Genomica 10-Q 2001 Q3 Quarterly report

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INDEX

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 September 30, 2001

/ / 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 000-31637

GENOMICA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware	23-2821818
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1715 38th Street, Boulder, Colorado	80301-2630
(Address of principal executive office)	(Zip Code)

Registrant's telephone number, including area code:(720) 565-4500

    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 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 as of November 9, 2001 was 23,001,057.

INDEX

PART I—FINANCIAL INFORMATION

Item 1—Condensed Consolidated Financial Statements

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

GENOMICA CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

			September 30, 2001			December 31, 2000
ASSETS
Current Assets:
	Cash and cash equivalents		$	3,728,747		$	25,784,803
	Short-term investments			65,053,040			73,153,650
	Accounts receivable-trade			246,741			353,448
	Interest receivable			2,320,473			2,162,810
	Prepaid expenses and other			344,546			352,114
		Total current assets		71,693,547			101,806,825
Long-Term Investments				42,047,919			24,992,694
Property and Equipment, net				4,971,108			2,723,507
Other Assets				124,317			66,750
		Total assets	$	118,836,891		$	129,589,776
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable		$	389,817		$	933,903
	Accrued compensation and employee benefits			528,359			431,357
	Deferred revenue			610,112			814,626
	Other accrued expenses			243,226			323,751
		Total current liabilities		1,771,514			2,503,637
Commitments and Contingencies
Stockholders' Equity:
	Convertible preferred stock, $.001 par value, 5,000,000 shares authorized, zero shares issued and outstanding, respectively			—			—
	Common stock, $.001 par value, 50,000,000 shares authorized, 23,118,144 and 22,839,559 shares issued and 22,993,601and 22,715,016 shares outstanding, respectively			23,118			22,839
	Treasury stock, at cost			(19,715	)		(19,715	)
	Additional paid-in capital			177,393,224			168,136,541
	Options and warrants			22,689,678			33,307,529
	Deferred compensation			(9,563,421	)		(16,929,010	)
	Accumulated other comprehensive income			1,231,440			256,984
	Accumulated deficit			(74,688,947	)		(57,689,029	)
		Total stockholders' equity		117,065,377			127,086,139
		Total liabilities and stockholders' equity	$	118,836,891		$	129,589,776

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENOMICA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2001			2000			2001			2000
Revenue				$	385,398		$	409,023		$	1,292,579		$	1,175,464
Operating Expenses:
	Costs of revenue				62,556			86,168			285,567			281,471
	Research and development				3,609,079			2,891,136			10,848,510			8,928,986
	Selling and marketing				1,816,004			2,067,583			5,873,224			5,097,491
	General and administrative				1,699,690			1,803,263			5,783,895			7,039,328
		Total operating expenses			7,187,329			6,848,150			22,791,196			21,347,276
			Operating loss		(6,801,931	)		(6,439,127	)		(21,498,617	)		(20,171,812	)
Interest Income					1,452,252			241,284			5,016,409			616,646
Interest Expense					—			(11,620	)		—			(41,088	)
Other Expense					(517,710	)		—			(517,710	)		—
Net Loss					(5,867,389	)		(6,209,463	)		(16,999,918	)		(19,596,254	)
Deemed Dividend Related to Beneficial Conversion Feature of Preferred Stock					—			(2,100,000	)		—			(17,108,813	)
Net Loss Applicable to Common Stockholders				$	(5,867,389	)	$	(8,309,463	)	$	(16,999,918	)	$	(36,705,067	)
Net Loss Per Share,basic and diluted				$	(0.26	)	$	(5.68	)	$	(0.75	)	$	(27.40	)
Weighted Average Common Shares Outstanding,basic and diluted					22,690,954			1,463,915			22,520,954			1,339,633
Pro Forma Net Loss Per Share (Note 2):
	Net loss per share, basic and diluted						$	(0.54	)				$	(2.57	)
	Weighted average common shares outstanding, basic and diluted							15,339,860						14,271,341

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENOMICA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

				Nine Months Ended September 30,
				2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	(16,999,918	)	$	(19,596,254	)
Adjustments to reconcile net loss to net cash used in operating activities
	Depreciation				1,282,185			483,160
	Amortization of deferred compensation				5,842,300			11,428,686
	Amortization of premium on investments				389,945			—
	Change in deposits				—			(625,000	)
	Change in other assets				(57,565	)		(120,246	)
	Changes in operating assets and liabilities—
		Accounts receivable			106,707			10,885
		Interest receivable			(157,663	)		—
		Prepaid expenses and other assets			7,567			(357,362	)
		Accounts payable			(544,086	)		458,356
		Accrued compensation and employee benefits			97,002			218,063
		Deferred revenue			(204,514	)		108,969
		Other accrued expenses			(80,525	)		306,985
			Net cash used in operating activities		(10,318,565	)		(7,683,758	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption and sales of investments					74,441,614			16,898,623
Purchases of investments					(82,803,152	)		(26,447,617	)
Purchase of property and equipment					(3,529,786	)		(2,010,212	)
	Net cash used in investing activities				(11,891,324	)		(11,589,206	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases					—			(97,310	)
Proceeds from issuance of preferred stock					—			18,033,954
Costs related to issuance of preferred stock					—			(25,139	)
Deferred financing costs					—			(665,258	)
Proceeds from exercise of common stock options					162,399			254,631
Purchase of treasury stock					—			(19,533	)
	Net cash provided by financing activities				162,399			17,481,345
NET DECREASE IN CASH AND CASH EQUIVALENTS					(22,047,490	)		(1,791,619	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS					(8,566	)		—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					25,784,803			3,518,570
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	3,728,747		$	1,726,951

The accompanying notes are an integral part of these condensed consolidated financial statements.

GENOMICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

    The unaudited condensed consolidated financial statements of Genomica Corporation and its subsidiary (the "Company") included herein reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to fairly present our consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in audited financial information prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's ("SEC") rules and regulations. The consolidated results of operations for the period ended September 30, 2001 are not indicative of the results to be expected for any subsequent quarter or for the entire fiscal year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Statements and notes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2000.

