inception. At
June 30, 2000, we had accumulated operating losses of approximately $88.2
million. Our losses have resulted principally from costs incurred in the
development of our gene expression databases, a $35.2 million non-recurring
charge incurred in connection with our acquisition of Oncormed and general and
administrative costs associated with our operations. These costs have exceeded
our revenues which, to date, have been generated principally from agreements for
our custom database and related software products. We expect to incur additional
operating losses in future years.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2000 and 1999
Revenues increased $1.3 million or 26% to $6.5 million for the three
months ended June 30, 2000 from $5.2 million for the same period in 1999.
Revenues increased $2.3 million or 24% to $11.5 million for the six months ended
June 30, 2000 from $9.3 million for the same period in 1999. The increase in
revenues resulted primarily from additional subscribers to the GeneExpress
Suite, as well as additional custom database revenues relating to milestone
payments received from certain customers. Due to the conclusion of the Aventis
CropScience collaboration in June 2000 and the uncertain timing of milestone
payments, revenues for the third quarter of 2000 are expected to decrease as
compared to revenues during the second quarter of 2000. Payments from each of
Aventis CropScience, Japan Tobacco and Procter & Gamble accounted for 10% or
more of revenues for the three and six months ended June 30, 2000, and payments
from each of Aventis CropScience, Japan Tobacco, Organon and Procter & Gamble
accounted for 10% or more of revenues for the same periods in 1999.
Research and development expenses increased to $10.6 million and $19.1
million for the three and six months ended June 30, 2000, respectively, from
$7.5 million and $14.5 million for the same periods in 1999. The increase in
research and development expenses for the three and six month periods ended June
30, 2000 was primarily attributable to increased usage of sample tissues and
Affymetrix GeneChips to expand and enhance the content of the GeneExpress Suite.
We expect research and development expenses to increase as we expand the content
of the GeneExpress Suite, further develop the Flow-thru Chip and pursue our
recent collaboration with Life Technologies, Inc.
During the second quarter of 2000, we entered into an agreement with
Life Technologies, Inc. whereby the two companies will collaborate to provide
customers with full-length sequences and clones. We began recording expenses
related to this agreement in the second quarter of 2000 and expect such expenses
to increase. Revenues from this collaboration are not expected to begin until
the middle of 2001.
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Selling, general and administrative expenses increased to $4.5 million
and $7.9 million for the three and six months ended June 30, 2000, respectively,
from $2.0 million and $3.8 million for the same periods in 1999. These costs
include the costs of corporate operations, finance and accounting, human
resources, sales and marketing and other general operations. For the three and
six month periods, approximately $1.5 million and $2.5 million, respectively, of
the increase in selling, general and administrative expenses was attributable to
increases in personnel expenses, recruiting and relocation costs and employee
travel related to the expansion of our sales and marketing efforts and general
business operations. Selling, general and administrative expenses are expected
to increase as we expand our product offerings and sales and marketing efforts.
Amortization of goodwill was $0.4 million and $0.8 million for the
three and six months ended June 30, 2000, respectively, as a result of the
acquisition of Oncormed in September 1998.
Net interest income increased to $3.8 million and $6.1 million for the
three and six months ended June 30, 2000, respectively, from $0.2 million and
$0.5 million for the same periods in 1999 primarily due to investment of the
proceeds of our public offering of common stock in February 2000.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 2000, we have financed our operations
through the sale of equity securities, payments from customers, and equipment
and tenant improvement financing. In February 2000, we completed a public
offering of 4,680,000 shares of our common stock (including exercise of the
underwriters' over-allotment option), generating net proceeds of approximately
$247.5 million. As of June 30, 2000, we have also obtained $0.5 million of
capital lease financing and $6.3 million under equipment and tenant improvement
loans. As of June 30, 2000, we had approximately $242.8 million in cash and
marketable securities, compared to $12.4 million as of December 31, 1999.
Net cash used in operating activities was $5.9 million for the six
months ended June 30, 2000 compared to $8.1 million for the same period in 1999.
During the six months ended June 30, 2000 and 1999, we primarily used cash to
fund our operating losses.
The Company's investing activities, other than sales, maturities and
purchases of available-for-sale securities, consisted of capital expenditures,
an $8.0 million equity investment in NeuralStem and capitalized software costs.
The increase in capital expenditures, which totaled $4.8 million and $1.5
million for the six months ended June 30, 2000 and 1999, respectively, was
primarily due to increased efforts in expanding the content in the GeneExpress
Suite. The increase in capitalized software costs of $1.9 million for the six
months ended June 30, 2000 was due to ongoing efforts to enhance the software
interface of the GeneExpress Suite, specifically GeneExpress 2000. Capitalized
software costs are expected to increase as a result of continuing efforts to
further enhance the GeneExpress Suite. Capital expenditures are expected to
increase at the end of 2000 and early 2001 as we meet our expanding facility
requirements.
Our financing activities, other than the repayment of capital lease
obligations and equipment loans, consisted of the issuance of common stock
primarily through our public offering in February 2000 and the exercise of stock
options.
