<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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 0-22570
LYNX THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25861 INDUSTRIAL BLVD.
HAYWARD, CA 94545
(Address of principal executive offices)
(510) 670-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of August 3, 2000 was
11,423,379. The aggregate market value of the common stock of the registrant
held by non-affiliates as of August 3, 2000 was $370,385,250.
Page 1 of 17
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LYNX THERAPEUTICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999..................................................................... 3
Condensed Consolidated Statements of Operations - three and six months
ended June 30, 2000 and 1999.............................................................. 4
Condensed Consolidated Statements of Cash Flows - six months
ended June 30, 2000 and 1999.............................................................. 5
Notes to Condensed Consolidated Financial Statements...................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................................ 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................................... 16
ITEM 2. Changes in Securities and Use of Proceeds................................................. 16
ITEM 3. Defaults Upon Senior Securities........................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders....................................... 16
ITEM 5. Other Information......................................................................... 16
ITEM 6. Exhibits and Reports on Form 8-K.......................................................... 16
SIGNATURES .......................................................................................... 17
</TABLE>
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<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999*
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,782 $ 18,050
Short-term investments 12,563 12,736
Accounts receivable 4,172 4,045
Other current assets 3,038 1,379
-------- --------
Total current assets 32,555 36,210
Property and equipment:
Leasehold improvements 10,383 10,347
Laboratory and other equipment 12,026 8,025
-------- --------
22,409 18,372
Less accumulated depreciation and amortization (7,020) (5,494)
-------- --------
Net property and equipment 15,389 12,878
Other non-current assets 741 2,550
-------- --------
$ 48,685 $ 51,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,409 $ 834
Accrued compensation 544 356
Deferred revenue - current portion 5,417 8,438
Notes payable - current portion 1,005 944
Other accrued liabilities 542 596
-------- --------
Total current liabilities 10,917 11,168
Deferred revenue 18,067 16,896
Notes payable 2,923 3,471
Other non-current liabilities 706 457
Stockholders' equity:
Common stock 75,558 74,606
Notes receivable from stockholders (293) (293)
Deferred compensation (1,976) (2,444)
Accumulated other comprehensive income (loss) (219) 1,128
Accumulated deficit (56,998) (53,351)
-------- --------
Total stockholders' equity 16,072 19,646
-------- --------
$ 48,685 $ 51,638
======== ========
</TABLE>
* The Balance Sheet amounts at December 31, 1999 have been derived from
audited financial statements at that date but do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
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<PAGE> 4
LYNX THERAPEUTICS, INC.
CONDENSED 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:
Technology access and service fees $ 2,834 $ 961 $ 5,850 $ 1,615
Operating costs and expenses:
Cost of services fees revenue 953 -- 1,398 --
Research and development 3,762 4,615 8,766 8,166
General and administrative 1,540 948 3,025 1,721
-------- -------- -------- --------
Total operating expenses 6,255 5,563 13,189 9,887
-------- -------- -------- --------
Loss from operations (3,421) (4,602) (7,339) (8,272)
Interest income, net 281 309 595 644
Other income/(expense) 33 (150) 3,216 27
-------- -------- -------- --------
Loss before provision for income taxes (3,107) (4,443) (3,528) (7,601)
Provision for income taxes 60 114 119 156
-------- -------- -------- --------
Net loss $ (3,167) $ (4,557) $ (3,647) $ (7,757)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.28) $ (0.41) $ (0.32) $ (0.70)
======== ======== ======== ========
Shares used in per share computation 11,338 11,065 11,273 11,052
======== ======== ======== ========
</TABLE>
See accompanying notes.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIXMONTHSENDED
JUNE30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,647) $ (7,757)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 1,526 636
Amortization of deferred compensation 468 699
Gain on sale of antisense program (3,119) --
Changes in operating assets and liabilities:
Accounts receivable (127) 5,313
Other current assets (1,659) 210
Accounts payable 2,575 (4,166)
Accrued liabilities 134 (129)
Deferred revenue (1,850) 6,885
Non-current liabilities 249 135
-------- --------
Net cash used in operating activities (5,450) 1,826
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (7,800) (13,539)
Maturities of short-term investments 11,544 7,080
Leasehold improvements and equipment purchases (4,037) (2,680)
Notes receivable from officers and employees 10 (130)
-------- --------
Net cash provided by (used in) investing activities (283) (9,269)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equipment loan -- 2,461
Repayments of equipment loan (487) (28)
Issuance of common stock 952 36
-------- --------
Net cash provided by financing activities 465 2,469
-------- --------
Net increase (decrease) in cash and cash equivalents (5,268) (4,974)
Cash and cash equivalents at beginning of period 18,050 16,170
-------- --------
Cash and cash equivalents at end of period $ 12,782 $ 11,196
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 137 $ 303
======== ========