    Subsequent to September 30, 2001, the Company announced that it is exploring a number of strategic alternatives, and that it was reducing its operating activities and headcount. These matters are further discussed in Note 8. These actions have had, and may continue to have, the effect of impairing certain long-term assets. Accordingly, in the fourth quarter of 2001, the Company will record substantial reductions to the carrying value of its long-term assets. Additional reductions may occur in future periods as the Company's strategic direction continues to evolve.

Note 2. Initial Public Offering

    On October 4, 2000, the Company closed its initial public offering and sold 6,440,000 shares of its common stock at $19 per share. The net proceeds, after paying the underwriting discount and estimated expenses associated with the offering, were $112.5 million. Management has broad discretion as to the allocation of the net proceeds of the offering. Although the Company intends to evaluate acquisition opportunities, there are no current agreements or commitments with respect to any acquisition. The Company has invested the net proceeds of the offering in interest bearing, investment-grade securities until needed to fund operations and development.

Note 3. Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

    The accounts of the Company have been consolidated. All intercompany accounts and transactions have been eliminated. The consolidated financial statements are stated in U.S. dollars and are prepared in accordance with accounting principles generally accepted in the United States. Unrealized gains and losses recorded as a result of translating the Company's foreign subsidiary's financial statements into U.S. dollars have been included in accumulated other comprehensive income in the accompanying balance sheets. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation.

Uses of Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and

assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Investments in Marketable Securities

    The Company's investment portfolio consists of investments classified as cash equivalents, short-term investments, or long-term investments. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Short- and long-term investments consist of U.S. government, state, municipal and corporate debt securities with maturities of up to 24 months, as well as money market mutual funds. The Company's investments are classified as available-for-sale investments as defined in Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, at September 30, 2001, all investments are carried at fair value as determined by their quoted market prices and included in either short- or long-term investments. All unrealized gains or losses are included in stockholders' equity as a component of accumulated other comprehensive income.

    The Company's cash, cash equivalents, short-term and long-term investments had a fair value at September 30, 2001, of $110.8 million and a gross unrealized gain of $1,240,006.

    The amortized cost basis, aggregate fair value, and unrealized gains or losses for the Company's cash, cash equivalents, short- and long-term investment portfolio as of September 30, 2001 is presented below:

	Amortized Cost Basis		Aggregate Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
Cash, cash equivalents, and short-term investments:
Euro dollar bonds	$	21,409,870	$	21,643,925		234,055		—
Corporate debt securities		41,843,112		42,400,055		556,943		—
Money market funds		3,000,000		3,000,000		—		—
Asset-backed securities		997,754		1,009,060		11,306		—
Cash		728,747		728,747		—		—
Total cash, cash equivalents, and short-term investments	$	67,979,483	$	68,781,787	$	802,304	$	—
Long-term investments:
Corporate debt securities		39,583,996		39,982,299		398,303		—
Asset-backed securities		2,026,221		2,065,620		39,399		—
Total long-term investments	$	41,610,217	$	42,047,919	$	437,702	$	—

Revenue Recognition

    The Company generates revenue from the license and related maintenance of its proprietary software products. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, collection is probable, and the fee is fixed or determinable. If an acceptance period exists, license revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The majority of the Company's license sales are on a term basis and generally, the license fees and subsequent maintenance revenue are bundled and deferred, to be recognized ratably over the term of the arrangement. Maintenance consists of software updates, content updates and support. Certain software arrangements are sold on a perpetual basis and include multiple elements, such as maintenance, services and training. If present, such elements are unbundled based on vendor-specific objective evidence of their fair value and the related revenue is recognized when those elements are delivered.

    The Company has entered into a reseller arrangement with Applied Biosystems, Inc. ("ABI"). Under this arrangement, the Company has granted ABI exclusive rights to license its Linkmapper software application and re-sell the software and related maintenance and support services to end users. To maintain this exclusive right, ABI must meet certain sales milestones each quarter for which they are currently not on track. ABI is required to pay royalties to the Company at contracted percentages of the sales price for each license or service contract sold. As the Company is responsible for providing maintenance services to ABI's end-customers related to the Linkmapper software, the Company has unbundled and deferred part of the royalty payments for recognition as the maintenance services are provided.

    The Company believes its current revenue recognition policies and practices are consistent with the provisions of Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), and related amendments, technical practice aids and interpretations. Implementation guidelines for these standards, as well as potential new standards, could lead to unanticipated changes in the Company's current revenue recognition policies. Such changes could affect the timing of the Company's future revenue and results of operations.

Note 4. Net Loss Per Share

    Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is determined by dividing the net earnings or loss by the sum of (1) the weighted average number of common shares outstanding, (2) if not anti-dilutive, the number of shares of convertible preferred stock as if converted upon issuance, and (3) if not anti-dilutive, the effect of outstanding stock options and warrants determined utilizing the treasury stock method.

    As a result of the Company's net losses, all potentially dilutive securities for the periods ended September 30, 2001 and 2000, as indicated in the table below, would be anti-dilutive and are excluded from the computation of diluted loss per share.

	September 30,
	2001	2000
Stock Options	1,638,070	1,980,189
Warrants	52,534	340,386
Preferred Stock	—	13,875,945
Total	1,690,604	16,196,520

Pro Forma Net Loss Per Share

    Pro forma net loss per share for the three and nine months ended September 30, 2000 was computed using the net loss and weighted average number of shares of common stock outstanding, including the pro forma effects of the assumed conversion of all outstanding shares of the Company's convertible preferred stock into shares of common stock as if such conversion occurred on January 1, 2000, or at date of original issuance, if later. The resulting pro forma adjustment includes an increase in the weighted average shares used to compute basic and diluted net loss per share of 13,875,945 shares for the three months ended September 30, 2000 and 12,931,708 shares for the nine months ended September 30, 2000.