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We believe that existing cash and marketable securities and anticipated
cash flow from operations will be sufficient to support our operations for the
foreseeable future. These estimates are forward-looking statements that involve
risks and uncertainties. Our actual future capital requirements and the adequacy
of our available funds will depend on many factors, including those discussed in
our Annual Report on Form 10-K for the year ended December 31, 1999 and the
following:
- progress of our discovery programs;
- the number and breadth of these programs;
- our ability to establish and maintain additional arrangements with
customers, including additional subscriptions to the GeneExpress Suite;
- the commercial success of the in-process technologies we acquired in our
acquisition of Oncormed;
- the progress of the development and commercialization efforts of our
customers;
- the level of our activities relating to our independent discovery programs
and to the development and commercialization rights we retain in our
arrangements with customers;
- 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.
We could require additional financing in the future, which we may seek
to raise through public or private equity or debt offerings. To the extent that
we raise additional capital by issuing equity or convertible debt securities,
ownership dilution to stockholders will result. If adequate financing is not
available when needed, we may be required to:
- curtail significantly one or more of our research and development
programs;
- obtain funds through arrangements with customers that may require us to
relinquish rights to certain of our technologies, discoveries or
potential products; or
- grant licenses on terms that are not favorable to us.
NEW PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 is based upon existing accounting rules and provides guidance on
how those rules should be applied. SAB 101 specifically addresses revenue
recognition for nonrefundable upfront fees in the biotechnology industry. Should
a change in accounting policy be necessary, the change would be reported as a
cumulative effect adjustment with resulting deferred revenue being recognized in
future periods over the remaining terms of the agreements. We will adopt SAB 101
for the fourth quarter of fiscal 2000. We are currently evaluating the effect
the implementation of SAB 101 will have on its results of operations and
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any financial instruments subject to significant market
risk.
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<PAGE> 13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 19, 1999, a lawsuit was filed in the Circuit Court of Cook
County, Illinois against Oncormed, Inc. and Gene Logic Inc. alleging that
Oncormed was negligent in determining and reporting laboratory test results of a
genetic test conducted by Oncormed. Oncormed sold its testing business to a
third-party company prior to our acquisition of Oncormed. We are not engaged in
any type of genetic testing, nor do we have plans to enter such markets. We
maintain insurance coverage against such claims, and do not believe this action
will have a material adverse impact on our business, financial condition or
results of operations.
In December 1999, Incyte Genomics, Inc., formerly Incyte
Pharmaceuticals, Inc., filed an action against us in the United States District
Court for the Northern District of California, Case No. C99-5180 MJJ. In the
action, Incyte asserts claims against us for infringement of certain patents
held by Incyte. The alleged infringement involves our use of a process that
Affymetrix recommends be used in the preparation of samples for use with the
Affymetrix GeneChip platform. We intend to defend our position vigorously. There
can be no guarantee that our defense will be successful and neither the ultimate
outcome nor the range of any losses resulting from this action can be predicted
at this time. We expect this action will continue to require significant
management time and expense for the foreseeable future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 8, 2000. At
the Annual Meeting, the Company's stockholders elected two directors to the
Company's Board of Directors and approved the proposals as more fully described
below.
At the Annual Meeting, 23,451,810 shares out of a total of 25,444,364
shares of Common Stock outstanding at the record date were represented in person
or by proxy.
The proposals considered at the Annual Meeting were voted on as follows:
1. Election of Directors
Proposal to elect two directors to hold office until the 2003 Annual
Meeting of Stockholders or his earlier resignation or removal.
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Charles L. Dimmler III 23,328,023 123,787
G. Anthony Gorry, Ph.D. 23,332,528 119,282
</TABLE>
The following individuals' term of office as a director continue after
the meeting: Jules Blake, Ph.D., Michael J. Brennan, M.D., Ph.D., Mark
D. Gessler, Jeffrey D. Sollender and Alan G. Walton, Ph.D., D.Sc.
2. Approve the Company's 1997 Equity Incentive Plan, as Amended
Proposal to approve the Company's 1997 Equity Incentive Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,500,000 shares. The
proposal was approved by a vote of 8,630,347 shares in favor and
6,271,780 shares against.
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3. Approve the Company's Employee Stock Purchase Plan, as Amended
Proposal to approve the Company's Employee Stock Purchase Plan, as
amended to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 250,000 shares. The proposal
was approved by a vote of 14,576,565 shares in favor and 326,363 shares
against.
4. Appointment of Independent Auditors
Proposal to ratify the selection of Ernst & Young, LLP as independent
auditors of the Company for its fiscal year ending December 31, 2000.
Proposal was approved by a vote of 22,287,752 shares in favor and
1,116,730 shares against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS:
+ 10.64 First Amendment to the Genomic Database
Collaboration and License Agreement, dated February
1, 2000, between Registrant and Procter & Gamble
Pharmaceuticals, Inc.
+ 10.65 Second Amendment to the Genomic Database
Collaboration and License Agreement, dated June 29,
2000, between Registrant and Procter & Gamble
Pharmaceuticals, Inc.
+ 10.66 Settlement Agreement, effective June 16, 2000,
between Registrant and Aventis CropScience GmbH.
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
---------------
+ Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission.
B) REPORTS ON FORM 8-K:
A Report on Form 8-K was filed on April 18, 2000, and amended
on May 4, 2000 and May 12, 2000 with respect to the dismissal
of Arthur Andersen LLP and engagement of Ernst & Young LLP as
the Company's independent auditors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENE LOGIC INC.
Date: August 14, 2000 By:/s/ Philip L. Rohrer, Jr.
----------------------------
Philip L. Rohrer, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
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