Cash paid during the period for interest $ 212 $ 23
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 6
LYNX THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. NATURE OF BUSINESS
Lynx Therapeutics, Inc. ("Lynx" or the "Company") is a leader in the
development and application of novel technologies for the discovery of gene
expression patterns and genomic variations important to the pharmaceutical,
biotechnology and agricultural industries. These technologies are based on
Megaclone(TM), Lynx's unique and proprietary cloning procedure, which transforms
a sample containing millions of DNA molecules into one made up of millions of
micro-beads, each of which carries approximately 100,000 copies of one of the
DNA molecules in the sample. Based on Megaclone(TM), Lynx has developed a suite
of applications that have the potential to enhance the pace, scale and quality
of genomics and genetics research programs. Currently, Lynx's principal
collaborators and customers are BASF AG, E.I. DuPont de Nemours and Company,
Aventis CropScience GmbH, Oxagen Limited and Hybrigenics S.A.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements
included herein have been prepared by the Company without audit, pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission (the
"SEC"). Certain prior year amounts have been reclassified to conform to current
year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented. The results of operations for the three and six months ended June 30,
2000, are not necessarily indicative of the results for the full year.
The unaudited condensed consolidated financial statements include
all accounts of the Company and its wholly owned subsidiary, Lynx Therapeutics
GmbH, formed under the laws of the Federal Republic of Germany. All significant
intercompany balances and transactions have been eliminated.
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the Company's
year ended December 31, 1999, included in its annual report on Form 10-K filed
with the SEC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from technology access fees have generally resulted from
upfront payments from collaborators and customers who are provided access to
Lynx's technologies for specified periods. The Company receives service fees
from collaborators and customers for genomic discovery services performed by
Lynx on the biological samples they send to Lynx. Technology access fees are
deferred and recognized as revenue on a straight-line basis over the
noncancelable term of the agreement to which they relate. Payments for services
and/or materials provided by Lynx are recognized as revenues when earned over
the period in which the services are performed and/or materials are delivered,
provided no other obligations, refunds or credits exist to be applied to future
work.
NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") is computed by dividing income or
loss applicable to common stockholders by the weighted-average number of common
shares outstanding for the period, net of certain common shares outstanding
which are subject to continued vesting and the Company's right of repurchase.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of the Company, to the extent such securities are dilutive. Basic
and diluted net loss per share is equivalent for all periods presented herein
due to the Company's net loss in all periods. Options to purchase approximately
2,122,317 shares of common stock at a weighted-average price of $11.57 per share
have been excluded from the calculation of diluted loss per share for 2000
because the effect of inclusion would be antidilutive. The options will be
included in the calculation at such time as the effect is no longer
antidilutive, as calculated using the treasury stock method. Approximately
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<PAGE> 7
36,000 common shares which are outstanding but are subject to the Company's
right of repurchase which expires ratably over five years, have been excluded
from the calculation of basic loss per share. The repurchasable shares will be
included in the calculation of diluted EPS at such time as the Company's right
of repurchase lapses.
COMPREHENSIVE INCOME
In 1998, Lynx adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes rules for the reporting and presentation of comprehensive
income and its components. The adoption of SFAS 130 had an immaterial impact on
the Company's net loss and stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other accumulated comprehensive income (loss).
Total comprehensive loss during the quarters ended June 30, 2000 and
1999 was $2.8 million and $4.6 million, respectively. For the six months ended
June 30, 2000 and 1999, total comprehensive loss amounted to $5.0 million and
$7.8 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires Lynx to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
assets, liabilities or firm commitments through earnings or recognized in the
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for Lynx's year ending December
31, 2001. Lynx does not currently hold any derivatives and does not expect this
pronouncement to materially impact results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), which must be
adopted in the fourth quarter of 2000. SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
in financial statements and specifically addresses revenue recognition for
non-refundable technology access fees. Lynx believes that its current revenue
recognition principles comply with SAB 101, and thus does not believe the
adoption will have a significant effect on results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain transactions Involving Stock Compensation, which contains rules
designed to clarify the application of APB 25. FIN 44 will be effective on July
1, 2000 and we will adopt it at that time. We believe the anticipated impact of
adoption of FIN 44 will not be material to our operating results and financial
position.