Note 5. Stockholders' Equity

Stock Plan

    Deferred compensation is included as a reduction of stockholders' equity and is being amortized in accordance with FASB Interpretation No. 28 over the vesting periods of the related options, which are generally three to five years. Stock compensation expense recognized for the three and nine months ended September 30, 2001, and remaining compensation expense to be recognized (without regard to cancellations or forfeitures) are as follows:

					Unamortized Deferred Stock Compensation To Be Recognized During the Periods Ending December 31,
	Deferred Stock Compensation Recognized During The Three Months Ended September 30, 2001		Deferred Stock Compensation Recognized During The Nine Months Ended September 30, 2001
					2001		2002		2003		2004		2005
Research and development	$	397,794	$	1,193,739
Selling and marketing		645,694		2,174,281
General and administrative		645,394		2,474,280
	$	1,688,882	$	5,842,300	$	2,077,118	$	4,592,256	$	2,245,947	$	631,616	$	16,484

    As a result of the restructuring plan implemented in October 2001, a substantial number of options will be forfeited. Accordingly, the amount of deferred compensation to be recognized in future periods will be reduced.

Note 6. Contingencies

    The Company, from time to time, may be subject to certain claims, assertions or litigation by outside parties as part of its ongoing business operations. The Company is currently not a party to any legal proceedings.

Note 7. Recent Accounting Pronouncements

    In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, and for all business combinations accounted for under the purchase method initiated before but completed after June 30, 2001. In addition, in June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangibles recognized in the financial statements at that date. The adoption of these standards is not expected to have an impact on the Company's current financial position or results of operations. However, accounting for any business combinations initiated from this point forward will be impacted by these two standards.

    Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Since inception, the Company has not entered into arrangements that would fall under the scope of SFAS No. 133 and thus, the adoption of SFAS No. 133 had no impact on the Company's financial condition or its results of operations.

    In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company has implemented the guidance in SAB 101 for all periods presented.

Note 8. Subsequent Events

    On October 2, 2001, the Company's Board of Directors approved a Cost Reduction Plan ("Plan") resulting in a restructuring of operations and consolidation of facilities including the involuntary termination of a significant portion of the Company's workforce. The Plan included the immediate termination of 101 employees, including 91 located in the Company's Boulder, Colorado office, three employees located in the Company's United Kingdom office and seven employees located throughout the United States. The Company currently has 41 employees. The Company will no longer sell its Discovery Manager suite of products directly to end user customers.

    The Plan was approved and implemented in October 2001. Accordingly, the Company anticipates recording a restructuring charge during the fourth quarter totaling approximately $4.3 million, including charges totaling $1.9 million for involuntary termination benefits, $1.7 million for asset impairment, and $660,000 for lease and contract termination fees. Termination benefits were paid at the time the plan was implemented. In conjunction with the restructuring, the office in the United Kingdom was closed,

and the Boulder, Colorado office was consolidated from 42,000 square feet to 18,000 square feet. The remaining 24,000 square feet of facilities in Boulder have been subleased. Losses relating to subleases are included in the $4.3 million restructuring charge. The asset impairments were primarily due to the consolidation of operations, facilities closures and excess equipment that was disposed of or taken out of service.

    The Company continues to explore strategic alternatives, and future decisions could result in additional liabilities for severance and restructuring charges, as well as additional impairment reserves.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

    The following discussion of our financial condition and results of operations should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and the Notes thereto included in our Form 10-K for the fiscal year ended December 31, 2000. This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors.

Overview

    We are a provider of innovative software products and services that are designed to enable pharmaceutical and biotechnology researchers to accelerate the drug discovery and development process. Discovery Manager, our primary product, is used for genomics research, including genetic research, gene discovery and pharmacogenomics. Our current customers include leading genomics-based research organizations such as AstraZeneca, GlaxoSmithKline, and the National Cancer Institute. We have a strategic alliance with Applied Biosystems to license and market certain components of our software technology and products for use with its industry-leading systems for drug discovery. However, ABI is not on track to meet the minimum sales milestones required to maintain its exclusive right to license and re-sell Linkmapper.

    We have sold our products directly to customers since June 1998. We derive revenue primarily from granting licenses to our Discovery Manager products and the Reference Database to pharmaceutical, biotechnology, and academic research organizations. Our software license agreements are currently one year or longer in length, and include support and maintenance. The price for each agreement depends upon the number of users licensed by our customers, the duration of the agreement and which of our product components and services the customer purchases. We typically invoice our customers on an annual or quarterly basis at the commencement of the software license agreement and on each subsequent anniversary date. We record deferred revenue at the time we invoice and we recognize the associated revenue ratably over the related period. For products sold through our relationship with Applied Biosystems, we recognize revenue on the license fee royalty and record deferred revenue for the support and maintenance, which is recognized over the annual support period.

    We have incurred losses since our inception. As of September 30, 2001, we had an accumulated deficit of $74.7 million. The deficit includes stock-based non-cash compensation charges of $22.1 million, including $5.8 million recognized in 2001, and a $17.1 million non-cash deemed dividend for the difference between the deemed fair value of our common stock and the price at which our Series C preferred stock and Series D preferred stock were convertible in 2000. The remainder of the accumulated deficit, $35.5 million, resulted from the significant costs incurred in the development of our technology platform and the establishment of relationships with our customers. In addition, as a result of option grants made prior to our initial public offering with exercise prices below their deemed fair market value for financial reporting purposes, we will incur approximately $9.6 million in additional non-cash compensation charges to earnings in future periods. This amount is subject to reduction for stock option forfeitures such as the October 2001 terminations discussed below.

Change in Business Strategy

    On October 2, 2001 our Board of Directors approved our Cost Reduction Plan ("Plan") resulting in a restructuring of our operations and consolidation of our facilities, including the involuntary termination of a significant portion of our workforce. The Plan included the immediate termination of 101 employees, including 91 located in our Boulder, Colorado, office, three employees located in our United Kingdom office, and seven employees located elsewhere throughout the United States. We currently have 41 employees.

    On October 4, 2001 we announced that, as a result of observable developments in the market environment for life science information products, we are adopting a new product and corporate strategy that requires restructuring of our operations and a workforce reduction. We believe the initial target market for third-party enterprise software is not developing fast enough to build stockholder value within a reasonable timeframe.

    We are currently exploring a range of strategic alternatives to leverage our position in genetic analysis software and technology into new markets and distribution channels, while continuing to support all of our customers and meet our contract and partnership obligations. Our alternatives include considering potential strategic buyers, evaluating new and existing strategic acquisition opportunities and developing new software products. We may also consider licensing our technology to other technology companies for integration into their product lines, and we may offer our technology to our existing customers under perpetual license arrangements.