4. CORPORATE COLLABORATIONS
In May 2000, the Company entered into an agreement with Hybrigenics
S.A. of Paris, France, to collaborate on a program to discover expressed genes
and protein interactions and pathways in human obesity. Each company is
responsible for paying its own expenses under this agreement. Pursuant to the
terms of this agreement, the Company and Hybrigenics will share equally any
profits of any kind and of any nature resulting from any agreement with a third
party for the sale, license or sublicense of the research results from the
collaboration.
Page 7 of 17
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Company's financial statements and accompanying notes included in this report
and the Company's 1999 audited financial statements and notes thereto included
in its 1999 Annual Report on Form 10-K. Operating results for the three and six
months ended June 30, 2000 are not necessarily indicative of results that may
occur in future periods.
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words "believe," "anticipate," "expect,"
"estimate" and similar expressions are intended to identify such forward-looking
statements. There can be no assurance that these statements will prove to be
correct. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the Company's 1999 Annual Report on Form 10-K as filed with the SEC. Lynx
undertakes no obligation to update any of the forward-looking statements
contained herein to reflect any future events or developments.
RESULTS OF OPERATIONS
REVENUE
Revenues for the second quarter and six-month period ended June 30,
2000 were $2.8 million and $5.9 million, respectively, earned primarily from
technology access and service fees from DuPont, Aventis CropScience and BASF AG.
For the corresponding second quarter and six-month period of 1999, revenues were
$1.0 and $1.6 million, respectively, earned from technology access fees from
DuPont and Aventis CropScience.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses were $6.3 million for the quarter
ended June 30, 2000, compared to $5.6 million in the corresponding period in the
previous year. For the six-month period ended June 30, 2000, operating costs and
expenses were $13.2 million, compared to $9.9 million in the corresponding
period in 1999.
For the quarter and six-month period ended June 30, 2000, cost of
service fees were $1.0 million and $1.4 million, respectively, and reflect the
costs of providing our genomic discovery services. Research and development
expenses were $3.8 million for the quarter ended June 30, 2000, compared to $4.6
million in the corresponding period in 1999. For the six-month period ended June
30, 2000, research and development expenses were $8.8 million, compared to $8.2
million in the corresponding period in 1999. The decrease in research and
development expenses from the 1999 quarter was primarily due to expenditures for
scientific materials and supplies used in commercial services in 2000 rather
than research and development, offset partially by increased compensation
expense resulting from higher headcount. The increase in research and
development expenses for the six-month period in 2000 as compared to the same
period in 1999 was primarily due to higher personnel-related expenses, as well
as materials used in commercial operations. Lynx expects research and
development expenses to increase substantially due to planned spending for
ongoing technology development and implementation, as well as new applications.
General and administrative expenses increased to $1.5 million for
the quarter ended June 30, 2000, compared to $0.9 million in the corresponding
period in the previous year. For the six-month period ended June 30, 2000,
general and administrative expenses increased to $3.0 million, compared to $1.7
million in the same period in 1999. Contributing factors to the increase in
expenses between years include increased personnel-related expenses and the
costs for outside services and fees incurred in relation to Lynx's proposed
follow-on offering of common stock. The company withdrew the proposed offering
in March 2000 due to unfavorable market conditions. Lynx expects to continue to
incur substantial administrative expenses in support of its research and
development and business development efforts.
INTEREST INCOME, NET
Net interest income was $0.3 million and $0.6 million for the
quarter and six-month periods ended June 30, 2000 and 1999, respectively. The
2000 periods reflected an increase in interest income due to a higher average
investment rate offset by higher interest expense, as compared to the 1999
periods.
OTHER INCOME, NET
Other income was $33,000 in the quarter ended June 30, 2000,
compared to other expense of $0.2 million in the 1999 period. The 2000 amount
was related to sublease rental income. The 1999 amount was a one-time
compensation-related payment, as negotiated in the terms of the sale of Lynx's
antisense business to Inex Pharmaceuticals Corporation ("Inex"). For
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<PAGE> 9
the six-month period ended June 30, 2000, other income was $3.2 million,
compared to $27,000 in the same period in 1999. The 2000 income was primarily
related to a $3.1 million gain recognized from the receipt of 400,000 shares of
common stock of Inex pursuant to the terms of a 1998 agreement for the sale of
Lynx's antisense program to Inex. The 1999 income was attributable to a gain on
the sale of certain fixed assets no longer used in Lynx's operations, offset by
a one-time compensation-related payment associated with the sale of Lynx's
antisense business.
INCOME TAXES
The provision for income taxes for the quarter and six-month periods
ended June 30, 2000 and 1999 consist entirely of alternative minimum tax.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $5.5 million for the
six-month period ended June 30, 2000, changed from net cash provided by
operating activities of $1.8 million for the same period in 1999. This change
was primarily due to the change in accounts receivable, deferred revenue and
other current assets, offset by a lower net loss and the change in accounts
payable. The 2000 amount differed from the net loss primarily due to the gain
related to the receipt of common stock from the sale of our antisense program to
Inex. The 1999 amount differed from the net loss primarily due to an increase in
deferred revenue and collection of accounts receivable, partially offset by a
decrease in current liabilities.
Net cash used in investing activities of $0.3 million for the
six-month period ended June 30, 2000 related primarily to the net maturities of
short-term investments, partially offset by capital expenditures. Net cash used
in investing activities of $9.3 million for the six-month period ended June 30,
1999, related primarily to the net purchases of short-term investments and
capital expenditures. Net cash provided by financing activities of $0.5 million
for the six-month period ended June 30, 2000 related primarily to the issuance
of common stock that was exercised through stock option grants, partially offset
by repayment of principal and interest under an equipment loan arrangement. Net
cash provided by financing activities of $2.5 million for the six-month period
ended June 30, 1999 related primarily to proceeds received under an equipment
loan arrangement. Cash, cash equivalents, short-term investments and marketable
securities were $25.3 million at June 30, 2000.
In late 1998, the Company entered into a financing agreement with a
financial institution under which we drew down $4.8 million during 1999 for the
purchase of equipment and certain other capital expenditures. Lynx granted the
lender a security interest in all items financed by it under this agreement.
Each draw down under the loan has a term of 48 months from the date of the draw
down. As of June 30, 2000, the principal balance under loans outstanding under
this agreement was approximately $3.9 million. The draw down period under the
agreement expired on March 31, 2000.
Lynx plans to use available funds for ongoing commercial and
research and development activities, working capital and other general corporate
purposes and capital expenditures. We expect capital investments during 2000
will be comprised primarily of equipment purchases required in the normal course
of business and expenditures for leasehold improvements. We intend to invest our
excess cash in investment-grade, interest-bearing securities.
Lynx has obtained funding for its operations primarily through sales
of preferred and common stock to venture capital investors, institutional
investors and collaborators, revenues from contractual arrangements and interest
income. The timing and amount of funds required for specific uses by us cannot
be precisely determined at this time and will be based upon the progress and the
scope of our collaborative and independent research and development projects;
payments received under collaborative agreements; our ability to establish and
maintain collaborative agreements; costs included in protecting intellectual
property rights; legal and administrative costs; additional facilities capacity
needs and the availability of alternate methods of financing.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as needed,
through contractual arrangements with corporate partners and others and through
equity or debt offerings. There can be no assurance that any additional
financing required by Lynx will be available or, if available, will be on terms
favorable to Lynx. The Company believes that, at current spending levels, its
existing capital resources, and interest income thereon, will enable it to
maintain its current and planned operations through at least the next 12 months.
ADDITIONAL BUSINESS RISKS
OUR TECHNOLOGIES ARE NEW AND UNPROVEN AND MAY NOT ALLOW US OR OUR COLLABORATORS
TO IDENTIFY GENES OR TARGETS FOR DRUG DISCOVERY.
Our technologies are new and unproven. The application of these
technologies is in too early a stage to determine whether it can be successfully
implemented. These technologies assume information about gene expression and
gene sequences may enable scientists to better understand complex biological
processes. Relatively few therapeutic products based
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<PAGE> 10
on gene discoveries have been successfully developed and commercialized. Our
technologies may not enable us or our collaborators to identify genes or targets
for drug discovery. To date, no targets for drug discovery have been identified
based on our technologies.
WE ARE DEPENDENT ON OUR COLLABORATIONS AND WILL NEED TO FIND ADDITIONAL
COLLABORATORS IN THE FUTURE TO DEVELOP AND COMMERCIALIZE DIAGNOSTIC OR
THERAPEUTIC PRODUCTS.