    We anticipate recording a restructuring charge during the fourth quarter totaling approximately $4.3 million, including charges totaling $1.9 million for involuntary termination benefits, $1.7 million for asset impairment, and $660,000 for lease and contract termination fees. Termination benefits were paid at the time the plan was implemented. In conjunction with our restructuring, we have closed our office in the United Kingdom and the Boulder, Colorado office was consolidated from 42,000 square feet to 18,000 square feet. The remaining 24,000 square feet of our facilities in Boulder have been subleased. Losses relating to subleases are included in the $4.3 million restructuring charge. Our asset impairments were primarily due to the consolidation of operations, facilities closures and excess equipment that was taken out of service or disposed of.

    We may institute additional cost reduction initiatives once we determine which strategic alternative to implement and there could be additional charges based upon the strategic direction we choose.

    The Company's restructuring plan was adopted subsequent to September 30, 2001, and, therefore, our financial position as of September 30, 2001, and the results of operations for the period then ended do not reflect any adjustments for the charges discussed above. The following summarizes the Company's financial statements had these charges been included in the period ended September 30, 2001.

	Pro Forma Balance Sheet Data September 30, 2001
Property and equipment, net	$	3,300,000
Total assets	$	117,100,000
Total current liabilities	$	4,300,000
Total stockholders' equity	$	112,800,000

	Pro Forma Statements of Operations Data
	For the Nine-months ended September 30, 2001			For the Three-months ended September 30, 2001
Net loss	$	(21,300,000	)	$	(10,200,000	)
Net loss per share, basic and diluted	$	(0.95	)	$	(0.45	)

Results of Operations

Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000

    Total Revenue.  Total revenue decreased to $385,000 in 2001 from $409,000 for the same period of 2000. The revenue decrease is due primarily to two customers not renewing their contract. There were no new customer contracts signed during the third quarter. Revenue from our Discovery Manager software may decrease in the future if current customers decide not to renew their contract. However, we may be able to recognize revenue on a one-time basis if we license our technology under a perpetual license, as discussed above, subject to meeting the revenue recognition standards. Royalty fees from our Linkmapper products sold through Applied Biosystems totaled $22,000 in the 2001 quarter, versus no such royalties in the 2000 quarter.

    Costs of Revenue.  Costs of revenue decreased to $63,000 in 2001 from $86,000 for the same period of 2000. The decrease is primarily due to decreased customer support costs and costs associated with our Discover Manager software product. We expect our costs of revenue to decrease substantially due to our change in strategy.

    Research and Development.  Research and development expenses increased to $3.6 million in 2001 from $2.9 million for the same period of 2000. Excluding non-cash compensation charges of $398,000 in 2001 and $882,000 in 2000, research and development expenses increased $1.2 million. The increase in costs is primarily due to increased salaries, recruiting, and other personnel costs associated with our hiring, in early 2001, additional software developers and scientists to develop scientific applications using Java technology and Oracle Corporation's relational database management system. We have substantially reduced our research and development activity by terminating 75 of our 108 employees, and we expect research and development expenses will decrease significantly due to our change in corporate strategy. We may reduce our costs further depending upon the strategic direction we choose.

    Selling and Marketing.  Selling and marketing expenses decreased to $1.8 million in 2001 from $2.1 million for the same period of 2000. Excluding non-cash compensation charges of $646,000 in 2001 and $1.2 million in 2000, selling and marketing costs increased $257,000 Additional salaries, other personnel costs, consulting, travel, advertising, and exhibition costs comprised the majority of the increase for the period. Selling and marketing expenses will decrease significantly as we terminated all 16 of our employees in the sales and marketing departments and due to our change in corporate strategy. We are not currently marketing any of our existing products and have no plans to do so in the immediate future.

    General and Administrative.  General and administrative expenses decreased to $1.7 million in 2001 from $1.8 million for the same period of 2000. Excluding non-cash compensation charges of $645,000 in 2001 and $1.1 million in 2000, general and administrative costs increased $386,000. The increase is primarily related to salaries, other personnel costs, investor relations and reporting costs associated with being a public company. We expect general and administrative expenses will decrease in the immediate future as we terminated ten of our 18 general and administrative employees and due to our change in corporate strategy.

    Non-cash Stock-based Compensation.  Deferred compensation is included as a reduction of stockholders' equity and is being amortized in accordance with FASB Interpretation No. 28 over the

vesting periods of the related options, which are generally three to five years. Deferred compensation for options granted is the difference between the exercise price and the deemed fair value for financial reporting purposes of our common stock on the date the options were granted prior to our initial public offering. Non-cash charges representing the amortization of deferred stock compensation totaled $1.7 million for the period in 2001 compared to $3.2 million for the comparative period in 2000. The decrease in non-cash compensation expense is due to the method of amortizing our deferred compensation, which results in the recognition of a larger portion of expense in the initial periods after grant, and due to employees who left the Company. We expect non-cash compensation expense to decrease in the future due to the termination of employees resulting from our change in strategic direction.

    Interest Income.  Interest income increased to $1.5 million in 2001 from $241,000 in the same period of 2000. The increase is due to our higher cash and investment balances resulting from the proceeds of our initial public offering. The proceeds from our initial public offering have been invested in investment grade securities to be used as needed. We expect a lower average rate of return on our investment portfolio in the future as securities mature and are reinvested into lower interest bearing securities caused by current market conditions. Due to our cost reduction plan, we will significantly reduce the amount of cash used to fund our operating losses in future periods.

    Other Expense.  Other expense increased $518,000 in 2001 from $0 in the same period of 2000 because we reserved for the uncollectability of a note receivable during the quarter. The impairment of the note was due to unfavorable changes in market conditions in the financing industry. The initial investment in the note receivable was made in the first quarter of 2001.