Our strategy for the development and commercialization of our
technologies and potential products includes entering into collaborations,
subscription arrangements or licensing arrangements with pharmaceutical,
biotechnology and agricultural companies. We do not have the resources to
develop or commercialize diagnostic or therapeutic products on our own. We
cannot assure you that we will be able to negotiate additional collaborative
arrangements or contracts on acceptable terms, or at all, or that such
collaborations or relationships will be successful.
Substantially all of our revenues have been derived from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. If we are unable to successfully achieve milestones
or our collaborators fail to develop successful products, we will not earn the
revenues contemplated under such collaborative agreements. If existing
agreements are not renewed, or if we are unable to enter into new collaborative
agreements on commercially acceptable terms, our revenues may decrease, and our
activities may fail to lead to commercialized products.
Our dependence on collaborative arrangements with third parties
subjects us to a number of risks. We have limited or no control over the
resources that our collaborators may choose to devote to our joint efforts. Our
collaborators may breach or terminate their agreements with us or fail to
perform their obligations thereunder. Further, our collaborators may elect not
to develop products arising out of our collaborative arrangements or may fail to
devote sufficient resources to the development, manufacture, market or sale of
such products. Some of our collaborators could also become our competitors in
the future. Our business could be harmed if our collaborators:
- do not develop commercially successful products using our
technologies;
- develop competing products;
- preclude us from entering into collaborations with their
competitors;
- fail to obtain necessary regulatory approvals; or
- terminate their agreements with us.
WE ARE AN EARLY STAGE COMPANY, SO OUR PROFITABILITY IS UNCERTAIN AND THERE IS A
HIGH RISK OF FAILURE.
You must evaluate us in light of the uncertainties and complexities
affecting an early stage genomics company. Our products and services are still
in the early stages of commercialization. Our technologies depend on the
successful integration of independent technologies, each of which has its own
development risks. We cannot assure you that our technologies will continue to
be successfully developed, that our services will continue to be sought by
customers or that any products developed from our technologies will prove to be
commercially successful. Further, we cannot assure you that we will be
successful in expanding the scope of our research into new areas of
pharmaceutical, biotechnology or agricultural research. Significant research and
development, financial resources and personnel will be required to capitalize on
our technologies. Commercialization of our technologies, whether through the
sales of services, royalties or other arrangements, may not generate sufficient
or sustainable revenues to enable us to be profitable.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception in 1992,
including net losses of approximately $10.8 million in 1997, $4.3 million in
1998 and $6.7 million in 1999. As of June 30, 2000, we had an accumulated
deficit of approximately $57.0 million. We expect these losses to continue for
at least the next several years. The size of these net losses will depend, in
part, on the rate of growth, if any, in our revenues and on the level of our
expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect research
and development expenses to increase substantially due to planned spending for
ongoing technology development and implementation, as well as new applications.
As a result, we expect our operating expenses will increase significantly in the
near term, and consequently, we will need to generate significant additional
revenues to achieve profitability. Even if we do increase our revenues and
achieve profitability, we may not be able to sustain profitability.
Our ability to generate revenues and achieve profitability is
dependent on many factors, including:
- our ability to enter into additional corporate collaborations and
agreements;
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<PAGE> 11
- our ability to discover genes and targets for drug discovery;
- our collaborators' ability to develop diagnostic and therapeutic
products from our drug discovery targets; and
- the successful clinical testing, regulatory approval and
commercialization of such products.
The time required to reach profitability is highly uncertain, and we cannot
assure you that we will be able to achieve profitability on a sustained basis,
if at all.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH MAY NOT BE AVAILABLE
TO US.
We have invested significant capital in our infrastructure and in
our scientific and business development activities. We expect our capital and
operating expenditures to increase over the next several years as we expand our
operations. Our future capital requirements will depend on many factors,
including:
- the progress and scope of our collaborative and independent
research and development projects;
- payments received under collaborative agreements;
- our ability to establish and maintain collaborative arrangements;
- the progress of the development and commercialization efforts
under our collaborations and corporate agreements;
- the costs associated with obtaining access to samples and related
information; and
- the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property
rights.
Changes to our current operating plan may require us to consume
available capital resources significantly sooner than we expect. We may be
unable to raise sufficient additional capital when we need it, on favorable
terms, or at all. If our capital resources are insufficient to meet future
capital requirements, we will have to raise additional funds. The sale of equity
or convertible debt securities in the future would be dilutive to our
stockholders. If we are unable to obtain adequate funds on reasonable terms, we
may be required to curtail operations significantly or to obtain funds by
entering into financing or collaborative agreements on unattractive terms.