    Deemed Dividend Related to Beneficial Conversion Feature of Preferred Stock.  In 2000 we incurred a charge of approximately $2.1 million related to the issuance of our Series D preferred stock. All of our preferred stock converted to common stock upon the closing of our initial public offering on October 4, 2000. There was no comparable charge for the same period in 2001.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000

    Total Revenue.  Total revenue increased to $1.3 million from $1.2 million for the same period of 2000. The revenue growth is primarily due to $57,000 of consulting fees and $64,000 of royalty fees from our Linkmapper product sold through Applied Biosystems. The consulting fees were from two consulting projects, one completed in April 2001 and the other completed in September 2001. Grant revenues of $27,000 were recognized for the first quarter of 2000; there were no grant revenues in 2001 as the grant was completed in February of 2000. Revenue from our Discovery Manager software may decrease in the future if current customers decide not to renew their contracts. However, we may be able to recognize revenue on a one time basis if we license our technology under a perpetual licenses discussed above, subject to meeting the revenue recognition standards.

    Costs of Revenue.  Costs of revenue increased to $286,000 in 2001 from $281,000 for the same period of 2000. The increase is primarily due to increased customer support costs and costs associated with our consulting fee revenue, partially offset by decreased costs of research grants. We expect our costs of revenue to decrease substantially due to our change in strategy.

    Research and Development.  Research and development expenses increased to $10.8 million in 2001 from $8.9 million for the same period of 2000. Excluding non-cash compensation charges of $1.2 million in 2001 and $3.4 million in 2000, research and development expenses increased $4.1 million. The increase in costs is primarily due to increased salaries, recruiting, and other personnel costs associated with our hiring, in early 2001, additional software developers and scientists to develop scientific applications using Java technology and Oracle Corporation's relational database management system. We have substantially reduced our research and development activity by terminating 75 of our

108 employees, and we expect research and development expenses will decrease significantly due to our change in corporate strategy. We may reduce our costs further depending upon the strategic direction we choose.

    Selling and Marketing.  Selling and marketing expenses increased to $5.9 million in 2001 from $5.1 million for the same period of 2000. Excluding non-cash compensation charges of $2.2 million in 2001 and $2.8 million in 2000, selling and marketing costs increased $1.4 million. Additional salaries, other personnel costs, consulting, travel, advertising, and exhibition costs comprised the majority of the increase for the period. Selling and marketing expenses will decrease significantly as we terminated all 16 of our employees in the sales and marketing departments and due to our change in corporate strategy. We are not currently marketing any of our existing products and have no plans to do so in the immediate future.

    General and Administrative.  General and administrative expenses decreased to $5.8 million in 2001 from $7.0 million for the same period of 2000. Excluding non-cash compensation charges of $2.5 million in 2001 and $5.2 million in 2000, general and administrative costs increased $1.5 million. The cost increase for the period is primarily related to salaries, and other personnel costs, investor relations and reporting costs associated with being a public company. We expect general and administrative expenses will decrease in the immediate future as we terminated ten of our 18 general and administrative employees and due to our change in corporate strategy.

    Non-cash Stock-based Compensation.  Non-cash charges representing the amortization of deferred stock compensation totaled $5.8 million for the period in 2001 compared to $11.4 million for the comparative period in 2000. The decrease in non-cash compensation expense is due to the method of amortizing our deferred compensation, which results in the recognition of a larger portion of expense in the initial periods after grant, and due to employees who left the company. We expect non-cash compensation expense to decrease in the future due to the termination of employees resulting from our change in strategic direction.

    Interest Income.  Interest income increased to $5.0 million in 2001 from $617,000 in the same period of 2000. The increase is due to our higher cash and investment balances resulting from the proceeds of our initial public offering. The proceeds from our initial public offering have been invested in investment grade securities to be used as needed. We expect a lower average rate of return on our investment portfolio in the future as securities mature and are reinvested into lower interest bearing securities caused by current market conditions. Due to our cost reduction plan, we will significantly reduce the amount of cash used to fund our operating losses in future periods.

    Other Expense.  Other expense increased $518,000 in 2001 from $0 in 2000 because we reserved for the uncollectability of a note receivable during the quarter. The impairment of the note was due to unfavorable changes in market conditions in the financing industry. The initial investment in the note receivable was made in the first quarter of 2001.

    Deemed Dividend Related to Beneficial Conversion Feature of Preferred Stock.  In 2000 we incurred charges of approximately $17.1 million related to the issuance of our Series C and Series D preferred stock. All of our preferred stock converted to common stock upon the closing of our initial public offering on October 4, 2000. There was no comparable charge for the same period in 2001.

Liquidity and Capital Resources

    On October 4, 2000, we closed our initial public offering of 6,440,000 shares of common stock at $19 per share. We received net proceeds of approximately $112.5 million in cash. Prior to this offering, we financed our operations primarily from the net proceeds of approximately $38.1 million generated from the issuance of preferred stock.

    During the nine months ended September 30, 2001, we used cash of approximately $10.3 million to fund our net losses of $17.0 million. Our investing activities for the nine months ended September 30, 2001 used cash of $11.9 million, and consisted of $8.4 million in net purchases and maturities of investments and $3.5 million in purchases of leasehold improvements, property and equipment, primarily related to increasing our staff levels. We do not anticipate making additional investments in our computer infrastructure and facilities during the remainder of the year.

    As of September 30, 2001, we had cash, cash equivalents and investments of approximately $110.8 million, down from the $123.9 million of cash, cash equivalents and investments at December 31, 2000. This decrease reflects the cash used to fund our operations and capital equipment purchases for the nine months ended September 30, 2001.

    Following the cash effects of our restructuring charges, we expect our usage of cash to decrease significantly to near break-even. We may also acquire complementary businesses or products, although we have not committed to do so. We believe that our cash, cash equivalents and short-term investments are sufficient to fund our working capital requirements for the foreseeable future.

FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS

    In addition to the other information in this report, the following factors should be considered carefully in evaluating our business and prospects:

Our recent change in business strategy could be unsuccessful and result in an inability to continue our operations.

    As a result of changes in the market environment for life science informatics products, we have adopted a new corporate strategy that resulted in a restructuring of our operations and a significant workforce reduction. We are exploring a range of strategic alternatives, including considering potential strategic buyers, evaluating new and existing strategic acquisition opportunities and developing new software products. We may also consider licensing our technology to other technology companies for integration into their product lines. Pursuing and evaluating any of these strategic alternatives may divert our management's attention from our ongoing business operations and result in decreased operating performance. We may be unable to identify an appropriate strategic buyer or strategic acquisition opportunities. In addition, our ability to develop new and competitive software products may be limited. If we are unable to successfully implement any of these strategic alternatives, we may not be able to continue our operations.

We have a history of operating losses and an accumulated deficit, and we may not succeed or become profitable.

    We are currently evaluating various strategic alternatives that may result in a significant change in our operating losses depending upon which alternative we select and we may not succeed or become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability in the future. If we do not achieve or sustain profitability, then we may be unable to continue our operations. We have incurred operating losses every quarter since we began operations and we have not generated enough revenue to cover the substantial amounts that we have spent to develop and market our products and services. We had an accumulated deficit of $74.7 million at September 30, 2001.

We will incur significant charges to earnings as a result of stock option grants. This will hamper our ability to become profitable.

    As a result of option grants prior to our initial public offering, we will incur significant non-cash charges to earnings in future periods, which will hamper our ability to become profitable. For 2000, these charges were $14.7 million. These charges were $1.7 million for the three months ended

September 30, 2001 and $5.8 million for the nine months ended September 30, 2001 and are expected to be approximately $2.0 million for the remainder of 2001, $4.6 million for 2002 and $2.9 million for future periods. As a result of the restructuring plan implemented in October 2001, a substantial number of options will be forfeited. Accordingly, the amount of deferred compensation to be recognized in future periods will decrease. Our lack of profitability in any particular period and the amount of any net loss, which will be exacerbated by these charges, could cause the market price for our common stock to drop, perhaps significantly.

Our limited operating history makes evaluating our business difficult. This also makes it difficult to forecast our future operating results.

    We commenced operations in September 1995 and we did not begin generating revenue from our product and services until June 1998. Also, we have only sold our product to a limited number of customers to date. Our limited operating history makes it difficult to evaluate our business and to forecast our future operating results. As a result, you must consider the risks and uncertainties inherent in the development of a new business enterprise.

If we fail to successfully redevelop our product to use a different computer programming language and database, our customer base will likely decline.

    To maintain and increase our customer base, we are currently redeveloping our product with a different programming language and database platform. We are not sure if the redeveloped product will have the same performance level as our current product. If we do not successfully redevelop this product, our customer base may decline. We have experienced delays in launching our product on the new technology platform due to software development taking longer than originally planned. This has negatively impacted our ability to attract new customers and meet our expected revenues. Any further delays in this redevelopment may result in postponement of future sales and customers with contracts up for renewal may choose to delay renewal until the new platform is complete or they may choose not to renew. In addition, until our customers transition to our redeveloped product, we will be required to devote resources to maintain and support both our current product and redeveloped product, which could consume both our personnel and other resources. If in the future our customers demand a different programming language or database platform than the ones we have chosen for the current redevelopment, we will incur substantial additional costs in redeveloping our product and our operating results will be harmed..

We expect to rely heavily on strategic relationships with larger companies to help us achieve market acceptance for our products. If we are unable to successfully develop these relationships, or if these companies do not perform as expected, our ability to achieve profitability would be materially harmed.

    Part of our business strategy is to work with larger, more established companies that are suppliers to the drug discovery and development industry to help create market awareness and acceptance of our products. We have limited experience in developing strategic relationships of this type and have entered into only three to date. If we are unsuccessful in developing strategic relationships, or if parties with which we develop relationships do not perform as expected, our products may not achieve broad market acceptance and our ability to achieve profitability will be significantly harmed. Our relationship with one of our strategic partners has not performed as expected. As a result, we have not met our revenue goals during 2001. Any further performance problems from our strategic partners will harm our ability to generate revenue.

Our revenue and profits may decrease if we lose any of our major customers.

    Historically, a small number of customers have accounted for a significant portion of our revenue in any particular period. The loss of a major customer could harm our business. For the nine month period ended September 30, 2001, three of our customers, AstraZeneca, GlaxoSmithKline, and Oxagen Limited, represented approximately 58% of our total revenue. In addition, some of our license agreements are short-term and may not be renewed by our customers. We expect our revenue from traditional sources will decrease, but this may be partially offset by revenue from the sale of perpetual licenses to existing customers.

Our customer contracts are cancelable with little notice and if we lose any of these contracts our revenues will be materially adversely affected.

    The contracts with our customers are cancelable by them with little notice. Our customers do not have any obligation to continue to use our current product or to purchase additional services from us. Our strategy has been to focus on potential customers who are considered market leaders in the drug discovery and development industries. Consequently, we depend on our customers not only for generating revenue but also for enhancing our marketing efforts with other potential customers. The loss of any of these contracts would adversely impact our revenue and operating results.

We may develop new products that may be subject to different pricing strategies from our current products potentially resulting in increased volatility of our future revenues.

    We have limited experience developing new products and in determining the appropriate pricing strategy for those products. These future products may be sold under perpetual license agreements with recurring annual support and maintenance fees or in combination with time-based license agreements. As a result, this pricing strategy may make our future revenues more volatile than they have been with our existing products that are sold on an annual subscription fee basis. In addition, we may be subject to uncertain sales cycles and we may have difficulty estimating our future revenues.

If we cannot retain, motivate and integrate additional skilled personnel, our ability to compete will be impaired.

    We are a small company and we believe many of our current and potential competitors have more employees than we do. Our success depends in large part on our ability to attract, retain and motivate highly qualified management and scientific personnel. We face intense competition for qualified personnel and the industry in which we compete has a high level of employee mobility. If we are unable to continue to employ our key personnel or to attract and retain qualified personnel in the future, our ability to successfully execute our business plan will be jeopardized and our growth will be inhibited.

Our failure to manage future growth could adversely affect our ability to increase revenue and become profitable.

    We are currently evaluating various strategic alternatives that may result in significant future growth. If we do not effectively manage future growth, our ability to significantly increase revenue and become profitable will be limited. Our past growth has strained and will continue to strain our management, financial controls, operations systems, personnel and other resources. If we do not manage our future growth effectively, our efforts to increase our customer base and product and service offerings may not be successful. In addition, our future growth could adversely affect our ability

to provide services and technical support in a timely manner and in accordance with customer expectations. To manage growth of our operations, we must:

•

improve existing and implement new operational, financial and management information controls, reporting systems and procedures



•

hire, train and manage additional qualified personnel



•

effectively manage multiple relationships with our customers, suppliers and other third parties, including our collaborators

    We may not be able to install management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations.