OUR REVENUES DEPEND ON A SMALL NUMBER OF COLLABORATORS AND CUSTOMERS.
To date, we have received a significant portion of our revenues from
a small number of collaborators and customers. For the three-month period ended
June 30, 2000, revenues from three collaborators and customers accounted for 6%,
56% and 38% of our revenues. For the three-month period ended June 30, 1999,
revenues from two collaborators and customers accounted for 48% and 52% of our
revenues. For the six-months ended June 30, 2000, revenues from three
collaborators and customers accounted for 19%, 51% and 30% of our total
revenues. For the same period in 1999, revenues from two collaborators and
customers accounted for 38% and 62% of our total revenues. Our operating results
may be harmed, if we lose one of these collaborators or customers and we are not
able to attract new collaborators or customers.
WE DEPEND ON A SOLE SUPPLIER TO MANUFACTURE FLOW CELLS USED IN OUR MPSS
TECHNOLOGY.
The flow cells used in our MPSS technology are obtained from a
single supplier. Our reliance on outside vendors generally, and this sole
supplier in particular, involves several risks, including:
- the inability to obtain an adequate supply of required components
due to manufacturing capacity constraints, a discontinuance of a
product by a third-party manufacturer or other supply
constraints;
- reduced control over quality and pricing of components; and
- delays and long lead times in receiving materials from vendors.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING RAPIDLY, AND OUR
COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized
by rapid technological change. In particular, the area of genomics research is a
rapidly evolving field. Competition among entities attempting to identify genes
associated with specific diseases and to develop products based on such
discoveries is intense. Many of our competitors have substantially greater
research and product development capabilities and financial, scientific, and
marketing resources than we do.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors:
- are attempting to identify and patent randomly sequenced genes
and gene fragments;
Page 11 of 17
<PAGE> 12
- are pursuing a gene identification, characterization and product
development strategy based on positional cloning; and
- are using a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to
attempt to identify disease-related genes.
In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomic research programs, either alone or in
partnership with our competitors. Our future success will depend on our ability
to maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our technologies and future
products becoming obsolete.
Any products that are developed through our technologies will
compete in highly competitive markets. Our competitors may be more effective at
using their technologies to develop commercial products. Further, we cannot
assure you that our competitors will not obtain intellectual property rights
that would limit the use of our technologies or the ability to commercialize
diagnostic or therapeutic products using our technologies. As a result, our
competitors may be able to more easily develop technologies and products that
would render our technologies and products, and those of our collaborators,
obsolete and noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, THIRD
PARTIES MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE IN THE MARKET.
Our success depends in part on our ability to obtain patents and
maintain adequate protection of the intellectual property related to our
technologies and products. The patent positions of biotechnology companies,
including our patent position, are generally uncertain and involve complex legal
and factual questions. We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting and defending
their proprietary rights in foreign jurisdictions. We have applied and will
continue to apply for patents covering our technologies, processes and products
as and when we deem appropriate. However, these applications may be challenged
or may fail to result in issued patents. Our existing patents and any future
patents we obtain may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design
around our patents. In addition, our patents may be challenged or invalidated or
fail to provide us with any competitive advantage.
We also rely on trade secret protection for our confidential and
proprietary information. We have taken security measures to protect our
proprietary information and trade secrets, but these measures may not provide
adequate protection. While we seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants, we cannot assure you that our proprietary information will not be
disclosed or that we can meaningfully protect our trade secrets. In addition,
our competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets, which could
adversely affect our ability to compete in the market.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our commercial success depends in part on our ability to avoid
infringing patents and proprietary rights of third parties and not breaching any
licenses that we have entered into with regard to our technologies. Other
parties have filed, and in the future are likely to file, patent applications
covering genes, gene fragments, the analysis of gene expression and the
manufacture and use of DNA chips. We intend to continue to apply for patent
protection for methods relating to gene expression and for the individual
disease genes and drug discovery targets we discover. If patents covering
technologies required by our operations are issued to others, we may have to
rely on licenses from third parties. We cannot assure you that such licenses
will be available on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary
technology without authorization. In addition, third parties may obtain patents
that relate to our technologies and claim that use of such technologies
infringes these patents. Regardless of their merit, such claims could require us
to incur substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize our technologies and
products.
WE HAVE LIMITED EXPERIENCE IN SALES AND MARKETING AND THUS MAY BE UNABLE TO
FURTHER COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Page 12 of 17
<PAGE> 13
Our ability to achieve profitability depends on attracting
collaborators and customers for our technologies and products. There are a
limited number of pharmaceutical, biotechnology and agricultural companies that
are potential collaborators and customers for our technologies and products. To
market our technologies and products, we must develop a sales and marketing
group with the appropriate technical expertise. We may not be able to build such
a sales force. We cannot assure you that our sales and marketing efforts will be
successful or that our technologies and products will gain market acceptance.
OUR SALES CYCLE IS LENGTHY, AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO ENTER INTO AGREEMENTS ON THE
SCHEDULE WE ANTICIPATE.
Our ability to obtain collaborators and customers for our
technologies and products depends in significant part upon the perception that
our technologies and products can help accelerate their drug discovery and
genomics efforts. Our sales cycle is typically lengthy because we need to
educate our potential collaborators and customers and sell the benefits of our
products to a variety of constituencies within such companies. In addition, we
may be required to negotiate agreements containing terms unique to each
collaborator or customer. We may expend substantial funds and management effort
with no assurance that we will successfully sell our technologies and products.
Actual and proposed consolidations of pharmaceutical companies have negatively
affected, and may in the future negatively affect, the timing and progress of
our sales efforts.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number
of our employees and the scope of our operations. This growth may place a
significant strain on our management and operations. As our operations expand,
we expect that we will need to manage additional relationships with various
collaborators and customers, suppliers and other third parties. Our ability to
manage our operations and growth effectively requires us to continue to improve
our operational, financial and management controls, reporting systems and
procedures. If we are unable to manage this growth effectively, our business may
be harmed.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR THE GROWTH OF OUR BUSINESS.
We are highly dependent on the principal members of our management
and scientific staff. The loss of any of these persons' services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We are dependent on our President and Chief Executive Officer, Norman
J.W. Russell, Ph.D., and Chairman, Sam Eletr, Ph.D., the loss of whose services
could have a material adverse effect on our business.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals, radioactive and biological materials.
Our operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
ETHICAL, LEGAL AND SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF, AND DEMAND
FOR, OUR TECHNOLOGIES AND PRODUCTS.
Our collaborators and customers may seek to develop diagnostic
products based on genes we discover. The prospect of broadly available
gene-based diagnostic tests raises ethical, legal and social issues regarding
the appropriate use of gene-based diagnostic testing and the resulting
confidential information. It is possible that discrimination by third-party
payors, based on the results of such testing, could lead to the increase of
premiums by such payors to prohibitive levels, outright cancellation of
insurance or unwillingness to provide coverage to individuals showing
unfavorable gene expression profiles. Similarly, employers could discriminate
against employees with gene expression profiles indicative of the potential for
high disease-related costs and lost employment time. Finally, government
authorities could, for social or other purposes, limit or prohibit the use of
such tests under certain circumstances. We cannot assure you that ethical, legal
and social concerns about genetic testing and target identification will not
adversely affect market acceptance of our technologies and products.
Page 13 of 17
<PAGE> 14
Although our technology is not dependent on genetic engineering,
genetic engineering plays a prominent role in our approach to product
development. The subject of genetically modified food has received negative
publicity, which has aroused public debate. Adverse publicity has resulted in
greater regulation internationally and trade restrictions on imports of
genetically altered agricultural products. Public attitudes may be influenced by
claims that genetically engineered products are unsafe for consumption or pose a
danger to the environment. Such claims may prevent genetically engineered
products from gaining public acceptance. The commercial success of our future
products may depend, in part, on public acceptance of the use of genetically
engineered products, including drugs and plant and animal products.
IF WE DEVELOP PRODUCTS WITH OUR COLLABORATORS, AND IF PRODUCT LIABILITY LAWSUITS
ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT
EXCEED OUR RESOURCES.
We may be held liable if any product we develop with our
collaborators causes injury or is otherwise found unsuitable during product
testing, manufacturing, marketing or sale. Although we have general liability
and product liability insurance, this insurance may become prohibitively
expensive or may not fully cover our potential liabilities. Inability to obtain
sufficient insurance coverage at an acceptable cost or to otherwise protect us
against potential product liability claims could prevent or inhibit the
commercialization of products developed with our collaborators.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
DIAGNOSTIC OR THERAPEUTIC PRODUCTS THAT WE MAY DEVELOP WITH OUR COLLABORATORS.