Our business will suffer if our product contains defects or does not function as intended, which would cause our revenues to decline.

    Our business would suffer if our product malfunctions or our customers' access to their information stored on our product is interrupted. In addition, our product is complex and sophisticated and holds vast amounts of data. As a result, our product and third-party software incorporated into our product could contain erroneous data, design defects or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If we fail to maintain the quality and integrity of our product, we would fail to achieve market acceptance.

If we are unable to maintain a product with adequate security safeguards, our product will not achieve market acceptance and our business would suffer.

    Researchers use our product to analyze proprietary data, sometimes in disparate locations. Our product must have effective, reliable and secure operations. If we fail to maintain an effective, reliable and secure product, our customers' data may be compromised and our customers would lose confidence in our product. Our revenues and ability to maintain or increase market share would then suffer.

Our business depends on our topographer technology license from Cold Spring Harbor Laboratory, the loss of which would jeopardize our business.

    The Genome Topographer technology license from Cold Spring Harbor Laboratory provides the intellectual property foundation for our Discovery Manager product. A breach by us of any of the terms of, or other failure to maintain, this license agreement could preclude future sales of Discovery Manager or delay or prevent the introduction of new products. Ways in which we could breach the license agreement include (1) uncured monetary breaches, (2) our failure to comply with United States export laws regarding software exports, (3) any breach of the confidentiality and proprietary information provisions of the license agreement, (4) our filing of bankruptcy or the imposition of receivership on our business, or (5) any impermissible assignment of the license agreement by us.

    If we were unable to continue using the Genome Topographer technology license for any reason, we may not be able to continue our operations. Our ability to identify and license or develop other equivalent technology is highly uncertain and, even if we were successful in doing so, the cost and delays of such a changeover in our base technology would likely cause material harm to our business. Further, the Chang-Marr algorithm patent included in the Genome Topographer technology may be challenged, invalidated or circumvented. This could limit or prevent our ability to make, use or sell this algorithm in our product. At the date of this filing, we believe we are in compliance with the terms of this agreement.

Our product currently depends on components licensed from other third parties, and the failure to maintain these licenses could result in the loss of access to these components and could delay or suspend our commercialization efforts.

    Discovery Manager incorporates technologies which are the subject of proprietary rights of others. We have obtained licenses for some of these technologies and may be required to obtain licenses for others. We may not be able to obtain any necessary licenses for the proprietary technology of other parties on commercially reasonable terms, or at all. In addition, one or more third parties whose software or technologies are used in our product might cease to make its software or other technologies available to us or to update such software or technologies as appropriate. We may not be able to develop alternative approaches if we are unable to obtain necessary licenses, or if third-party software or technologies become unavailable to us or obsolete. We cannot assure you that our current or future licenses will be adequate for the operation of our business. The failure to obtain necessary licenses or identify and implement alternative approaches could have a material adverse effect on our business, financial condition and results of operations.

Our intellectual property protection may be inadequate, allowing others to use our technology or similar technologies, reducing our ability to compete.

    The steps taken by us to protect our proprietary technology may be inadequate to prevent misappropriation of our technology by third parties or third parties may develop similar technology independently. We rely on a combination of trademark, copyright and trade secret laws, employee and third-party non-disclosure agreements and other contracts to establish and protect our technology and other intellectual property rights. However, these agreements may be breached or terminated, and we may not have adequate remedies for any breach. In addition, we currently have no patents or patent applications pending, although we do have an exclusive license to one patent. A third party could copy or otherwise obtain and use our products or technology without authorization.

Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.

    Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property claims. We may have to pay substantial damages, possibly including treble damages, for past infringement if it is ultimately determined that our products infringe a third-party's patents. We would have to obtain a license to sell our product if our product infringed another person's intellectual property. We might be prohibited from selling our product before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.

    Our employees may be bound by confidentiality and other nondisclosure agreements regarding the trade secrets of their former employers. As a result, our employees or we could be subject to allegations of trade secret violations and other similar violations if claims are made that they breached these agreements.

Our operating results may fluctuate, making it likely that, in some future quarter or quarters, we will fail to meet analysts' estimates of operating results or financial performance, causing our stock price to fall.

    If revenue declines in a quarter, our earnings will decline because many of our expenses are relatively fixed. In particular, research and development, sales and marketing and general and administrative expenses are not affected directly by variations in revenue. In some future quarter or

quarters, our operating results likely will be below the expectations of securities analysts or investors. In this event, the market price of our common stock may fall abruptly and significantly.

We may fail to engage in strategic acquisitions, which could limit our future growth.

    One of the business strategies we are evaluating is to engage in selective strategic acquisitions of key products, technologies or companies. Our ability to conduct such acquisitions is limited by our ability to identify potential acquisition candidates, obtain necessary financing and consummate the acquisitions. In the event we are unable to identify and take advantage of these opportunities, we may experience difficulties in growing our business. In addition, pursuing acquisition opportunities could divert our management's attention from our ongoing business operations and result in decreased operating performance.

If we engage in acquisitions, we may experience significant costs and difficulty assimilating the operations or personnel of the acquired companies, which could threaten our future growth.

    If we make any acquisitions, we could have difficulty assimilating the operations, technologies and products acquired or integrating or retaining personnel of acquired companies. In addition, acquisitions may involve entering markets in which we have no or limited direct prior experience. The occurrence of any one or more of these factors could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, pursuing acquisition opportunities could divert our management's attention from our ongoing business operations and result in decreased operating performance. Moreover, our ability to become profitable may suffer because of acquisition-related costs or amortization of intangible assets. Furthermore, we may have to incur debt or issue equity securities in any future acquisitions. The issuance of equity securities would dilute our existing stockholders.

We face intense competition, including from internal bioinformatics departments, and we may not have the resources required to successfully compete.