If we are successful in validating targets for drug discovery,
products that we develop with our collaborators based on those targets may
include diagnostic or therapeutic products. The ability of our collaborators to
commercialize such products may depend, in part, on the extent to which
reimbursement for the cost of these products will be available from government
health administration authorities, private health insurers and other
organizations. In the U.S., third-party payors are increasingly challenging the
price of medical products and services. The trend towards managed healthcare in
the U.S., legislative healthcare reforms and the growth of organizations such as
health maintenance organizations that may control or significantly influence the
purchase of healthcare products and services, may result in lower prices for any
products our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products, and we cannot assure
you that adequate third-party coverage will be available to enable our
collaborators to maintain price levels sufficient to realize an appropriate
return on their investment in research and product development.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATION.
Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The trading price of our common stock is subject to significant
fluctuations. The market prices of the common stock of many publicly held, early
stage biotechnology companies have in the past been, and can in the future be
expected to be, especially volatile. In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The following
factors and events may have a significant and adverse impact on the market price
of our common stock:
- fluctuations in our operating results;
- announcements of technological innovations or new commercial
products by us or our competitors;
- release of reports by securities analysts;
- developments or disputes concerning patent or proprietary rights;
- developments in our relationships with current or future
collaborators or customers; and
- general market conditions.
Many of these factors are beyond our control. These factors may cause a decrease
in the market price of our common stock, regardless of our operating
performance.
Page 14 of 17
<PAGE> 15
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, EITHER OF WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Under our certificate of incorporation, our board of directors has
the authority, without further action by the holders of our common stock, to
issue 2,000,000 additional shares of preferred stock from time to time in series
and with preferences and rights as it may designate. These preferences and
rights may be superior to those of the holders of our common stock. For example,
the holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.
Although we have no present intention to authorize or issue any
additional series of preferred stock, any authorization or issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could also have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock. The
preferred stock may have other rights, including economic rights senior to those
of our common stock, and, as a result, an issuance of additional preferred stock
could adversely affect the market value of our common stock. Provisions of
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company invests in
highly liquid and high-quality debt securities. The Company's investments in
debt securities are subject to interest rate risk. To minimize the exposure due
to adverse shifts in interest rates, the Company invests in short-term
securities and maintains an average maturity of less than one year. As a result,
Lynx believes it is not subject to significant interest rate risks.
Page 15 of 17
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2000 Annual Meeting of Stockholders held on
May 25, 2000, stockholders voted on the following matters:
PROPOSAL I - ELECTION OF DIRECTORS- The following six
directors were each elected for a one year term expiring at
the Company's 2001 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
Nominee For Against
------- --- -------
<S> <C> <C>
Sam Eletr 8,399,959 377,299
William K. Bowes, Jr 8,637,338 139,920
Sydney Brenner 8,608,101 169,157
James C. Kitch 8,635,235 142,023
Norman J.W. Russell 8,641,948 135,310
Craig C. Taylor 8,635,223 142,035
</TABLE>
PROPOSAL II - Approval of the Company's 1992 Stock Option
Plan, as amended, to increase the aggregate number of shares
of common stock available for issuance by 600,000 shares:
For Against Abstain Non-Vote
--- ------- ------- --------
6,595,010 2,177,120 5,128 ---
PROPOSAL III - Approval of the Company's Amended and Restated
Certificate of Incorporation to increase the authorized number
of shares of common stock 40,000,000 from 20,000,000 to
60,000,000 shares:
For Against Abstain Non-Vote
--- ------- ------- --------
6,677,988 2,094,385 4,885 ---
PROPOSAL IV - Ratification of the selection of Ernst & Young
LLP as the Company's independent auditors for the fiscal year
ended December 31, 2000:
For Against Abstain Non-Vote
--- ------- ------- --------
8,764,227 10,381 2,650 ---
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits - The following documents are filed as Exhibits
to this report:
EXHIBIT NUMBER DESCRIPTION
------------- -----------
3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws, as amended
27.1 Financial Data Schedule
b) Reports on Form 8-K - No reports on Form 8-K were filed
during the three-month period ended June 30, 2000.
Page 16 of 17
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Norman J.W. Russell
---------------------------------------------
By: Norman J.W. Russell, Ph.D.
President and Chief Executive Officer
Date: August 14, 2000
/s/ Edward C. Albini
---------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2000
Page 17 of 17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- ------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws, as amended
27.1 Financial Data Schedule
</TABLE>