    We face significant competition from the internal bioinformatics departments of our customers and other companies that are potential customers. Some of our customers and potential customers have internally developed software to organize and analyze genomic data. These companies may believe that their software is adequate for their needs and that our product is unnecessary. In addition, certain internal departments of a corporation may be resistant to outsourcing software because it could reduce the departments' budgets.

    We face competition from other organizations, as well, including:

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other bioinformatics companies



•

specialized drug discovery software companies



•

academic and scientific institutions



•

public and private research organizations

    Many of our customers and potential customers and other competitors have much greater resources and name recognition than we do. Some of our third-party competitors may offer discounts as a competitive tactic. Moreover, our competitors may in the future offer broader product lines or technologies or products that are more commercially attractive than our current or future products or that may render our technologies or products obsolete.

    If our customers and potential customers elect to continue to develop their own bioinformatics software, or we are unable to compete successfully with our third-party competitors, then we will be unable to meaningfully improve our operating results and we may not be able to continue operating our business.

We experience rapid technological change in our markets. If we do not modify our products to incorporate new technologies, they may become obsolete and our sales will suffer.

    We compete in a market that is subject to rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving industry standards. To remain competitive, we must continue to expand our databases, improve our software, and invest in new technologies in anticipation of the needs of our customers. Our products could become obsolete due to the introduction of products containing new technologies, changing customer requirements or changing industry standards. This would have a significant negative impact on our revenue generation.

    The technological life cycles of our products are difficult to estimate. Our future success will depend upon our ability to continue to enhance our current products and to continue to develop and introduce new products that keep pace with competitive and technological developments and customer demands. If we fail to develop, market and deliver new products on a timely basis, we may lose market share, perhaps significantly, and our ability to continue our business could be seriously jeopardized.

Our current and potential customers primarily consist of biotechnology and pharmaceutical organizations, which face risks that could affect our ability to license our products.

    We currently derive a substantial portion of our revenue from product licenses to biotechnology and pharmaceutical organizations. We expect that these organizations will continue to be our primary source of revenue for the foreseeable future. If the drug discovery, development and related industries experience a downturn, our business will be harmed. Thus, our ability to generate revenue is indirectly subject to risks and uncertainties that could cause reductions and delays in research and development expenditures within the drug discovery, development and related industries. These reductions and delays may result from factors such as:

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market-driven pressures on companies to consolidate and reduce costs



•

reduced revenue or profitability of our current and potential customers



•

the uncertainty of healthcare reform, including the continuing efforts of governmental and third-party payors to contain or reduce the cost of health care



•

changes in regulations of the U.S. Food and Drug Administration or other regulatory agencies

    These factors are not within our control. In addition, consolidation in the drug discovery and development industries will reduce the number of our potential customers and, therefore, may adversely affect our future revenues.

We will not be able to sell our products if the use of genomic information to develop drugs is not commercially successful.

    The development of new drugs based on genomic information is unproven. Few therapeutic products based on genomic discoveries have been developed and commercialized. If our customers and potential customers are unable to develop drugs based on genomic information in general and using our products or services in particular, then demand for our products will diminish and our ability to generate revenue and profitability would be significantly harmed.

If ethical and other concerns surrounding the use of genetic information become widespread, the demand for our products could decrease.

    Genetic testing and research has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information. For these reasons, governmental authorities may limit or regulate the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for

those that have no known cure. Any such action by governmental authorities could reduce the potential markets for our products, which could seriously harm our ability to generate revenue.

Our stock price may be volatile and your investment in our stock could decline in value.

    The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

•

announcements of technological innovations or new commercial products by our competitors or us



•

developments concerning proprietary rights by our competitors or us



•

developments concerning any development or marketing collaborations



•

publicity regarding actual or potential medical results relating to products under development by our competitors or us



•

litigation



•

economic and other external factors, including disasters or crises or



•

period-to period fluctuations in financial results

    In addition, the stock market and the market for technology companies in particular have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the performance of those companies. During the recent drops in value of the Nasdaq National Market, companies with ongoing losses like us were among the most vulnerable to sharp declines in value. You may not be able to sell your common stock at a price at or above your purchase price.

If our stock price is volatile, we may become subject to securities litigation, which is expensive and could divert our resources.

    Many companies with a volatile stock price have been subject to class-action litigation brought by security holders. If the market value of our common stock experiences adverse fluctuations, and we become involved in this type of litigation, we could incur substantial legal costs and our management's attention could be diverted, causing our business to suffer, regardless of the outcome of the litigation.

The proceeds from our initial public offering have been invested in interest-bearing, investment-grade securities that may be subject to market risk.

    We have invested our IPO proceeds in interest-bearing, investment-grade securities that may be subject to interest rate fluctuations and credit risk. Our investment portfolio is used to preserve our capital until it is required to fund our business. If interest rate fluctuations and credit risk do occur, then the principal amount of our investments will decline.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

    The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates or a change in the credit of any companies represented by such securities may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. For investments held at September 30, 2001, a 1% change in the interest rate would change the value of our investments by approximately $1 million. In addition, if we hold a security that was rated on the credit risk of certain companies and any of these company's credit is downgraded, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. Set forth below is quantitative, tabular disclosure relating to our current investments:

	Maturity Dates
	2001			2002			2003			Total			Fair Value
Marketable Debt Securities, Principal Values	$	13,338,000		$	63,403,000		$	27,519,000		$	104,260,000		$	107,100,959
Average Interest Rate		6.851	%		6.630	%		6.209	%		6.547	%

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

    On October 4, 2000, in connection with our initial public offering, a Registration Statement on Form S-1 (File No. 333-32472) was declared effective by the Securities and Exchange Commission, pursuant to which 6,440,000 shares of our common stock were offered and sold for our account at a price of $19 per share, generating net proceeds of approximately $112.5 million. As of September 30, 2001, we had used approximately $1.7 million of these proceeds comprised of approximately $900,000 for capital expenditures and $833,000 to pay off capital leases and to finance a note receivable. The remaining $110.8 million has been invested in money market funds as well as other interest-bearing, investment-grade securities.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 13, 2001	GENOMICA CORPORATION (Registrant)
	By:	/s/ DANIEL R. HUDSPETH   Daniel R. Hudspeth Vice President of Finance, Chief Financial Officer, Secretary and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)